9/29/17 – Stocks Higher on GDP Growth and Tax Reform

Stocks Higher, Framework of Tax Reform Released

Stocks finished the third quarter on a positive note as both major indices finished higher. The Dow gained 0.2% while the S&P 500 added 0.7%. The big financial news out this week was strong second quarter GDP growth and a rough framework for potential tax reform.

The US economy grew at an annualized rate of 3.1% rate in the 2nd quarter. This was revised up from 3.0% estimate last month and is the best quarterly growth since the 1st quarter of 2015. This report looks good, but sustainability is the key. Over the last 10 years we’ve had multiple quarters that grew at a 3%+ annualized rate, but have never put up a whole year with that level of growth near 3%. Read More

Increasing GDP growth is a central aspect to Trump’s tax reform proposal. The key provision of his plan is a reduction in corporate tax rates to 20% from 35% currently. The US corporate tax rate is the highest in the developed world. We’re also the only country to tax global earnings. The Trump plan includes a 10% tax on repatriated foreign earnings, which could lead to over $2 trillion of US corporate cash to be returned to the US. Current tax law allows company to defer taxes on global income until the cash comes back to the US. Bringing $2 trillion back to the US strikes me a very positive thing. Even if the money is simply paid out in one-time dividends or used for share repurchases, that’s a big win versus it sitting in overseas bank accounts. If some of the money is reinvested back into the economy, that’s even better. While the corporate reform framework seems very positive to me, the likelihood of it happening seems pretty low. I don’t believe the market expects it will happen either, so if Republicans are able to pass tax reform, it could provide a nice boost to stocks. Read More

We’ve never seen a President use social media to the extent Trump uses Twitter. Twitter, as a company, has never made money. It’s lost over $2 billion over the last two years. Since it’s Initial Public Offering, the stock is down 60%. That said, the President is helping to support Twitter’s value. One analyst estimated that Trump being so active on Twitter is worth $2 billion. The company currently has a market valuation of $12.5 billion, so the President is responsible for over 15% of Twitter’s value, according to this analyst. Anecdotally, this makes sense to me. Twitter seemed to be slowly dying until Trump became President. Now, numerous media outlets and people check Twitter first thing every morning to see what the President tweeted out overnight. Read More

Oil increased again this week, gaining 1.9% to close at $51.58/barrel. The yield on the 10-yr Treasury moved higher, up to 2.33% from 2.26% last week. The average rate on a 30-yr fixed held steady at 3.83%.

Close Weekly YTD
Dow Jones 22,405.09 0.2% 13.4%
S&P 500 2,519.36 0.7% 12.5%
Oil 51.58 1.9% (4.3%)
10-yr Treasury (∆ in bps) 2.33 7 (12)

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