Tax Reform Optimism Sends Stocks Higher
- Reports Thursday that Republicans had Votes for Tax Reform Propelled Markets Higher
- Real Earth Elements Discovered in US Coal Basins
- S&P 500 was up 1.5% this week, Dow up 2.9%.
Stocks took off Thursday when John McCain committed to voting for the Republican tax plan, signalling the Republicans should be able to get the 50 votes needed to pass tax reform. Markets are mostly responding to the corporate tax cut portion of tax reform, which would reduce the rate from 35% down to 20%. A reduction to 20% would bring the US corporate tax rate in line with other developed nations. The bill would also reduce taxes on foreign earnings, although the exact rate isn’t clear yet. Earlier versions of the Senate bill included a 10% tax on repatriated earnings. The US is the only developed country to tax foreign earnings.
Both of these policies seem very positive for US companies and the US economy. Lower corporate taxes will lead to some combination of lower prices, higher earnings and wages, and increased dividends/share repurchases and/or investment. All of those things benefit consumers and investors. Even if all the tax cuts goes straight to higher profits, I still think that’s a win for the overall economy. Pension funds, 401k plans, etc. benefit from higher corporate earnings and millions of Americans depend on pensions and 401ks for retirement income.
Lowering taxes on foreign earnings should encourage companies to bring back to the US some of the $2.8 trillion US corporate cash being held overseas. Personally I would preferred a 0% rate on repatriated cash. Some critics of this argue that the money will likely be used for share repurchases or dividends instead of additional investment. That might be true. There is ample capital available for investment right now, so that doesn’t seem to be limiting investment. However, I think having the cash in US banks, whether still in corporate accounts, or in investor accounts, is still a positive versus leaving it trapped overseas. As I’m writing this, there still hasn’t been a vote on the Senate bill, but it appears it will occur later this evening. After it passes it will head to committee to reconcile with the House bill. Read More
The Department of Energy reported this week that high concentrations of rare earth elements have been discovered in coal basins in Appalachia and Colorado. This could be a very important discovery. Rare earth elements (REE) are critical in the manufacturing of numerous high tech devices including cell phones, computers and even national security devices. The US currently has no REE mines. The only one we did have filed for bankruptcy in 2015 leaving us dependent on foreign supplies. China is a leading REE miner and provides essentially all US supply. Discovering a large domestic supply of rare earth elements could significantly reduce our need for China to provide these critical materials. Read More
Oil declined this week, decreasing 1.1% to close at $58.31/barrel. The yield on the 10-yr Treasury ticked higher, up to 2.37% from 2.34% last week. The average rate on a 30-yr fixed rate mortgage declined to 3.90% from 3.92% a week ago.