The final tax reform bill is scheduled to be released at 5:30pm eastern and it appears that Republicans in the Senate have enough votes for passage. The final details aren’t known, but it appears the corporate rate will be reduced to 21%. The individual tax code is seeing less significant reductions, but is being simplified through the doubling of the standard deduction. From an investing standpoint, the reduction in the corporate rate is the key aspect of the bill. While many companies don’t pay the full statutory rate, a tax cut will free up capital for investment, dividends or share repurchases. Every capital investment decision has to include a provision for taxes. If the tax rate is lower, additional investments will start to make economic sense. Read More
One thing that remains interesting to me is the bond market reaction to tax reform. I’ve written about this over the last year, but it still surprises me how different the bond market seems to think about the economy and future economic growth versus the stock market. The 10-yr Treasury is at 2.35%. At the beginning of the year it was 2.45%, essentially the same level. The stock market seems to believe economic growth is going to start exceeding 3% annually, but the bond market isn’t believing that, otherwise the 10-yr Treasury would be trading significantly higher than it is. The gold market seems to agree with the bond market. Gold is up 9% this year, but it has largely traded in the $1,200-1,300/oz range for the past two years. That means the market isn’t expecting a sharp increase in inflation in the near term. If growth is able to get above 3% consistently, we would likely see higher inflation.
The latest Star Wars movie officially opened today, but many theaters showed the movie last night. Remarkably, the movie made $45 million last night and expects to be around $100 million by the end of the day today. This could end up being the most lucrative opening weekend in history. In addition to Disney winning from the latest Star Wars release, it announced this week it was buying a number of asset from Fox, one of which is the remaining Star Wars assets it doesn’t own. If this deal goes through, Disney will now own all of the Star Wars franchise and Star Wars appears poised to be a business success for years to come. Read More
Oil declined slightly this week, decreasing 0.1% to close at $57.32/barrel. The yield on the 10-yr Treasury moved lower, down to 2.35% from 2.38% last week. The average rate on a 30-yr fixed rate mortgage ticked lower to 3.93% from 3.94% a week ago.