9 July 2020
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US companies won't waste these tax cuts, which could delay the next recession!

Peter Switzer
22 December 2017

Good news begets good news and this argument of mine was given support when a survey of US chief financial officers found that some 60% would actually use the Trump tax cuts for useful purposes.

Admittedly, 41% of the CFOs were honest enough to say that they could increase stock buybacks, which is less desirable from an economic perspective but it will be good for raising US stock prices. Anyone long on stocks and recognising how Wall Street leads our stock market, can’t be too upset at this news.

That said, the CNBC survey showed 29.2% of these company bean counters said they would “increase their headcount”, while 33.3% of a third thought they’d raise wages. And 29.2% wanted to use the tax cut savings to “increase R&D spending”.

All three actions represent stimuli that has to be good for US economic growth and this too feeds into company profits and, ultimately, share prices. In total, the survey points to these President Trump tax cuts being a real fillip for company bottom lines, economic growth, job creation and stock prices.

But it’s not all win-win — you’d have to expect inflation starts to get a real wriggle on in the USA over the next couple of years. This will force the Federal Reserve to raise interest rates and it will be the pace of these rises that stock market heavies will watch closely, like the way a Labrador watches a sausage at a barbeque!

Interestingly, this week’s tax cut legislation raised the yield on the 10-year bond in the US, and that’s seen as a good thing.

In the hard-to-understand world of the bond market, there are short-term and long-term bonds. If short bonds have a higher interest rate or yield than long-term bonds, we say the yield curve is inverted or sloping negatively.

In the US, this has been a prelude to a recession and historically has happened about eight quarters (or two years) after the yield curve turns negative.

If these tax cuts push up long-term rates, it could delay the arrival of the next recession and if they produce more economic growth rather than too much inflation, too quickly, then these Trump tax cuts could actually delay the arrival of the next recession.

Overnight, the US stocks went higher and that’s a good sign that these tax cuts still have the capacity, especially when they produce real economic growth, to keep US stocks creeping higher. And that will help our stock prices head north as well over the next couple of years.

So what about the so-called Santa Claus rally? Will we see some more rises between now and year’s end?

You’d think Wall Street would’ve had enough after a huge year — the S&P 500 Index is up 20% this year so far! —  but these tax cuts have feed the fire in the stomach of market bulls.

"The seasonal Santa Claus rally is at hand, and we think it will help prevent a pullback before year-end,” said Katie Stockton, chief technical strategist at BTIG in the US.

“Our sentiment readings are not yet sending a collective warning, and breakouts continue to outnumber breakdowns." 

God love those positive, dear little Yanks.

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