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Tax cuts have been given the green light. Does that make Trump a winner?

Trump tax cuts mission complete! Where's the stocks surge?

Peter Switzer
21 December 2017

By Peter Switzer

At long last the US Congress has made President Donald Trump look like a winner, with his tax cuts now given the green light. It was mostly expected and that’s why Wall Street’s response overnight was not excessively spectacular. But if the tax bill had been rejected, we could have been looking at a 10% stock market slump!

So if you want some good news, well, try this: we dodged a bullet. And this sets the US economy and, therefore, the world economy, for a pretty good year ahead. That is good news for a ‘dig’em up and export the stuff’ place like Australia.

This might be accepted, but you still could be asking: where is the Santa Claus rally that these tax cuts were supposed to have brought? And to answer this I’d suggest you look at the stock market scoreboard because Santa has been sneaking around since early October here in Australia and some of those stock market gifts have been Trump tax cut related.

Our S&P/ASX 200 index finished yesterday at 6082.8. On 4 October it was 5652.10, so that’s a 7.6% gain, and, if we added in dividends, we’d be looking at a 9% gift for the true believers who stuck with stocks after a disappointing run from May to the end of September.

Over that time, the positivity about the economy and where stocks were heading was so weak that we couldn’t get past 5830 but at least we didn’t want to slump below 5650. It was like a case of key market influencers holding out for some additional blue sky to add to the revelation that the world economy was growing in synchronization for the first time post GFC.

And Donald Trump, dressed in a Santa suit with a bagful of tax cuts, was going to be the blue-sky delivery boy.

The more likely these tax cuts would get through Congress, the more the stock market felt the ‘love’.

The best test of how the Yanks had held out for the tax cuts is seen in the Russell 2000 index, which looks at the smallest 2000 companies in America’s group of biggest 3000 businesses on the stock market.

From mid-August, the Index went from 1357 to its current level of 1544. That’s a 13.7% spike!

Why is this so important? Well, a lot of big US companies use a whole lot of tax tricks to reduce their tax bills to around 21%, or lower, but many smaller companies pay close to 35% plus some extra state taxes.

These companies will be the biggest gainers from these tax cuts and many of them are more locally based than the export-oriented outfits at the bigger end of town.

Most economists in the USA think these tax cuts will deliver higher economic growth and, therefore, better company profits but the growth gains might not be as big as many have been hoping.

That said, the economists could be too conservative in their calculations but nearly all see it as a plus for 2018. I see it as a plus too, albeit with a little more enthusiasm than my US economic buddies.

This from Action Economics in the States sums up why many experts think US stocks can go higher next year: a “big wealth effect” from the tax cuts is expected in 2018 and “negotiations has led to a pulling forward of the tax cut benefits into the first four years.”

All up, this tax cut story has delivered the stock market plus that was expected over the past three months and so no one should be too disappointed about the possible absence of a rip roaring Santa Claus rally over the next two days because we’ve kind of had it.

And he’s brought the gift that keeps on giving, stock-wise, for at least a couple more years.

Go Santa, aka Donald T!

The 2018 earnings for US companies tells us why the Trump tax cuts have been powering up stocks.

According to the professionals who do the numbers earnings per share for these powerhouse businesses of Wall Street without the tax cuts would be up 8-11%. However, with the tax cuts the gain is tipped to be 13-18%!

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