Supercharged Economy

The tax bill is signed and complete. Below are two links that provide a thorough review of how tax reform might impact your finances – I added a Fox News link for my Republican clients, and a CNN Money link for my Democratic clients. If you’re an independent, then you’re out of luck because there is no unbiased news.

This year will most likely go down as the first time in history that the stock market hasn’t experienced a negative month. There has already been a new record for the longest period without the S&P 500 falling 3%.

The market naysayers have had a very difficult year in 2017. I hope that they have even worse of a year in 2018. As we enter the tenth year of a bull market, investors have grown concerned about when the next bear market will strike. The challenge going forward will be predicting how the economy will be impacted by tax reform.  This tax package will not lower taxes for everyone and will raise taxes for many families in the middle-class, especially those living on the coasts.

Even though the stock market has been on an upward trajectory, a new poll released on Monday by Gallup, surveyed that 51% of people do not approve of how Trump is handling the economy as president, while 45% say they approve. The only explanation for the low results of this poll are that not enough people are invested in the stock market or were holding too much cash in 2017. I’m sure that most small business owners would give President Trump much higher approval ratings on the economy. Overall, the approval rating of how President Trump is doing in the White House remains very low. This particular poll had 59% of people not approving of the job that he is doing in the White House. If you’re a Trump supporter, then you probably don’t believe any of these polls.

The positives of this tax bill are that companies will repurchase shares and increase dividends. Other companies will raise wages and increase capital expenditures. The labor market is already very tight and corporate profits will be much stronger in 2018. The best investments, if you could make them, would be in “pass-through” businesses (companies not incorporated). The owners of shareholders of S-corporations, LLCs, and partnerships have the most reason to celebrate this holiday season. The wild card next year will be if these businesses hire and reinvest in their businesses. I believe that they will because there is now a major incentive to make even more money in the Donald Trump economy. I just hope that the bond market continues it’s hibernation and doesn’t wake up to the fact that economic growth is about to get supercharged.

The biggest negative in this tax package is limiting the property tax and mortgage deductions. How this ultimately impacts home prices and the economy is anyone’s guess. The National Association of Realtors’ believes that house prices could drop substantially for luxury homes. Many other people believe that this tax package was a corporate giveaway. The upcoming midterm elections could be cause of anxiety for investors in 2018. Another unintended consequence of tax reform might be higher interest rates and higher inflation. I believe that this is the biggest risk to the stock market in 2018. The combination of these two powerful forces are the enemies to investors.

I’ve maintained a higher allocation to stocks throughout 2017 and have mostly avoided bonds. I prefer holding investments that will benefit from a strong U.S. economy. This corporate tax cut is going to result in companies reporting record profits in 2018. I continue to favor high quality companies in the technology and financial sector. Even after very strong returns in 2017, I’m still finding many new investment opportunities.

Happy Holidays to you and your family, and cheers to a prosperous New Year.

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