Trump Policies and Market Performance Pt2

By Donald Trump getting his tax reform bill passed at the end of 2017, it added another leg to the market growth that we may not see end for years to come. Everyone with money to invest has enjoyed positive returns for the past 10 years since the mortgage failures of 2008. A new level of excitement came through with the passing of the tax reform bill that reduces corporate and personal income taxes. From the first day of trading in 2018, the market went straight up to hit a peak on January 27th.

The market started to dip in February, but pulled back harder after the first round of earnings were announced. This first round of earnings in

2018 was for the 4th quarter of 2017 which caused a high level of confusion for investors. Investors were expecting higher earnings, which wasn't going to be the case as companies had more incentives to write off capital expendentures in 2017 rather than carry them into 2018 where they won't have as big of effect due to the lower tax rate. This was amplified after Alphabet (GOOGL) reported their 4th quarter earnings. from that point, everything dipped lower. 

In the middle of the 2017 4th quarter earnings season, Trump changed the Federal Reserve Chairman to Jerome Powell. The market likes to test new Fed Chairmans and this was definitely the case as he came into his job with the desire to raise interest rates as many times as possible to strengthen the dollar. Then we finally got into the changes from the tax bill as companies started reporting their 1st quarter earnings in April. 

The market started moving up again around the 1st quarter earnings, but every time it tried to move forward, it would retreat with new tariff news. The market doesn't like uncertainty and tariffs have uncertainty written all over them. The market was over sold in February but did come back to retest those lows as the new tax rate led to many companies changing accounting procedures to maximize their tax break. 

The drop in corporate taxes in the 1st quarter earnings created a higher level of expectation in the 2nd quarter earnings reports that were almost impossible to reach. This was especially true in technology stocks as many of them have beat their earnings estimates, but would guide down expectations for the remainder of the year. Everything has a tendency of rotating as we have seen rotation move away from retail. I would expect the rotation to move back to technology stocks in the 4th quarter. 

We are coming to the end of the 3rd quarter which means we are about to enter its earning season. I would expect to see everything continue to move up for the remainder of the year as the earnings reports will be better and better. Disappointment by few companies will not affect the market as in the past 6 months. By the end of the year, Donald Trump will forge a new trading agreement with China which will send the market higher. 

If a new trading agreement is not made with China, the market will go higher in the 1st quarter of 2019 as the auto stocks will boom with their most profitable quarter ever due to the lower personal tax rate creating larger refunds and when people get large tax refunds, they buy new cars. 

If you don't know what to invest in, pick a no cost mutual fund with Schwab, Fidelity or Robinhood. If you don't have your money working for you, you have nobody to blame but yourself.

Trump Policies and Market Performance Pt1

Donald Trump has dominated news with his Twitter antics that make him almost unbearable with his messed up opinions. Unfortunately Trump's Twitter is so bad it overshadows all the good he is doing for the economy. For each good thing has brought a bad thing. Trump has changed the Fed Chairman, imposed trade tariffs and lowered the corporate tax rate which have improved the economy but caused so issues along the way.

The change of the Federal Reserve Chairman from Jane Yellen to Jerome Powell was unnecessary as Yellen was doing a good job with gradual rate increases. Powell came in with an agenda to strengthen the US Dollar with increasing the Fed Funds Rate as many times as possible. The dollar was excessively weak and has strengthened. While our currency has improved, other economies of the world have struggled. Turkey's failure should not affect the US economy, but the opposite is not true. Turkey will continue having problems as we increase our rates. An increase in rates will increase our problems as well.

An increase in interest rates will ultimately trickle back to everyone in the United States in more than one form. Raising interest rates affect loans businesses need for improvement and growth. When businesses have problems with money they cut back on employees. The effect is compounded when the mortgage interest rates increase to the point where people stop buying bigger homes because they can only afford the high prices smaller homes. When people stop buying the large homes, builders stop build over prices multi-family housing for rental and sales. The increases in rates and homes is compounded by the increasing cost of materials due to tariffs. Did someone say inflation?

Inflation appears inevitable as we have more people working, interest rates are rising and tariffs are increasing the cost of materials regardless of where they come from. Really the tariffs are imposed to raise the cost of materials we import so they are above the higher cost of domestic materials. Should US materials cost more when Trump has reduced the corporate tax?

Donald Trump passed the most comprehensive tax reform that the US has ever had. By lowering the domestic tax, companies have less to pay domestically which means higher profits and reduction of the need to export production to import the final products. This should be the end result although all that it has been used for this year has been tfor companies to waste money by buying back stock. Buying back stock reduces the amount of stock supply on the market which should increase the price of the stock as demand increases. That sounds like more inflation which is not the intended purpose.

The intended purpose of the tax reform was to help companies keep jobs in the United States with more production in the United States. By having more money available should mean more employment and higher paying jobs. There is the problem. While the profits increase for companies, they don't pay their employees that much more. It was nice to see some huge companies pay incentives to employees earlier this year, but this trend will not live long.

What does appear to be building strength is inflation. Inflation kills returns when related to interest rates and the best hedge for inflation is investment in company stock. That circles us back to the desire to buy stock when there is less available for us to buy. Now that all of this is in place, I will break down the effects of the tax reform on the market in the next blog,