10 Serious Risks and Opportunities for Investors Under Tax Reform and Tax Cuts

When it comes to a dysfunctional political climate in Washington, D.C., every day people like you and me are thrown into the push-pull antics. We may all feel different about entitlements, benefits, health care, gun laws, and how the nation should be governed. One thing that actually boils down to a common complaint is how people are taxed. Some of us may want to be taxed less, and some may want other groups to pay more. At the end of the day, we all seem to care about the taxes we pay.

With tax reform, or at least tax cuts, looking much more promising than other efforts from President Trump and the Republican Congress, 24/7 Wall St. has decided to offer up 10 key issues that will matter to investors under changes to the tax code. The timing, and the ultimate impact, of any tax changes will remain up for debate, even as more proposals are released in the days ahead.

There are barely 50 days left until the start of 2018, and we all know that Congress isn’t working every one of those days. These tax reform (or cuts) may not apply to the tax year 2017, but they still may get applied retroactively.

Investors have no choice but to care about how and why tax changes will impact their current holdings and how the changes will impact the markets in the months and years ahead. The president was elected one year ago now. His economic and regulatory plans have helped to add support under the equity markets, hence the so-called Trump bump and the Trump rally referenced by the financial press. Here is how the broad market indexes and exchange traded funds have risen from a year ago and year to date, as of November 8, 2017:

  • Dow Jones Industrial Average up 19% in 2017 and up 29% from a year ago.
  • S&P 500 up almost 16% in 2017 and up over 21% from a year ago.
  • Nasdaq 100 up 30% so far in 2017 and up over 32% from a year ago.
  • iShares MSCI Emerging Markets ETF (NYSEARCA: EEM) up 33% so far in 2017 but up 25% from a year ago.
  • SPDR EURO STOXX 50 ETF (NYSEARCA: FEZ) up 23% so far in 2017 and up over 27% from a year ago.

There are some obvious issues and risks when it comes to predicting how tax reform (or tax cuts) will play out. Lobbyists have yet to make their marks, and everyone should never underestimate the power of special interest groups trying to get their way. Some of these expected outcomes could even change radically, which means that some of the expected outcomes might even come with a reverse-course over what was initially intended.

24/7 Wall St. took numerous views of proposed tax changes as they stand the first week of November. Lawmakers are already targeting some changes, and various mark-up efforts in the House and Senate have yet to be telegraphed to the public. However tax reform comes, it can impact stock market sectors, it can impact classes of investors, it can impact Treasury yields and other debt yields, it can impact dividends and buybacks, and so on.

Here are 10 areas of tax reform that may change handily for the investment community.

1. Corporate Tax Rate Cuts

There is a large debate between parties over whether corporate tax rates dropping from 35% to 20% (or even 25%) will create jobs. There is also still a debate whether the savings will really turn into more jobs. U.S. companies are without argument taxed at much higher nominal rates than almost all OECD nations. If the business climate improves further and is expected to remain pro-business for years ahead, it would make sense that companies will reinvest in their businesses and would hire more people. Still, this debate continues on.

What would seem to be obvious is that the extra after-tax cash, even if it is used for the greater good as well, will be sent back to investors. The direct issue will be more money for dividends and more money for stock buybacks. If that holds true, it translates to higher stock prices if all other issues remain static. It also will generate more cash for mergers and acquisitions, which generates better returns for investors who own companies being acquired.

Moody’s recently showed the impact that past tax reform efforts had in different sectors and their stocks.

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