President Trump is ending the year as he began it, touting announcements from corporate giants as validating his leadership.
This week, that meant pausing from his more regular habit of cheerleading the ongoing stock market rally to highlight splashy business headlines generated by his tax-cut victory. Whether the corporate cut at the heart of that plan breeds widespread prosperity is up for debate. But market watchers, for their part, see plenty more room for share prices to rise, even after investors have priced in tax cuts whose promise helped power the market run this year.
“2018 is going to be a rinse-and-repeat year,” for stocks, says Brian Belski, chief investment strategist for BMO Capital Markets. “We’re going to be buying stocks again because great American companies have rebuilt their balance sheets, restored their cash flow, and their earnings growth is accelerating.”
Belski may be a noted bull, but his sentiment looks to be widely shared. Here are Lu Wang and Elena Popina of Bloomberg News:
“Maybe it’s the Fed, maybe it’s Donald Trump, maybe it’s bitcoin froth seeping into equities. But lately, daring, animal spirits and greed have supplanted fear as the bull market powers toward its ninth year. Bears that once roared at any sign of trouble now seldom make a peep. Too many dire predictions failed to come true. It’s not just anecdotal. A recent survey by the National Association of Active Investment Managers found that even the most pessimistic mutual fund overseers are fully invested in stocks. Equity exposure rose to the highest level in data going back to 2006.”
Trump’s serial boasting about the roaring stock market — he has tweeted about it 58 times since taking office — deserves some asterisks. For one, those gains aren’t broadly shared, because stock ownership is concentrated among the wealthiest. Plus, as Axios pointed out Thursday, the percentage growth of the S&P 500 in Trump’s first 11 months in office trails its pickups during the same time frame under President George H.W. Bush and President Barack Obama:
One obvious difference between this year and Obama's first: Trump inherited a healthy economy with the steadily climbing market to prove it. And though the promise of fiscal stimulus out of Washington cheered investors, the Trump era has also injected a new breed of chaos that rattled them at times, as well. As this chart from Bespoke Investment Group shows, the impact of those events proved fleeting:
By late summer, investor confidence in prospects for a tax overhaul — which had surged post-election, then flagged — started coming back to life. This chart from Bespoke, plotting the performance of the S&P 500’s 125 highest-tax stocks against its 125 lowest-tax stocks, demonstrates the trend:
The convergence of the lines suggests that investors by now have largely priced in the tax-cut package that congressional Republicans wrapped up work on this week, says Paul Hickey, co-founder of the Bespoke Investor Group. "Now, the market is going to look for other catalysts. It can’t just keep rallying on the same theme."
Charlie Smith, chief investment officer of Fort Pitt Capital Group, pointed to some fundamentals that he says will sustain the rally. The fact the Fed has reversed its quantitative easing policy has made corporate treasurers finally recognize that the Fed doesn’t have their back anymore. “They have to get out there and start to invest in real growth,” he said. “It’s unadulterated good news for the economy when real risk-taking is revived, and we’re beginning to see the first signs of that.”
Unadulterated good news for the economy, the kind that reaches beyond the market, could give Trump and his party a much-needed boost heading into what’s shaping up to be a difficult political season.
This week’s corporate announcements — from heavily regulated giants with major pending business before the administration, including AT&T, Boeing, Comcast and Wells Fargo — looked more like a lobbying and public relations play. As The Washington Post’s Phil Rucker writes, “The corporate announcements are not being coordinated by the White House, administration officials said, though one official acknowledged that during the tax debate, representatives of some of the companies had informally discussed with the administration spending decisions they were considering making should the bill pass.”
And Wells Fargo sent mixed messages about its news of a pay hike, per the Los Angeles Times: “Wells Fargo & Co.’s move to raise its minimum pay to $15 an hour was part of a long-term plan and not related to the passage of the Republican tax overhaul as the company implied, said a bank spokesman, who later backtracked and stated the hikes were a result of the bill’s approval.”
Reviewing statements from 20 of the largest U.S. companies on the tax package, The Post's Heather Long found nearly all supported it; many said they would use the extra cash to pay out higher dividends; and only two said they would add jobs. Good news for shareholders, for starters.
Trump himself seemed pleasantly surprised by the corporate lovefest:
Our big and very popular Tax Cut and Reform Bill has taken on an unexpected new source of “love” - that is big companies and corporations showering their workers with bonuses. This is a phenomenon that nobody even thought of, and now it is the rage. Merry Christmas!— Donald J. Trump (@realDonaldTrump) December 22, 2017
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— Tax cuts buoy Republicans. But they're sinking. NYT's Jonathan Martin: "The sweeping tax overhaul approved by Congress this week hands Republicans a long-sought achievement they believe will bolster their defenses in next year’s midterm campaign, but party officials concede the measure may only mitigate their losses in what is shaping up to be a punishing election year. While the tax legislation is broadly unpopular as it reaches President Trump’s desk, the bill offers Republicans the sort of signature accomplishment they have been lacking to galvanize their demoralized donors and many of their voters. Republican lawmakers, who spent much of this year forced to explain or defend Mr. Trump’s erratic behavior, now have an opportunity to go on the offensive with an issue that unites their increasingly fractious party. And they hope that up-for-grabs voters will reward them should the economy keep growing while their tax bills are falling."
— Massive marketing push begins. Politico's Kevin Robillard, Nancy Cook and Cristiano Lima: "Conservative groups are planning a multimillion-dollar effort to sell the GOP’s tax cut law ... The Koch network will launch a multimillion-dollar push next year to sell the bill, with paid advertising and town halls to educate voters. A major GOP super PAC is planning to spend $10 million to protect House members. And another group, the Committee to Unleash Prosperity, plans to spend the majority of its $1 million annual budget selling the tax plan next year, according to one of the group’s founders, Stephen Moore, a distinguished visiting fellow at The Heritage Foundation and an informal economic adviser to the president."
(Click here to see a cool infographic from the WSJ's Nick Timiraos and Youjin Shin exploring out tax cuts affect revenue.)
— Tax bill = M&A ahoy. WSJ's Aaron Back: "The starting gun for the latest deal-making wave went off a couple of months ago when the contours of the tax bill started to come into focus. Now with the plan nearly done, mergers and acquisitions should accelerate next year. The deal-making should pick up in industries facing pressure from technology, changing consumer tastes or new competitive pressure such as media, consumer brands and health care. Other industries could see upticks in deals as the tax penalty for selling businesses fall...One big positive for prospective sellers is the lower 21% corporate tax rate will reduce the tax bill to companies that sell off business units. Another is the lower rate will give companies more cash to spend, especially at a time when share buybacks are less attractive because of high stock prices. Finally, companies with overseas cash will be able to bring it home, though the biggest tech companies probably won’t go on a spending spree."
WSJ's Richard Rubin:
That book is the tax bill, about to be enrolled in Congress and then sent to the White House. pic.twitter.com/e8zYjklT8l— Richard Rubin (@RichardRubinDC) December 21, 2017
— How to circumvent SALT limit with charities. Washington Examiner's Joseph Lawler: "It appears that state and local governments could help residents circumvent that limit by setting up charities to fund programs. Here's how it would work: Taxpayers suffering tax hikes due to the SALT limitation could donate to the charities and, in return, receive a dollar-for-dollar tax credit applicable to their state or local tax bill. Then, they could deduct up to 37 percent of that the “donation” from their federal taxable income through the charitable deduction, which was left uncapped in the tax overhaul. The deduction level would depend on their tax bracket.
In this way, states could create tax credits for donations to, for instance, their university systems by giving donors back 100 percent of the gift in the form of state income tax breaks. From the state’s perspective, it would still be getting revenue to fund services. But from the taxpayers' perspective, they would be able to write off a portion of that donation from their federal taxes, which they couldn't do if the university funding were collected in the form of a tax."
— 4.2 million homes go income-tax free. WSJ's Richard Rubin: "The tax bill that Congress just approved will remove 4.2 million households from the income tax rolls in 2018, according to Tax Policy Center estimates released on Thursday. Under current law, 43.4% of households don’t pay income taxes or get net refunds in 2018. Under the bill that President Donald Trump will sign, that would rise to 45.8%. That gap narrows over time as a slower inflation measure in the law kicks in and because the child tax credit isn't indexed while the repealed personal exemption is. If the individual tax cuts expire as scheduled after 2025, more people would pay income taxes. In 2027, 40.7% would pay no income taxes under current law, compared to 40.1% under the bill. The estimates don’t include the effects of eliminating the penalty for not having health insurance."
— Hundreds make gifts with convenient timing. Uh oh. WSJ's Andrea Fuller: "When Michael Milken donated $27 million of stock to charity in September 2013, the former junk-bond financier’s timing scarcely could have been better, for tax purposes. Twenty-six trading days later, the shares of K12 Inc., an education company in which he was an early investor, lost 38% of their value in a single day. A decade prior, he donated stock in another company he helped seed, LeapFrog Enterprises Inc., shortly before it fell 25% in one day.
That meant Mr. Milken’s stock gifts would have been worth millions of dollars less if made a few weeks later. So would have been his potential tax deductions. Mr. Milken was among hundreds of people who donated stock to charities near price peaks or a few weeks before the stocks tanked, a Wall Street Journal analysis of federal data shows. Such donations occurred more often than chance would dictate, according to researchers interviewed by the Journal. Mr. Milken’s timing was better, in terms of potential tax deductions, than that of about 99% of corporate insiders and large shareholders who reported stock gifts to the Securities and Exchange Commission over 14 years, the Journal calculated. (The comparison group included some gifts that didn’t generate deductions.)"
— Pay for school with 529 plans now. NYT's Ron Lieber: "Just last month, it was not certain that the Senate would go along with the House of Representatives’ proposal to let families use 529 college savings plans to pay for private school from elementary school onward. In a bill that offered many perks for the wealthy, the 529 provision was a particularly brazen giveaway. After all, it’s mostly wealthier people who can save enough to reap large benefits from the provision, which allows $10,000 in annual tax-free 529 account withdrawals for pre-college students starting in 2018. But it really did happen, and President Trump will soon sign the bill that makes it the law of the land. The short-term opportunities for affluent families are potentially worth five figures. The schools, however, will now confront a major financial aid question that the new bill forces on them. And states could make offsetting tax changes that cost 529 savers money. Any eventual populist blowback could threaten the plans, too."
— Congress averts shutdown. The Post's Mike DeBonis and Erica Werner: "Congress passed a stopgap spending bill Thursday, averting a partial government shutdown at midnight Friday but pushing into January showdowns on spending, immigration, health care and national security. Among the issues still to be resolved is federal aid for victims of recent hurricanes and wildfires. The House on Thursday passed a separate $81 billion disaster relief bill, but the Senate did not immediately take it up amid Democratic objections. The stopgap extends federal funding through Jan. 19 and provides temporary extensions of the Children’s Health Insurance Program, which has languished politically since it expired in October, a veterans health-care program and a warrantless surveillance program set to expire Jan. 1."
— McConnell: No entitlement reform. The Post's Karoun Demirjian: "The Senate’s top Republican on Thursday quashed calls from House leaders to tackle Medicare and Medicaid spending next year, declaring it politically unfeasible and thus off the 2018 agenda. 'I think Democrats are not going to be interested in entitlement reform, so I would not expect to see that on the agenda,' Senate Majority Leader Mitch McConnell (R-Ky.) said at a breakfast sponsored by Axios. 'What the Democrats are willing to do is important, because in the Senate, with rare exceptions like the tax bill, we have to have Democratic involvement.'
McConnell’s comments are a direct blow to the agenda of House Speaker Paul D. Ryan (R-Wis.), who has been saying for weeks that Congress will work on ways to reduce spending on Medicare, Medicaid and welfare in the new year. His statement is also a sign that Senate Republican leaders want to limit the situations in which they are willing to rely on procedural moves to get around Democratic opposition in a high-stakes election year."
— Mueller's silent treatment. Bloomberg's Chris Strohm, Steven T. Dennis, and Shannon Pettypiece: "Through all the controversy, threats and noise surrounding the Trump-Russia investigation, one person has been conspicuously silent: Special Counsel Robert Mueller. The former FBI director hasn’t uttered a single word in public since he was appointed in May to lead the probe into Russian meddling in the U.S. election despite increasingly combative attacks by Republicans and their allies on the FBI, the Justice Department and the integrity of his probe. It’s an intentional strategy meant to convey the investigation’s credibility and seriousness in an age of 24-hour noise, amplified by cable news shows and Twitter, according to current and former U.S. officials who know Mueller personally or who have followed his work."
— Sanders brushes off 'hoax' Russia probe. Politico Cristiano Lima: "White House press secretary Sarah Huckabee Sanders said Thursday that President Donald Trump hopes special counsel Robert Mueller will wrap up his "hoax" investigation soon, and she said lawmakers should "absolutely" look into what they view as election-related wrongdoing under the previous administration. Sanders said Trump does not intend to fire Mueller, whose team is investigating Russian interference in the 2016 election, including any ties to Trump campaign officials. But the White House spokeswoman also took aim at the probe's legitimacy. 'We have no intentions of firing Bob Mueller. We are continuing to work closely and cooperate with him,' Sanders said on Fox News. 'We look forward to seeing this hoax wrap up very soon.'"
Brookings Institution holds an event titled “Should the Fed stick with the 2 percent inflation target or rethink it?” on Jan. 8.
- The American Enterprise Institute holds an event on “New thinking about poverty and economic mobility” on Jan. 18.
From The Post's Tom Toles:
Watch Vice President Pence's address to troops during a surprise visit to Afghanistan:
Sen. Al Franken (D-Minn.), resigning on Jan.2, denounced President Trump and the GOP in a final floor speech:
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Seth Meyers takes a closer look at President Trump's claim he repealed Obamacare: