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Water Cooler Wisdom: The Day Finally Arrived

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Water Cooler Wisdom

The Day Finally Arrived

On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act of 2017 into law. The long-awaited tax legislation includes a wide array of changes, but a few interesting highlights are listed below.

  • Reduces the top corporate tax rate from 35% to 21%.
  • Changes the taxation of multinational companies from a worldwide system with deferral and credit for taxes paid abroad to a territorial system in which only domestic profits would be taxed.
  • Imposes a one-time repatriation tax of 15.5% on cash and 8% on illiquid assets on the more than $2.6 trillion in profits held by their foreign subsidiaries. (See “Overseas Cash Stash”)
    • How will this impact fourth quarter earnings for multinational companies? (See “Corporate Profits”)
    • What will they do with the cash? (See “Use of profits: capex vs. payouts”)

 

Forecasters are projecting long-term benefits for corporations, but it will be interesting to see the similarities and differences in decisions made by management. The C-suite may be criticized by its shareholders when we eventually have 20/20 hindsight on this topic. On a lighter note, below are the predictions from Bob Doll’s crystal ball.

 

Bob Doll’s Predictions for 2018[1]

 

  1. S. real GDP reaches 3% and nominal GDP 5% for the first time in over a decade.
  2. Despite ongoing protectionism, the global expansion continues with the fewest countries in recession in history.
  3. Unemployment falls to the lowest level in nearly 50 years as wage growth is the highest since the Great Recession.
  4. The yield curve flattens (but does not invert) as the 10-year Treasury yield reaches 3% for the first time since 2014.
  5. Stocks enjoy longest bull market in history but experience a 5+% correction after the longest period without one.
  6. S. equity returns lag earnings growth for the first time in six years, the longest streak in decades.
  7. Equities beat bonds for the seventh consecutive year for the first time in nearly a century.
  8. Corporate capital expenditures increase at the expense of share buybacks.
  9. Telecommunication services, information technology and health care outperform utilities, energy and materials.
  10. Republicans lose the House, retain the Senate and further distance themselves from President Trump.

 

2018 is off to a great start. Low inflation, low unemployment, high consumer confidence, global expansion, fiscal stimulus…What more could an investor want? At the time of writing this note the government is only funded until January 19th, but let’s assume a spending bill passed. Let us know your thoughts.