Since our last quarterly commentary, the stock market has continued to increase without much pause. Here’s a report card detailing the spectacular returns we saw in investment markets in the fourth quarter and the full year:
One of the items propelling U.S. equity prices higher is a major Federal tax overhaul bill that went into law, effective January 1st of this year. We have analyzed the tax changes and, while there are some adjustments at the individual income tax level, the only change we’d consider “major” is the permanent corporate tax rate cut from 35% to 21%.
Since U.S. economic growth is largely consumer spending driven, individual tax rates typically have a larger influence on the economy than corporate tax rates. However, corporate tax rates have a bigger impact on the stock market. An increase in corporate profits, due to lower expenses (i.e. taxes), should lead to higher stock prices. And this, of course, benefits you and anyone else who owns stocks.
If corporations use their newfound wealth to increase employee’s wages or invest in capital projects that create jobs, or if foreign companies, enticed by lower tax rates, decide to invest in the U.S., economic growth could certainly increase. However, if recent history is any guide, the majority of these tax savings will be used to buy back stock and/or pay dividends, benefiting shareholders. Stocks have increased in anticipation of the tax bill and while it remains to be seen what companies will actually do with their winnings, increasing equity prices cast a vote toward shareholders reaping the rewards.
With regard to individual tax changes, tax rates are being reduced marginally (and temporarily through 2025) and standard deductions are going up significantly. These two things lead to lower taxes, all else equal. However, certain exemptions and […]