Where in the hell is Santa?

By Peter Switzer

What happened to the Trump tax cut rally? That’s a question I got from a few stock market watchers. In fact, one even asked: “Where in the hell is Santa?”

Of course, this is reference to the famed Santa Claus rally that usually emanates out of Wall Street and then the Christmas cheer is spread from stock market to stock market.

In the US, Santa’s called Donald

But appreciate the real gift of these Trump tax cuts to stock players, then just think the opposite where the tax cuts were rejected by Congress.

Also read: ‘What the hell is it?’ 74 bitcoin questions, answered

What if the bill was rejected?

If the tax bill had been rejected, we could have been looking at a 10% stock market slump!

So if you want some good news, try this: we dodged a bullet.

What does this mean?

This sets the US economy and, therefore, the world economy, for a pretty good year ahead. That is good news for a ‘dig’em up and export the stuff’ place like Australia.

Santa has been busy down under!
For those who expect more from a Santa Claus rally that these tax cuts were supposed to have brought, look at the stock market scoreboard recently and you might see that Santa has been sneaking around since early October here in Australia. And some of those stock market gifts have been Trump tax cut related.

What happened to our index?

Our S&P/ASX 200 index finished Thursday at 6082.8 — around decade highs! On 4 October, it was 5652.10, so that’s a 7.6% gain. And, if we added in dividends, we’d be looking at a 9% gift for the true believers who stuck with stocks after a disappointing run from May to the end of September.

Also read: This is how your shares are taxed

Negativity was the obstruction

Over that time, the positivity about the economy and where stocks were heading was so weak that we couldn’t get past 5830 but at least we didn’t want to slump below 5650. It was like a case of key market influencers holding out for some additional blue sky to add to the revelation that the world economy was growing in synchronization for the first time post GFC.

And Donald Trump, dressed in a Santa suit with a bagful of tax cuts, was going to be the blue-sky delivery boy.

What’s the effect of all this?

The more likely these tax cuts would get through Congress, the more the stock market felt the ‘love’. The best test of how the Yanks had held out for the tax cuts is seen in the Russell 2000 index, which looks at the smallest 2000 companies in America’s group of biggest 3000 businesses on the stock market.

From mid-August, the Index went from 1357 to its current level of 1544. That’s a 13.7% spike!

Why is this so important? Well, a lot of big US companies use a whole lot of tax tricks to reduce their tax bills to around 21%, or lower, but many smaller companies pay close to 35% plus some extra state taxes.

These companies will be the biggest gainers from these tax cuts and many of them are more locally based than the export-oriented outfits at the bigger end of town.

Also read: 11 reasons why 2018 is looking rosy

And will the US rebound?

Most economists in the USA think these tax cuts will deliver higher economic growth and, therefore, better company profits but the growth gains might not be as big as many have been hoping.

That said, the economists could be too conservative in their calculations but nearly all see it as a plus for 2018. I see it as a plus too, albeit with a little more enthusiasm than my US economic buddies.

And will stocks go higher in 2018?

This from Action Economics in the States sums up why many experts think US stocks can go higher next year: a “big wealth effect” from the tax cuts is expected in 2018 and “negotiations has led to a pulling forward of the tax cut benefits into the first four years.”

Also I liked this revelation that 2018 earnings for US companies tells us why the Trump tax cuts have been powering up stocks.

According to the professionals who do the numbers earnings per share for these powerhouse businesses of Wall Street without the tax cuts would be up 8-11%. However, with the tax cuts the gain is tipped to be 13-18%!

But wait there’s more…

A survey of US chief financial officers found that some 60% would actually use the Trump tax cuts for useful purposes.

Admittedly, 41% of the CFOs were honest enough to say that they could increase stock buybacks, which is less desirable from an economic perspective but it will be good for raising US stock prices.

Will the impact here be good?

Anyone long on stocks and recognizing how Wall Street leads our stock market can’t be too upset at this news. That said, the CNBC survey showed 29.2% of these company bean counters said they would “increase their headcount”, while 33.3% of a third thought they’d raise wages and then 29.2% wanted to use the tax cut savings to “increase R&D spending”.

All three actions represent stimuli that has to be good for US economic growth and this too feeds into company profits and, ultimately,ō share prices.

Go Santa!

Putting it altogether and this tax cut story has delivered the stock market plus that was expected over the past three months and so no one should be too disappointed about the possible absence of a rip roaring Santa Claus rally over the next few days because we’ve kind of had it.

A gift that keeps giving

And he’s brought the gift that keeps on giving, stock-wise, for at least a couple more years.

Go Santa, aka Donald T!