Trump’s tax cut plan may keep dark clouds away from U.S. stocks
GEOFF ZOCHODNE
Skittish investors are still waiting for the sky to fall on surging U.S. stocks, putting the spotlight on a push for tax cuts by U.S. President Donald Trump that could end up fuelling a further run.
The S&P 500 is up about 15 per cent for the year, and had topped 2,575 points Monday morning, a record high. Last week marked 16 months since the last five per cent S&P 500 drawdown, the fourth longest streak in the history of the index and well past the historical average of 92 trading days without a slip of that size, according to Goldman Sachs.
The rise of those U.S. equities, though, has some investors bracing for a correction. The index was down slightly Monday afternoon, about 0.19 per cent as of 2:40 p.m.
“Like everyone else on the planet, we keep looking for indications for what could go wrong,” Canaccord Genuity said Monday in a note. “Sorry folks, but the only thing we can come up with is — there is nothing we can come up with.”
Analysts, however, are paying attention to the improving odds of corporate tax cuts in the U.S. The Trump administration scored a win of sorts last week, when the U.S. Senate passed the $4-trillion budget plan, positioning the Republican-dominated Congress to take a run at cutting taxes. Markets were high Monday on hopes that Trump’s tax plans may move forward after the Senate’s approval of a budget resolution on Friday.
Prior to the budget blueprint’s passage, RBC Global Asset Management said last week that there was a 60 per cent likelihood of “tax stimulus of some form” next year in the U.S.
“This, of course, would be positive for U.S. equities and the U.S. dollar,” wrote Eric Lascelles, chief economist for RBC Global Asset Management.
Goldman Sachs said Friday that tax reform “remains the key potential upside and downside risk to equity markets,” and that its economist was predicting a 65 per cent chance that cuts are passed early next year.
Canaccord said investors aren’t adjusting their expectations to account for a number of headwinds that have become tailwinds for further economic growth, including “the strong possibility of a cut in corporate tax rates in 2018.”
“Regulatory reform and the potential for corporate tax cuts have kept consumer and small business confidence near historically high levels,” added the firm.
Canaccord said it currently has “no fundamental or tactical reason” to back down from its 2018 target for the S&P 500 of 2,800, citing the potential lift from tax reforms.
“In other words, our SPX 2,800 target could prove to be overly conservative by a couple hundred points,” it said.
Goldman Sachs noted Thursday was the 30-year anniversary of Black Monday, when the Dow Jones Industrial Average fell 508 points, or 22.6 per cent, its greatest single day decline. The gloomy anniversary also coincided with 20 months since the last 10 per cent S&P 500 correction, Goldman said, with clients asking “When will the rally end?”
“We do not expect an imminent drawdown and believe tax reform will determine the direction of the S&P 500’s next 100 points,” the firm said Friday in a note.
“Persistently cautious investor sentiment is one reason we expect limited downside from any economic or policy-related disappointment.”
Brian Belski, chief investment strategist at BMO Capital Markets, said Thursday in a note that “tax reform and Fed policy have been two of the most discussed topics among investors lately,” with a variety of opinions on what they could mean for stocks.
“Thus, we believe it is only a matter of time before the unprecedented level of market tranquillity is disrupted as these matters unfold,” Belski wrote. “Nonetheless, we do not envision any sort of major U.S. market meltdown in the coming months and would encourage investors to use any periods of potential weakness as an opportunity to increase U.S. stock exposure even further.” gzochodne@postmedia.com Twitter: @geoffzochodne