What Trump’s tax plan means for stocks

Whatever happens will have less of an effect than you think

There’s a lot of hot-and-heavy haggling over whether President Trump’s tax plan is good or bad, and who wins and loses.

I’ve no clue what Congress will do. Nor does Congress. But I do know — cold — the ultra-long history of tax changes and parallel stock price wiggles.

And I’m here to tell you this: Whatever happens will have less impact on stocks than you can possibly imagine. That’s good. Let me show you why.

Most investors think tax cuts are good and that hikes are bad. But regardless of what is enacted, speculating on it just doesn’t work. Take last November: Speculating that defense and infrastructure stocks would shine because Trump was supposedly for them didn’t work. And it shouldn’t. Stocks pre-price, or build into current prices, all that thinking long, long before anything happens. It’s not good or bad, it’s just what stocks do. By the time tax law is changed, it’s ancient history to the market.

And that’s particularly true now. This Congress is like an ungulate. It keeps regurgitating and re-chewing its cud, not passing it through.

To see how little stocks will actually care about tax changes, consider history. There are three basic federal tax categories: corporate, personal income and capital gains. Since 1927, we’ve cut corporate taxes 10 times. The following year, U.S. stocks have risen six times, 60% of instances, averaging 11.3% increases per year.

We’ve also hiked those taxes 13 times. Stocks rose the next year nine times, 69% of instances, averaging 12.5% annually. Cuts? Hikes? About the same frequency and size of gains, regardless.

Personal income taxes? We’ve had 15 cuts. Stocks rose the next year 10 times — 66% of those years, gaining 8% on average. That’s good, right? But returns after 13 comparable hikes also rose, gaining 10 times, or 77% of those years, and averaging 15.7% annually. Great. So are income tax hikes bullish? No. Congress simply cut them following several bear markets as the next bull market’s big returns were born, tilting total returns slightly.

Capital gains taxes are trickier. They should have the most impact. After all, they’re a tax directly on selling stocks. So, a big difference between how stocks react to a cut vs. a hike sounds right. But it’s not so clear.

Congress has cut capital gains taxes six times. Stocks rose the next year five times, averaging super-high 19.1% annual returns.

Stocks pre-price all that thinking long before anything happens. By the time tax law is changed, it’s ancient history to the market.

Groovy. But stocks also rose after all but one of the nine capital gains tax hikes, averaging 12.1%. Groovy II.

It’s impossible from data to conclude that tax cuts or hikes are better or worse for stocks. Taxes are just one aspect, not some all-powerful force, particularly if tax wiggles aren’t perceived as enduring, as I wrote here May 9. And with Republicans’ congressional majority as scant as it is now, envisioning reversals in 2021 is very realistic should Democrats take control in 2020.

Still, maybe, there is one conclusion to draw from the data. Maybe just getting past tax talk blather is bullish. After all, stocks rose after all those times mentioned above in 73% of all years, whether this tax or that one was whacked or jacked. And that’s about 10% above normal.

Remember: The reverse of Congress is progress. In light of what really happens, tax “reform” is a circus-like distraction. Focusing on it leads too many people to overlook some crucial trends: Solid American profit growth; even faster growth overseas; fears of rising European populism fading; the huge strength of foreign stocks markets like South Korea’s.

When the tax talk and whack-or-jack adjustments are finished, the real drivers of this bull market come into clearer focus. Then stocks will likely keep charging higher, as they usually have after tax “reform.”

Be bullish about increased clarity, not possible tax cuts.