Investors Get Excited About Taxes

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What's going on?

On Wednesday, Republican lawmakers released a new tax plan with the backing of President Trump, and its got investors attention

What does this mean?

Immediately following President Trumps election, investors bet that lower business taxes would benefit companies profits and thus would push up stock prices. However, the failure to pass substantive legislation so far had caused investors to significantly re-assess the likelihood of tax changes being passed. The recent push in Washington is refocusing investors on the implications of large scale tax reform.



Under the proposed plan, the corporate tax rate would drop from 35% to 20%, and companies holding money abroad would be able to pay a one-off levy if they brought that cash back to the US (after that, foreign earnings would be tax-free, ending a quirk of the US tax system that encourages companies to keep profits overseas).

Why should I care?

For markets: Certain types of companies would be the biggest beneficiaries.

The proposed plan benefits companies that do most of their business within the US which are typically smaller companies. On Wednesday, stocks of smaller and mid-sized companies jumped 2%, much more than US stocks overall. The plan would also benefit companies that have lots of cash overseas, like tech companies with big, international operations (think: Apple, Facebook and others).

The bigger picture: The so-called Trump trades return…

In the immediate aftermath of the presidential election, markets reflected a higher likelihood that new laws from Washington would boost US economic growth at least in the near term. Stocks went up, especially of those companies that are US-focused. And, importantly, investors also pushed up interest rates (a.k.a. bond yields) by selling bonds (find out how that works here). For one, investors are likely anticipating that, if the economy were to get a boost due to new policies out of Washington, the US Federal Reserve would raise interest rates more quickly. On Wednesday, both of those Trump trades got a boost from investors.

Originally posted as part of the Finimize daily email.

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