Blog

Mar
29
Impact of Tariffs and Corporate Tax Breaks

The market vibe for the last 14 months appeared to be economic nirvana! What happened in March 2018 that caused the market to retreat? Stocks like Nvidia, Amazon and the so-called F.A.N.G. stocks in general were literally sucking in investor dollars. In-flow from mutual funds and ETF’s greatly inflated stock prices. Even though concerns mounted amongst asset managers and I agree, many funds and ETF’s have borrowed money (leveraged) to purchase popular stocks. Leverage positions have nearly reached their all time high! With the massive corporate tax cut the federal government is relying on economic growth, in turn increasing the tax base. Until that happens, the U.S. government must borrow money. The Federal Reserve is about to issue billions in bonds and treasuries.

The government is first in line when it comes to borrowing money. The private sector gets what’s left. This is called “crowding out.” The government borrowing coupled with the private sector highly leveraged pushes up interest rates. Whether interest rates are increasing due to “crowding out” or economic expansion remains to be seen. One thing’s for certain, the corporate tax cut is huge! One can call it a 17% pay raise. Its massive, 17% of 100 million is a 17-million-dollar savings. What will the corporations do with all this extra money? They could buy their own stock, which would support their stock’s price level, or they could expand and hire in-turn sustaining economic growth…either bodes wells for stocks.

The trade war is targeting China. Let’s face it, its all about that $375 billion-dollar trade deficit with China. The deficit is mostly consumer goods and manufactured products including the iPhone. The U.S. has surpluses in crops and materials, a tariff means a consumer tax! Prices will rise, and China will continue to funnel goods through other countries. I’m sure the trade courts will be inundated with cases pertaining to imports. Perhaps the U.S. can play China’s game and use other countries. The real impact remains to be seen.

Conventional wisdom may lead one to think that increased import prices would help domestic companies to better compete. Cheap labor coupled with a quality product is tough to beat. Wage levels in the U.S, would have to be near the 1975 range to compete. Only automation can bring manufacturers back to the U.S. Robots on assembly lines, sewing clothes, and performing the duties of sweat shop workers. Robots don’t call in sick, don’t require health benefits or a salary and they can be worked 24/7. We’re almost there, amid a transitional period with robotics.

There are political, economic, and social issues abound throughout the world. Still the global economy continues with an upward bias. China, India, Nigeria to name a few have experienced explosive growth. At the same time, the number of publicly traded companies in the United States have dropped 46% over the past 20 years and projected to be less than 2,500 over the next ten years.

There are less and less investment options, I foresee higher prices for stocks going forward and less to choose from. So as investors, what should we do? The direction of the economy is higher interest rates and stock prices with less stocks to choose from. We purchase high quality companies that offer high demand products and services and are too vital to fail. It must pay a strong dividend! We take a stake in these stocks and we hold them. Milk the dividend; add to the position during a market pullback. We diversity and target low debt (leveraged) companies.

The market will be choppy, possibly until Fall 2018. Your money must make money! There’s more money on the sideline looking for deals than ever before. A seller has no problem finding buyers of dividend paying stocks. The market ups and downs are quite unnerving, but it doesn’t go up forever and it doesn’t stay down either. A pull back from the 25% plus run up is healthy however, in the long run I see higher prices.


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Michael M. Smith, CFP®

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