What would a cut in the corporate tax rate mean for the economy?

With 2017 quickly approaching, we have seen the market rally to new highs. The expectation of economic change has consumer confidence running high, and a decrease in the corporate tax rate seems to be the most probable change in the near future. But what would this cut in tax rates really mean for the US economy?

At 35%, the US has the highest corporate tax rate in the developed world. It is charged on profits earned abroad minus foreign tax paid when repatriated. This incentivizes companies to book their profit in low-tax countries (such as Ireland) and outsource jobs abroad so as to avoid US taxes and only incur the low taxes of the country they choose.

But aside from high tax rates, corporate investment in the US have been on the decline; consumption and saving patterns have weakened demand. And most corporations don’t pay 35% because of very aggressive tax efficiency strategies, allowing them to owe less. The tax code is riddled with loop holes that enable said strategies; the proposal for cutting corporate taxes also includes plans to simplify the tax code and cut regulation.

The idea is that if corporations can save on taxes, their earnings will grow. CNBC reported that for every one percentage point reduction in the tax rate, this could “hypothetically add $1.31 to 2017 earnings”. The current tax rate is at 35% with a goal of reducing it to 15%; if this 20% reduction takes place that could mean $26.20 added to earnings on average. Aside from these savings going to the bottom line, extra capital can be used for other purposes: investing in equipment, mergers and acquisitions, or stock buybacks.

less-is-more-corp-tax-blog

Source: Barron’s

An investor cannot invest directly in an index. The opinions and forecasts expressed are those of the author, and may not actually come to pass. This information is subject to change at any time, based on market and other conditions and should not be construed as a recommendation of any specific security or investment plan. Past performance does not guarantee future results.

Unemployment rate and what it means for the economy

The US unemployment rate dropped to 4.6% in November, per the Bureau of Labor Statistics. While many had expected the rate to remain unchanged from October at 4.9%, we are now seeing the lowest level of unemployment since August 2007. Despite the strong jobs numbers, wages declined 0.1%, coming off a surge in October when they increased by 0.4%. Lagging wage growth is due in part to low inflation. While the drop is significant, some of this is due to 446,000 people who have dropped out of the labor force and a factor to the fall in the unemployment rate.

With unemployment remaining at or below 5% for nearly a year, an interest rate increase by the Federal Reserve is all but imminent on December 14. This would be the Fed’s only rate hike this year, but would be a sign that the economy is improving.

jobs-by-industrySource: Yahoo! Finance

Take a look at the table above to see jobs created by industry. Manufacturing has seen a continued streak of losing jobs in the last 3 months. This industry will be closely monitored, as much of President-elect Donald Trump’s campaign focused on job growth in the sector. His first step of this promise was evident on Monday when he negotiated with Carrier, a manufacturer of air conditioners, to save roughly 800 jobs in the US.

An investor cannot invest directly in an index. The opinions and forecasts expressed are those of the author, and may not actually come to pass. This information is subject to change at any time, based on market and other conditions and should not be construed as a recommendation of any specific security or investment plan. Past performance does not guarantee future results.

The roller coaster ride in oil continues

The overproduction that has kept oil prices low for the past two years is seemingly coming to an end with OPEC’s decision to cut production by 1.2 million barrels per day. Coupled with lagging demand due to weak economies in Europe and developing markets, and more energy-efficient vehicles, the suppressed prices have put pressure on OPEC 13-member economies. Their decision is on the low-end of what many economist had estimated, meaning this could be a happy medium between drastic cuts and price stabilization.

Saudi Arabia, OPEC’s largest producer, agreed to cut production by nearly 500 million barrels a day, the most out of any member country. Iran was given the nod to freeze- rather than cut- their production to meet pre-sanction output levels.

History has shown that a verbal agreement by OPEC does not necessarily result in actual production cuts. And while this agreement should boost crude prices short-term, it may not be enough to balance supply and demand. Countries outside of OPEC with higher costs of production may actually start to ramp up their output if crude prices continue to increase. US shale producers in particular have been patiently waiting for prices between $50-55 a barrel as they are not profitable at current levels. Our assumption is that while beneficial short-term, any upward price momentum will be stymied by domestic shale production increases, and the roller coaster ride in oil will likely continue into 2017.

oil-slump-graph

An investor cannot invest directly in an index. The opinions and forecasts expressed are those of the author, and may not actually come to pass. This information is subject to change at any time, based on market and other conditions and should not be construed as a recommendation of any specific security or investment plan. Past performance does not guarantee future results.

Post-Election Rally and Thanksgiving Week Trading are Positive for Stocks

The post-election rally continues, and continues to surprise, but should it?

Historically, markets tend to rally after the results of an election, even if it didn’t go as the pollsters say.  This is because the uncertainty is out of the way and the market can then focus on the shifts of valuation within the market under the new administration.

So far, that valuation has been bullish as we’ve seen the S&P 500 draw a three percent rally with reduced volatility.  Now, the S&P 500 is approaching the 2,200 level.

Historically, round numbers are natural resistance and support levels for indices.  The more the zeros the heavier the resistance or support.  In this case, the S&P 500 hits this round number with its RSI starting to breach into overbought signals.  This, combined with the round-number may help to bring the index lower soon, but long-term the market has bullish tendencies.

Of course, there’s this…

Historically, the S&P 500 performs well during the Thanksgiving Holiday shortened week.  The chart below displays the disparity between the performance of this week against that average weekly performance for the S&P 500 on any week of the year since 1990.

stock-chart-1

Source: Johnson Research Group, johnsonresearchgroup.com

So, back to the chart, the rally we’ve seen mirrors that which happened in July, 2016 (circled) and is likely to follow the same course as we should expect a consolidation after this week that will lead to a buying opportunity.

Short-term “traders” are likely to embrace the breach of 2,200 as a new high, but should expect to be able to trade shares cheaper in the next two weeks.  This is due to a higher likelihood that the market will see some consolidation after its recent rally. From there, we expect seasonality and “Santa Clause” to do the rest of the work to have the S&P 500 shares closing out the year on a strong note.

stock-chart-2

Source: StockCharts

An investor cannot invest directly in an index. The opinions and forecasts expressed are those of the author, and may not actually come to pass. This information is subject to change at any time, based on market and other conditions and should not be construed as a recommendation of any specific security or investment plan. Past performance does not guarantee future results.

 

Market Summary for 11/21

by Christopher Johnson, Director of Research

U.S. equity futures are starting the Thanksgiving week modestly higher, with S&P futures up four points. The early bid follows a positive start to the week in most overseas markets and a 2% gain in oil.

This morning’s 2% gain in oil takes it back above $47 per barrel and comes after Iran’s oil minister suggested a that an oil production deal is highly likely to be reached at OPEC’s November 30 meeting. Also helping is news that Iraq will present three production proposals at technical meetings today and tomorrow, in order to work toward a deal ahead of the OPEC meeting.

In Europe, markets are holding moderate gains with strength in the materials and energy sectors. Gold miners such at Glencore and BHP are both trading well over 1%, along with energy giants, Shell (+1.2%) and BP (+1.4%).

There were a few deals announced this morning with LifeLock (LOCK ) being acquired by Symantec (SYMC) in a $2.3 billion deal while Headwaters (HW) will be acquired by Australian firm Boral for roughly $2.6 billion. Applied Micro (AMCC) will be acquired by MACOM Technology Solutions (MTSI) for approximately $770 million and Novartis (NVS) acquired Selexys Pharmaceuticals.

In earnings news, Tyson Foods (TSN) is trading lower by 9% after reporting disappointing results and guidance. After the close tonight look for results from Vipshop (VIPS), Beacon Roofing Supply (BECN), Dycom (DY), and Palo Alto Networks (PANW), among a few others.

 Fed Vice Chairman Stanley Fischer is speaking now, noting that certain fiscal policies, particularly those that increase productivity, can increase the potential of the economy and help confront some of our longer-term economic challenges. His remarks don’t appear to be having any market impact.

Finally, this week is a holiday-shortened one with U.S. markets closed on Thursday for Thanksgiving and then closing at 1:00 pm ET on Friday. Volume is likely to be lighter but retailers will be in focus around Black Friday and cyber Monday, kicking off the all-important holiday shopping season.

An investor cannot invest directly in an index. The opinions and forecasts expressed are those of the author, and may not actually come to pass. This information is subject to change at any time, based on market and other conditions and should not be construed as a recommendation of any specific security or investment plan. Past performance does not guarantee future results.