May 2018 – Never mind the naysayers, the US economy continues to perform well a year after Trump’s election and the economic outlook continues to be firmly positive despite softness in the global economy. The US media had predicted economic doom and gloom because of the election results and of course those predictions were quietly buried when none of it came to pass. The same media pundits and economists predicted worldwide catastrophes related to Brexit, North Korea and trade wars. All of these fears appear to be overblown as the economy continues to chug higher driven by strong overall earnings and tax cuts.
Currently, economic headwinds include rising interest rates and oil prices. However, to put those into perspective, interest rates are still at historic lows while the Fed tries to bring rates back up to more historical norms and economists have just changed their tune on oil prices and now say that the impact of higher oil prices (up to $90 per barrel) on the economy is little to no impact. While the stock market has been volatile this year, there is continued good news being reported by all sectors of the economy and most agree that the stock market will continue to move higher albeit in a volatile way in 2018. At some point, rising interest rates will also make the bond market more attractive as bonds have languished since the financial crisis of 2008.
The Trump Tax Plan of 2017 was decried as a boondoggle for the rich. What the tax plan actually did was simplify the tax code to a degree but also reduced overall federal taxes and revenues. Under the eight years of the Obama administration, capital spending (investments in equipment and productive capacity) dropped to an all-time low. This was mainly due to the Obama administration’s deeply held belief that corporations were the chief cause of economic ailments. At that time, corporations and small business alike did not invest in capital goods for fear of some new regulation from the Obama administration which would impact the bottom line such as higher taxes and social entitlement laws like Obamacare. One key component of the tax plan was allowing companies to repatriate money previously held overseas that amounted to trillions through the lower tax rates.
One of two things is happening to this money, it either gets used to buy back company stock in which case the money goes directly to the shareholders or the smart companies take the money and invest it into R&D and capital investments. Apple Inc alone say they will spend 100 billion just on buying back stock but that still leaves them with hundreds of billions of repatriated cash to invest or pay out in dividends. Also, there is a big increase in mergers and acquisition as companies look to grow and deals are made. Either way the cash makes its way back in into the US economy from overseas and is fueling economic activity. The boost from tax reform is clear and hard to deny for even the most vehement of Trump haters who are now resorting to saying it was the Obama administration that was responsible for this growth (without proof or logic of any sort).
While you should never base any investment advice on anything you see on the internet and without doing your own research, it seems clear the outlook for the economy and the markets are pretty good for the next several quarters.
