Vail Daily guest column: Will tax plan re-shape the economy?
May 1, 2017
President Donald Trump unveiled a tax reform plan last week that, as far as some investors were concerned, was the first concrete step toward his making good on his campaign promise to remake the American economy.
The verdict, for now, was positive, as the major indexes surged on the news. In fact, the Nasdaq crossed the 6,000-point mark for the first time, and both the Dow Jones Industrial Average and the S&P 500 neared their all-time highs before retreating on Friday. The proposed tax plan was not the only news that drove the market northwards, as investors were also upbeat about the election results in France, more positive first-quarter earnings news and the fact that the government didn't shut down. Even the response on Friday to the weakest gross domestic product (GDP) reading in three years was muted, perhaps because a slow first quarter has become the norm.
The election in France
Europe's stock indexes jumped last week after the first round of the presidential election in France narrowed the field for the May 7 run-off to the centrist Emmanuel Macron, who was the leading vote getter, and the far-right candidate Marie Le Pen, who would like to see France leave the European Union (EU). Despite the fact that presidential pollsters and pundits have been wrong of late – look no further than our election in November – Macron is seen as the heavy favorite, meaning that France is likely to stay in the EU. Investors responded accordingly and positively.
The tax plan
As promised, President Trump unveiled a tax plan last week that centered on cutting business taxes from 35 percent to 15 percent. The proposed plan would also increase the standard deduction for individuals, lower the tax on capital gains and eliminate both the estate tax and the alternative minimum tax. Predictably, the plan's outline was met with mixed reviews, some seeing it as only benefiting the wealthiest Americans, while others were concerned about the lack of revenue to cover the cost of the tax plan, which could reduce revenue by anywhere from $3 billion to $7 billion over the next decade. The White House argued that the growth spurred by the cuts would cover the cost, but it remains to be seen how that will sit with the GOP's deficit hawks, not to mention Democrats.
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The S&P, NAFTA, and 100 days
President Trump also came to terms with the GOP hard-liners in the House who had helped scuttle his first attempt to undo Obamacare, but the new bill is apparently still a work in progress. On Thursday, Speaker of the House Paul Ryan (R, Wisconsin), the man who will be tasked with shepherding a new plan through the House, said, "We're going to go when we get the votes," and not be guided by "some artificial deadline." Also, during the week, the president went from saying that he was going to "terminate" the North American Free Trade Agreement (NAFTA) — the trade agreement with Canada and Mexico that's been in place since 1994 – to pledging to renegotiate the terms of the agreement. Even so, as President Trump closed out his first 100 days in office, the S&P 500 was up almost 5 percent during that time, according to The New York Times, the fastest pace since George Bush's first 100 days in 1989, when it soared 7.7 percent. (For the record, the index increased 2.8 percent during President Obama's first 100 days, and fell 1 percent during Ronald Reagan's.)
Still open for business
Money to fund the federal government for the rest of this fiscal year ran out on Friday, but the two parties negotiated a one-week extension without the usual rancor nor the threat of a government shutdown, probably because the president dropped his insistence on including money to cover the cost of a wall along our border with Mexico.
First quarter GDP lags, again
GDP growth hit a three-year low of 0.7 percent in the first quarter of 2017, but investors were by and large unfazed. Spending grew at only 0.3 percent, its slowest pace since the last three months of 2009. Given the recent readings for consumer confidence and leading economic indicators, GDP seems low and out of line, but it's worth remembering that the government adjusts the data to eliminate seasonal influences such as holiday spending in the fourth quarter. According to The Wall Street Journal, the economy has grown at an average rate of 1 percent during the first quarter over the last eight years and 2.5 percent for the remaining three quarters. In other words, this first quarter was growth as usual, and, given all the other positive indicators, it should bounce back for the rest of 2017, with estimates for the current quarter ranging as high as 4 percent.
The latest evidence for strong consumer sentiment came last week, when the University of Michigan said its final reading for April was 97, up from 96.9 in March and well above the pre-election reading of 87.2.
In other economic news, new home sales rose 5.8 percent in March from the month before to 621,000, the Commerce Department reported, the highest level since July 2016. Sales were up 15.6 percent from a year earlier. The S&P CoreLogic Case-Shiller Home Price Index also surged, rising 5.8 percent in February from a year earlier and posting its fourth consecutive all-time high. However, rising prices and tight supply held back the National Association of Realtor's Pending Home Sale Index, which dipped 0.8 percent in March to 111.4 from February's 112.4, and was up just 0.8 percent from March 2016. Lastly, the Labor Department said that first-time jobless claims for the week ending April 22 rose 14,000 to 257,000; the four-week moving average fell 500 to 242,250.
A look ahead
This week will be a busy one, with more news about President Trump's tax plan and the possible reemergence of the health care bill, not to mention the need to fund the federal government and the election in France on Sunday. There will also be updates on personal consumption expenditures, manufacturing, construction spending, vehicle sales, the trade balance, nonfarm productivity, factory orders, orders for durable and capital goods, along with consumer credit. In addition, the Federal Reserve will meet on Tuesday and Wednesday (it's expected to leave its rate unchanged), and on Friday the government will release the unemployment rate for April.
This commentary was prepared specifically for local wealth management advisers by Northwestern Mutual Wealth Management Company.
The opinions expressed are as of the date stated on this material and are subject to change. There is no guarantee that the forecasts made will come to pass. This material does not constitute investment advice and is not intended as an endorsement of any specific investment or security. Information and opinions are derived from proprietary and non-proprietary sources. Sources may include Bloomberg, Morningstar, FactSet and Standard & Poors.
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