Now that the tax bill is final, we thought we would share our high-level thoughts on the legislation and how it might impact individuals and broader markets.
Historically, tax cuts have not produced a significant increase in GDP. However, we have been focused and remain so on the impact to corporations; the legislation passed today could further extend the profit cycle, which in turn, supports the business cycle and broader economy. This is ultimately what determines the course of the markets.
We feel this legislation today has the potential to significantly add to the current level of growth of the US economy, with some estimates pointing to up to 1%. In addition, the fact the tax cuts will take effect starting in 2018, rather than 2019, is a near-term positive for the economy as well corporations. In fact, the lowering of effective tax rate is expected to have the most significant impact on the economy and more importantly, on the equity markets.
On the individual front, the lowering of tax rates is a clear positive but the removal of several significant popular deductions raises uncertainty. However, we believe the majority of Americans will see lower income taxes when this legislation is implemented despite the removal of several popular deductions given the lowering of the tax rates.
As always, the markets will handicap winners and losers. Some stocks had already experienced impacts to their share price before yesterday’s vote, as the prospects for passage of the bill increased. We continue to believe that the net impact of this bill will result in a material increase in corporate earnings and will be a tailwind for the markets in 2018.
In the end, we continue to focus on the impact to our portfolios as well as potential investments. Our process of identifying high-quality businesses, many of which stand to see a notable increase in their overall cashflow, will benefit as those companies use the incremental cashflow to grow their business or return it to their shareholders.
If you have a question about how the legislation impacts your portfolio, please do not hesitate to reach out. We’re here to help you.
Mark R. Freeman, CFA
Executive Vice President, Chief Investment Officer, Senior Portfolio Manager