Don't look for the Trump tax revamp to trigger runaway exuberance in the stock market. After all, passage of the new law has been mostly discounted, argues Ed Yardeni, president and chief investment strategist of Yardeni Research, in an interview with ThinkAdvisor.
The independent strategist discusses the impact of the new tax law on individuals (who get temporary cuts set to expire in eight years) and corporations (which get permanent cuts), and the risk these decreases pose to the U.S. economy a bit down the road.
Yardeni, whose consulting clients include institutional portfolio managers, corporate treasurers and government policymakers, examines implications of the tax cuts to high earners and just how long investors have to wait to know specifics on how the cuts will benefit corporate earnings.
Yardeni founded his consultancy in 2007 after 25 years on Wall Street as chief economist at EF Hutton, Prudential Securities and C.J. Lawrence, as well as chief investment strategist of Deutsche Bank Securities. Earlier, Yardeni, who received a Ph.D. from Yale, had short stints at the Federal Reserve and the U.S. Treasury.
ThinkAdvisor spoke with the strategist on Dec. 14, on the phone from his office in Brookville, Long Island, New York. He explained precisely why he blogged, in November: "The administration has to raise taxes to cut taxes." Here are highlights of our conversation:
Are there any big losers because of the tax package?
High earners in high-tax states will wind up paying more because state and local deductions are going to be severely reduced. The question is: Will that translate into political pressure on these states to reduce taxes? I suspect there could be. The tax program could lead to more people leaving places like New York, Connecticut, New Jersey and California and moving to states where taxes are much lower, like Florida and Texas.
How will the new tax law affect the stock market?
It should be very positive for the market. But investors will have to wait at least until first-quarter earnings conference calls — which won't happen till April — to get feedback from management on just how the cuts will affect after-tax earnings.
Do you think the market has already discounted the tax cuts?
Yes, to a large extent. I'm not convinced that the passage of this program is going to lead to much more euphoria in the market because it already pretty well discounted that we [were] going to pass the package.
How will the tax cuts affect the U.S. economy?
It won't hurt the economy. If anything, the risk is that it might overheat it. But that's not immediate. In the past, we've usually had tax cuts when the economy was weak and we were trying to revive economic activity. This program was sold as a way to boost the economy and create more jobs. But we're basically at full employment now. So the economy is already quite hot.
What will be the immediate impact, then?
It will probably help the economy, and we'll see corporations repatriate money. Some of that may be used to hire people and expand capacity, and some to pay dividends and [for stock buybacks].
Is this program really tax reform?
