Every week, market veteran and president of Winston Capital Advisors, Fabian Onetti, gives his take on what will impact markets in the weeks ahead.
We have just started the last quarter of the year. Last week we finished the third quarter and in my column we reviewed the excellent performance of markets worldwide so far this year.
And now the question is, what to expect for the remainder of the year? The Tax Plan!
Yes, president Trump announced some details last week and more came from his team at the Treasury and Council of Economic Advisors. I will discuss here only what would be relevant for the markets and not all the implications of what is a very ambitious new tax code, one that has not changed in three decades.
In one paragraph the next tax plan shrinks the individual brackets from seven to three, the high bracket goes from 39.5% to 35% and the lowest one from 10% to 12%. Some deductions are doubled and others eliminated.
From the corporate side the plan is to take the 35% rate, one of the highest of the developed world, to 20% (President Trump wants 15%) and also close the loophole for individuals not to incorporate themselves and pay at the corporate level (this will require a separate article given that if you go independent you may significantly benefit from this).
The most notable piece also is that if any corporation repatriates any of the $3 trillion stashed outside the US next year it will pay a special tax rate of 10% on those funds!
Ok, so where do we go from here? After President Trump crossed the aisle a few weeks ago and negotiated with the Democrats to raise the debt ceiling and avoid a government shutdown, the market grew more confident that some form of significant tax reform could happen. There are and will be many changes and details that are not worth the time to discuss now, but what could happen to the markets is important because some is already being discounted.
Any repatriation of profits held abroad will create a rally on the dollar, which already broke the 50-day moving average last week. After that most analysts agree that the funds will be used for share repurchases. More money in the US, less shares available to buy, you know what happens next.
As for the local economy, less personal taxes will mean in the short term more disposable income and more consumption. The Russell index, which is more exposed to the US economy than the S&P, rallied very strongly last week setting a new record and outperforming the S&P and the Dow.
Here we go again, there is no investor euphoria and everybody hates this bull market, but now you have another reason for a great fourth quarter.
Winston Capital Advisors is a firm that advises international advisors on capital markets and wealth planning. A former director at Morgan Stanley, Onetti has over 30 years of experience in international wealth management.