Published On: Wed, Nov 29th, 2017

Trump Tax Trade Misses Key Beneficiaries

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The Trump tax trade appears to be rallying the wrong stocks.

The Dow Jones Industrial Average jumped 255 points on Tuesday, and another 65 points by midday Wednesday, after the Senate Budget Committee passed the tax bill. But while investors seem to be cheering the Republican plan to cut the government levy on corporations and wealthy Americans, the stocks of high-tax companies that would benefit the most have oddly risen the least.

Shares of the companies with the highest tax rates, which did take off after the election, have lagged lately, returning just 13 percent this year compared with nearly 20 percent for market in general as measured by the S&P 500. Even odder, the shares of the 100 companies in the S&P 500 that had the lowest tax rates last year are some of the market’s best performers, up 25 percent on average this year, or nearly double the 100 highest-paying ones.

What’s going on? Let me propose three possible answers. First, investors still don’t believe a tax cut is going to happen, and they do seem to have had their doubts along the way. But, as I have said in the past, the stock market’s nearly 20 percent climb this year can’t be explained by better earnings alone. The anticipation of tax cuts, at least to me, seems clearly part of what has propelled the S&P 500 this year. But it’s possible that something else has been driving the Dow higher, like repeal of regulations, or the growing assumption that interest rates won’t rise that much. Also on Tuesday, Jerome Powell, Trump’s nominee to chair the Federal Reserve, who many believe will continue Janet Yellen’s low-rate policies, did well in his Senate confirmation hearing.


The second answer is that investors have been buying the wrong stocks and that high-tax stocks are a screaming buy. That seems unlikely, but there does appear to be some evidence for that. The market’s highest tax payers are trading at a discount to the lowest ones. The average price-to-earnings ratio of the high tax paying group is just over 19, based on the past 12 months of earnings. The lowest tax paying ones have a P/E of over 24.

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