Selling into the Messy Tax Cut Process

Stocks have seen losses over the past week, and there’s basically one reason why — the machinations on tax reform.

Traders, individual investors and professional money managers mostly have profited mightily over the past year, as the Trump pro-growth trade gave the bulls hope that regulations would be reduced (i.e. Obamacare repeal and replace), that infrastructure spending would be enacted and, of course, that taxes would be cut both on the individual and corporate fronts.

Yet, the process we’re witnessing right now on Capitol Hill isn’t pretty. As I told subscribers to my Successful Investing advisory service on Friday, if you’ve read Upton Sinclair’s classic novel, “The Jungle,” you know just how ugly the operations of the meat industry were in the early 1900s.

And while this novel’s goal was to promote and advance socialism in the country (a goal that I abhor), the novel was an eye opener for the vile conditions that existed in the slaughterhouses and meat factories of the day.

I thought of that novel last week, and again this week, as I watched the metaphoric sausage being made in Congress on tax cuts.

From comments by Treasury Secretary Mnuchin on a possible delay of the corporate tax to the Senate’s outlined version of tax reform that included seven individual tax brackets, the tax reform outlook got decidedly muddy.

We know that because, last Thursday, stocks declined sharply after Mnuchin’s comments. For the most part, that slide hasn’t really ceased (although the decline isn’t substantial enough to make me fear that a correction is imminent).

Yes, I realize this is all part of the tax cut sausage being made. The Senate will unveil its bill likely before Thanksgiving, and then the House will vote on its version of the bill. Then, the real “fun” begins, with the House and Senate going into reconciliation to see if they can come out with some substantive reforms.

Unfortunately, as I said last week, tax reform is no guarantee. And, the proposed tax reform I’ve seen so far doesn’t represent the kind of big economic stimulus I had hoped to see.

So, from a market perspective, it makes sense to see traders and professional money locking in some gains here, especially in front of the uncertainty of tax reform.

The Smart Money is fully aware that at current multiples, tax cuts are priced into this market. That means any major disappointment on tax cuts, i.e. a complete whiff on getting any bill passed, will likely take this market down.

If tax reform resembles another Obamacare redux of Congress keeping the status quo, then look for the selling gates to swing wide open.

And if those selling gates do swing open, how will you know when it’s time to exit? Subscribers to Successful Investing will know, and that’s because of the built-in “safety switch” in markets that protects us from being in the market during significant corrections and bear markets. To find out more, I encourage you to check out Successful Investing, today.

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Uncle Milton on Taxes

“I am in favor of cutting taxes under any circumstances and for any excuse, for any reason, whenever it’s possible. The reason I am is because I believe the big problem is not taxes, the big problem is spending.”

— Milton Friedman

The Nobel Prize winner was a brilliant economist, but he also was a great conveyor of information to the public. Friedman could explain things in a concise, clear fashion often laced with homespun wisdom, humor and a great sense of irony that made him eminently understandable.

If you want a good lesson on why real tax reform is impossible, watch a speech given by Friedman in 1978. This nearly 40-year-old talk could be delivered today as an indictment on what’s going on at Capitol Hill right now. The essence of Friedman’s argument is… it is government that stands to lose most from reducing taxes and simplifying the tax code. As the French say, “Plus ça change, plus c’est la même chose.” The more that things change, the more they stay the same.

Wisdom about money, investing and life can be found anywhere. If you have a good quote you’d like me to share with your fellow readers, send it to me, along with any comments, questions and suggestions you have about my audio podcast, newsletters, seminars or anything else. Click here to ask Jim.