FANG Stocks Fall On Tax Cut Talks
Wednesday’s stock market action was driven by the changes that will go into effect when the tax cuts are passed. The Russell 2000 was up 0.38% and the Dow was up 0.44% while the S&P 500 was down 0.04% and the Nasdaq was down 1.27%. As you can see from the chart below, the effective tax rate is much lower than the statutory tax rate. With the statutory tax rate going from 35% to 20% and some deductions eliminated, there will be some firms helped and some firms hurt. A company like Disney will be helped as it pays a 30% effective tax rate; that’s why its stock was up 1.77%. On the other hand, the FANG stocks were hurt today because they pay low tax rates. Facebook’s effective tax rate last quarter was 10% which is why its stock was down 4%. Amazon’s effective tax rate last quarter was 0% which is why its stock was down 2.71%. Netflix’s effective tax rate was 0% and its stock was down 5.54%. Finally, Google’s effective tax rate was 16% and its stock was down 2.46%.
Senate Votes To Start Debate On Tax Bill
The Senate is planning to vote on the tax bill this week. On Wednesday, the Senate voted 52-48 to debate on the tax bill. This is a great sign of unity for the GOP. Unless there’s a turncoat moment like what Senator McCain did in the summer on the healthcare legislation, the Senate should pass this plan when it votes later this week. Lisa Murkowski, one of the holdouts on the healthcare reform plan, says she will vote in favor of the tax plan. This supports the expectation that it will pass. The vote on Wednesday started a 20 hour window where the plan will be debated before a ‘vote-a-rama’ starts. This is where any Senator can put an amendment to the plan up for a vote. The votes made on the amendments will make or break the decisions of those senators who are on the fence about the bill such as Susan Collins, Steve Daines, and Jeff Flake. One of the final concepts being debated by Republicans is if the plan should include triggers. These triggers are tax increases which will go into effect if the dynamic growth caused by the tax cut doesn’t cover enough of the projected $1.4 trillion debt increase expected to be incurred from this plan over the next 10 years.
This vote to start the tax bill debate pushed the odds of an individual tax cut by the end of the year up 5% to 44%. The odds of a corporate tax cut by the end of the year were pushed up 8% to 71%. The chances of the individual mandate portion of Obamacare being repealed by the end of the year were pushed up 17% to 62%. Clearly these odds will shift dramatically on Thursday after the votes start to come in. The stocks which moved today will continue their recent trend if the plan is passed; they will reverse course if the plan doesn’t pass. I think the plan will pass, but this doesn’t mean it’s out of the woods yet. As I showed in a previous article, the House and the Senate will need to come together on a plan.
Q3 GDP Growth Estimate Pushed Higher
The initial estimate for Q3 GDP growth was 3.0%. On Wednesday that estimate was revised higher to 3.3%. Furthermore, the BEA estimates that the real GDP growth would have been 3.9% in Q3 if it wasn’t for the hurricanes slowing down growth. This is the fastest growth rate since Q3 2014. That means the GDP growth rates this year have been 1.4%, 3.1%, and 3.3%. This is the first consecutive growth of above 3% since 2004-2005. The average growth rate in 2017 is 2.6%. If the Q4 GDP growth rate is 2.6% or higher, 2017 will have the fastest GDP growth of this expansion.
Consumer spending grew 2.3% which was revised down from 2.4%. That was a big decrease from the 3.3% growth rate in Q2. The economy grew fast without the consumer. That’s not a sustainable trend. If Q4 GDP growth is strong, it will likely be the result of accelerated consumer spending growth. Business equipment spending increased at a 10.4% pace which is a 3 year high. It was revised up from an 8.6% growth rate. This was caused by an increase in transportation gear spending. Corporate pre-tax earnings were up 5.4% year over year. Residential investment was revised higher to a 5.1% decline from a 6.0% decline. The savings rate was revised down to 3.3% from 3.4%.
Big OPEC Meeting On Thursday
Besides the vote on the tax bill on Thursday, the other important decision is from OPEC. The meeting on Thursday is all about whether Russia agrees to a deal to extend production cuts. It’s expected that OPEC will extend the production cuts, but some think the extension will be shortened to between 3 and 6 months. There will also be a debate on the exit strategy for the cuts. As you can see from the chart below, there is a high speculative position in oil heading into the meeting. This usually means there will be a decline in oil prices. The effect on oil prices will depend on what deal is struck. This situation along with the tax cuts should make Thursday a volatile day.
Conclusion
The fact that the Q3 GDP growth rate estimate was pushed higher to 3.3% furthers the point that 2017 was a great year for the economy. The possibility of tax cuts being passed could help growth in 2018. Tax cuts in America along with improvements from Brazil and India should help the domestic and international economy respectively. After years of monetary policy being used to boost the economy, we are finally getting fiscal policy to come through. The issue is the fiscal stimulus isn’t needed as the economy is healthy. Unfortunately, it isn’t politically feasible to push through a tax cut when the economy weakens sometime in the next 2-3 years. There will be less of an ability to stimulate the economy in 2019-2020. The Fed will be put in the same situation it was in the past few years as it will need to help alleviate the woes caused by the next recession.