Since the election, markets have seemed to trade on hope and improved sentiment the new administration will enact a pro-growth agenda that will be bullish for American business. The U.S. stock market is up 9% since the election and some sectors which would presumably benefit the most from President Trump’s proposed policies are up much more. But now that Trump and many of his key cabinet members have been sworn in, the honeymoon is nearing its end. Markets will no longer be able to trade on the hope of the best possible policy outcome, but on the reality of what can actually get done.
That situation presents challenges for investors out over their skis with respect to risk. As the FT highlights, the proposed border adjustment tax House Republicans are hoping will provide a source of funding for lower corporate tax rates isn’t going to be a cinch. Without the revenue from a border adjustment tax, the ultimate reduction in corporate rates may underwhelm.
The EU and other US trading partners have begun laying the groundwork for a legal challenge to a US border tax proposal in a move that could trigger the biggest case in World Trade Organisation history.
The preliminary moves come as Republicans in Congress are working to convince President Donald Trump to back a major shake-up of the US corporate tax system that would include a new “border adjustment” system. It would see US imports subject to tax and export revenues exempted.
Were the US to adopt the mechanism, it would represent the biggest shake-up in the global corporate tax system in almost a century, according to tax experts….
A defeat in a border tax case could open the door to some $385bn a year in trade retaliation against the US, according to Chad Bown, an expert on WTO trade disputes at the Peterson Institute for International Economics.
Read more here.
After eight years of growth sapping regulation and tax policy, it is natural to be hopeful and optimistic that better days for business lie ahead, but don’t allow such positive sentiment to cloud your investment judgment. You are still investing in an aging bull market that is far from cheap. Long-term return expectations should remain tempered.
Jeremy Jones, CFA
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