John Authers suggests that while the tax-cut is mostly priced into equity markets, the bond market could be in for a surprise next year if the reforms have the impact the GOP is hoping for.
Bonds globally suffered a sharp sell-off on Tuesday, with little obvious news to justify. As the sell-off was widespread, it is hard to attribute this entirely to events in the US. However, it was noticeable that the rate effect swamped any tax cut effect. Rate-sensitive sectors such as real estate sold off most; financials were more robust. And the stock market overall dipped a bit.
Once the details in this complicated and messy legislation have been sorted out, the question of rates will endure. If the tax cut has as little impact on behaviour as many fear, it will not have much impact on rates either. Once the upward shift in next year’s earnings has been priced in, nothing much will change. If it does have an impact, it could push up rates, which could more than counteract any positive fiscal stimulus from the tax cut.
One painful conclusion is hard to avoid. Despite the excitement over the tax cut, the central issue for financial markets remains the same. As we enter the ninth calendar year of the recovery, can rates possibly continue at such low historical levels?
Read more here.
Jeremy Jones, CFA
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