Low Expectations

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by Ralph Cole, CFA
Executive Vice President of Research

Week in Review

The dog days of summer have officially set in. Millions of people took Monday off to watch the eclipse, while millions more merely peeked out their office windows. The market was quiet this week, finishing up just under 1 percent on low volumes. The bond markets were quiet as well, with the 10-year U.S. Treasury note finishing at 2.17 percent.    

Low Expectations
“The secret to happiness is low expectations.” – Barry Schwartz, psychologist

We feel the same when it comes to legislation. The S&P 500 has had a great year this year, without any help from Washington. As we entered the year, we expected less from fiscal stimulus than was priced into the equity and bond markets. Stocks rallied on the news of a new administration, and bond yields rose in anticipation of tax cuts and increased government spending. With the U.S. government $20 trillion in debt, we were not expecting much.

As we sit here eight months into the year, nothing has come through from Congress, and the expectations of tax cuts have been wrung out of the market. In the chart below, you can see the performance of a “high tax” basket of stocks relative to the S&P 500 since the beginning of 2016. The arrow points to the sharp rise in stocks that have higher tax rates than the S&P 500. They would seem to be the main beneficiaries of an across-the-board tax cut for U.S. corporations. As you can see, the expectation now is for no tax policy changes.

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This week Congress hit the road to sell America on their upcoming tax plan. Speaker Paul Ryan was in Oregon speaking at Intel, and followed it up with a trip to Seattle to visit Boeing. Congress is correct in trying to gain support for their initiatives. It remains to be seen if a deal can be reached or not. As a firm, we will continue to keep our expectations low, and hope to be pleasantly surprised.   

Takeaways for the Week:

  • We were not expecting much fiscal stimulus to start the year
  • The markets expectations for corporate tax reform have been properly lowered, this may set the stage for an upside surprise