Stocks markets have been passing new all-time highs with regularity. This begs two questions, why? And should we be celebrating?
Forget the sparkling wine, the markets seem to be cracking open the very best vintage champagne. US stock markets have been passing record highs with such regularity that it is almost becoming normal.
To put it in context, the Dow Jones, the S&P 500, the NASDAQ Composite, US Russell 2000 and US mid cap have all recently hit new highs. The Dow Jones has risen over 19,000 for the first time ever, and to put that in context, earlier in the month it dropped below 18,000. The S&P 500 has passed 2,200 for the first time ever.
So why, why is it happening?
Some people felt a little down when it became clear that a certain billionaire was going to be the next US president. And while The Donald has been back-tracking rather a lot, suggesting that his more extreme ideas have been put on the back-burner, he does clearly advance the ideals of protectionism, and economists have been saying for just about as long as there has been economists, that protectionism is bad for the economy.
So let’s repeat, Why?
It appears to boil down to Trumponomics and planned tax cuts.
If US corporation tax is going to be cut, then that is good for corporates – at least it is in the short term, and whatever the longer term arguments, the markets don’t seem to care.
The US, unlike other countries, does tax the foreign earnings of its companies, it is just that they are allowed to defer this, by holding the cash they earned abroad. Many companies have been gambling on the possibility that that US corporation tax will be cut, so they have been waiting for that day before repatriating their cash.
And there is a lot of cash pertaining to US companies, sitting overseas. It has been estimated that in fact there is no less than $2.6 trillion. So just imagine what might happen if this money went back home – the surge in investment that may result.
The big techs, Apple, Microsoft, Cisco, Oracle and Alphabet hold a very substantial chunk of this money.
It is just that rather a lot of this money is tied up, for example, it is used to support partners, giving them more favourable trade terms.
Goldman Sachs has estimated that actually, after taking into account money invested abroad, only $1.1 trillion is left over. Now that is still a lot of money, it is just not quite the eye-watering sum the headlines proclaim.
The markets, however, may not be buying on the assumption that this $1.1 trillion will be returning to the US to fund investment, instead they are anticipating a big rise in share buybacks and mergers and acquisitions.
We have been here before. In 2004, under George Bush, $300 billion returned to the US, but instead of seeing an investment led boom, we got a big jump in share buybacks and corporate deals.
The markets like that idea, and that is why they are buying.
But if US corporation tax is cut, other countries will surely follow and indeed the UK is ahead of the game, with chancellor Philip Hammond recently using his Autumn Statement to confirm plans to cut corporation tax to 17% by 2020.
We may end up with a kind of corporate tax race to the bottom. Earlier this decade the Brazilian finance minister said we were seeing currency wars. They seem to be over, but maybe we are set to see corporate tax wars.
And in the short run at least, that would be good for share prices.