29 Jan 2018
Finally here. One year ago, just after the election of Donald Trump, we were asking ourselves if his promises of fiscal stimulus would extend the business cycle that had been underway for the previous seven years. While we were doubtful about the worth of the measures in the first place, there was a frustrating lack of progress for most of last year – to the point that we doubted much would get done at all.
However, confounding the naysayers, the bill was eventually passed in late December, boosting stocks and areas of the market that were seen to be beneficiaries of a lower tax rate. Meanwhile, on the economic front, data released since last summer confirms that the US is in good shape. At this point we expect positive growth to continue through 2019.
After seven years of economic growth, does this work?
The corporate tax cut and the investment incentives included in the new legislation are designed to boost the US economy. As a result, they should disproportionately help small and mid-sized companies, which tend to be domestically focused. Aside from fiscal policy, the Trump administration’s policy has in general been favourable to domestic and (by definition) smaller companies.
Returning to the tax cuts, undoubtedly the impact will be bigger for companies that are higher tax payers. The question is how the additional cash that will be released will be deployed by companies. We expect to see a pick-up in capital expenditure (capex). This has been confirmed by recent surveys (see chart below) as companies indicate that capex and reinvestment and cutting debt are top of their spending priorities.
What do you plan to do with funds made available from tax cuts and repatriated funds?
Source: Evercore ISI Company Survey, January 2018
The tax reform will not just benefit companies; personal taxes are also being reduced. This should also have a positive impact on consumer spending, carrying on the improving trend that we have seen recently.
Separate to the current government’s agenda we are also seeing an uptick in infrastructure spending. This is the result of funding made by the previous administration as well as the decision of a number of states to raise gasoline taxes to pay for infrastructure projects. Because of the lag between planning and starting these projects, we are only now starting to reap the rewards of these decisions.
A significant feature of the current economic situation is the relative lack of inflation. As a consequence of this, despite low levels of unemployment and an extended economic cycle, the Federal Reserve does not have to aggressively raise interest rates to slow inflation and therefore the economy. It is inflation which we will be watching closely to determine how long the current economic cycle lasts.
While in recent years growth companies have led the stockmarket’s performance, we expect market leadership to be more balanced in 2018. Earnings growth will be boosted by the tax cuts and we anticipate that the market will perform in line with earnings.
Cormac Weldon manages the Artemis US Smaller Companies Fund; visit the fund page for further information about the fund, its performance and current positioning.
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