Has 21% corp tax and deregulation already been factored into equity prices?

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chuckcintron
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Has 21% corp tax and deregulation already been factored into equity prices?

Post by chuckcintron » Mon Jan 01, 2018 8:15 am

Based on my other thread about my 401K, I've been doing a lot of reading and research thanks to the pointers I was given.

One question: Jack Bogle, as well as others, all say the stock market will most likely enter a more temperate phase over the next few years as compared to the last couple of years of run-up.

Does this mean that the new US tax code (21% corp rate), deregulation, etc -- have all already been contemplated in the current equity prices? Otherwise, I would have thought that the next couple of years we will see higher corporate profits. And thus, would see higher valuations.

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TomatoTomahto
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Re: Has 21% corp tax and deregulation already been factored into equity prices?

Post by TomatoTomahto » Mon Jan 01, 2018 8:25 am

^ that money has already been spent, like an NFL player who is bankrupt a week after his playing career ends. 8-)

I think that the tax code changes were well telegraphed. The only questions are if they were overbaked or underbaked into the numbers.

livesoft
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Re: Has 21% corp tax and deregulation already been factored into equity prices?

Post by livesoft » Mon Jan 01, 2018 8:26 am

Consider this: The new law is expected to borrow $1.5 trillion over the next 9 years, so the economy gets an extra $166 billion a year. That turns out to not be much money when hurricanes, floods, and fires use up half of that each year. And there are costs to borrow money that are probably not good for the economy.

So I think that Yes, what is known is already factored into equity prices. They will trend up like they always do, but don't expect anything major on average to happen.
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johnbarry
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Re: Has 21% corp tax and deregulation already been factored into equity prices?

Post by johnbarry » Mon Jan 01, 2018 8:33 am

livesoft wrote:
Mon Jan 01, 2018 8:26 am
Consider this: The new law is expected to borrow $1.5 trillion over the next 9 years, so the economy gets an extra $166 billion a year. That turns out to not be much money when hurricanes, floods, and fires use up half of that each year. And there are costs to borrow money that are probably not good for the economy.

So I think that Yes, what is known is already factored into equity prices. They will trend up like they always do, but don't expect anything major on average to happen.
+1. Agreed. See slso efficient market hypothesis. This seems like an easy thing for markets to understand. There is also probably an expectation that taxes may go back up in the future to repay the debt this bill will create.

chuppi
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Re: Has 21% corp tax and deregulation already been factored into equity prices?

Post by chuppi » Mon Jan 01, 2018 11:29 am

Market is essentially a result of collective ‘wisdom’ of all people investing.
Most people would have already put their Warren buffet hat and made their investment decisions based on tax and regulation :)

tibbitts
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Re: Has 21% corp tax and deregulation already been factored into equity prices?

Post by tibbitts » Mon Jan 01, 2018 11:35 am

chuckcintron wrote:
Mon Jan 01, 2018 8:15 am
Based on my other thread about my 401K, I've been doing a lot of reading and research thanks to the pointers I was given.

One question: Jack Bogle, as well as others, all say the stock market will most likely enter a more temperate phase over the next few years as compared to the last couple of years of run-up.

Does this mean that the new US tax code (21% corp rate), deregulation, etc -- have all already been contemplated in the current equity prices? Otherwise, I would have thought that the next couple of years we will see higher corporate profits. And thus, would see higher valuations.
They were factored in long ago. If you see higher valuations it will having nothing to do with anything that has already happened. I get the impression that you're doing too much reading and research and not realizing that everybody else has already done much more than you have.

OldSport
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Re: Has 21% corp tax and deregulation already been factored into equity prices?

Post by OldSport » Mon Jan 01, 2018 11:45 am

chuckcintron wrote:
Mon Jan 01, 2018 8:15 am
Based on my other thread about my 401K, I've been doing a lot of reading and research thanks to the pointers I was given.

One question: Jack Bogle, as well as others, all say the stock market will most likely enter a more temperate phase over the next few years as compared to the last couple of years of run-up.

Does this mean that the new US tax code (21% corp rate), deregulation, etc -- have all already been contemplated in the current equity prices? Otherwise, I would have thought that the next couple of years we will see higher corporate profits. And thus, would see higher valuations.
Jack Bogle may be right that we'll see ~4% CAGR over the next 10 years, but it won't be a placid ride. There will likely be a bear market year or two in there, and plenty years of double digit gains. This may average 4% CAGR, but it won't be smooth sailing.

The sequence of return will determine if this works out better to those in the accumulation phase vs. distribution phase.

OldSport
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Re: Has 21% corp tax and deregulation already been factored into equity prices?

Post by OldSport » Mon Jan 01, 2018 11:47 am

What was the 10-year CAGR in Total US Stock and S&P 500 from the 2001 market peak and the 2007 market peak?

frankmorris
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Re: Has 21% corp tax and deregulation already been factored into equity prices?

Post by frankmorris » Mon Jan 01, 2018 11:57 am

There are two phases of any policy/tax change - the immediate investor reaction and psychological bump that the market as a whole may receive, and then the latent benefits/drawbacks that will come to fruition in the coming years. The former is likely already baked in, the latter hasn't even been calculated. So, I'd say most certainly not - the entirety of the tax reform legislation has not been priced in.

Another variable I often see overlooked when having this conversation - this corporate tax cut is permanent, so it will affect earnings in perpetuity (or until the tax rates change again). The idea that this is just a one time bump that's already over just doesn't make sense. Earnings in 2037 may be well be affected by this legislation.

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