There we have it.
The US Senate has voted ‘yes’ to a massive overhaul of the tax system. This happened on Saturday, and Monday marks the beginning of the Senate and House of Representatives rehashing their respective versions, so that they may present the final draft to the president, hopefully by Christmas. The final product could result in huge cuts in corporate tax rates, down up to 20% from 35%. A crucial point of adjustment for the House and Senate will be whether to implement their corporate tax cuts immediately, or in 2019.
This news had Wall Street jumping – literally. Corporate America couldn’t be happier with this, where major financials, media and transports jumped as much as 2% when markets opened December 4th. Unsurprisingly, health care related stocks and the tech sector took a dip. Even now, as the exact impact on companies with the tax cut remains unclear, Wall Street has already starting reacting strongly, evening out whatever negative dips some sectors may have experienced.
Overall, the S&P 500 has climbed a healthy 18% this year in direct expectations of GOP’s Congress promising corporate tax cuts. The DOW jumped a 142 points.
“You’re seeing tech lagging and financials leading. This is some rotation on the back of the Senate vote,” said Lindsey Bell, investment strategist at CFRA (CNBC).
Investors were seen selling technology stocks, in order to buy stocks benefiting from lower taxes, such as bank stocks which resulted in tech suffering a little. On average, however, this tax plan seems to work in favour Corporate America. Specifically, it will be Domestic America that will benefit, as these tax cuts are aimed at boosting the American economy from inside out. Therefore companies who conduct business in the US are poised to be the biggest beneficiaries.
It’s important to understand why financials gained and tech slipped. It’s sectors that stand to gain the most from tax cuts that investors want – they are getting a greater return. Sectors such as software and services, pharma and biotech, etc are those that have rates under 20% and therefore don’t stand to benefit from the plan.
It is noteworthy that another reason behind financial stocks rising is the continued speculation that the Fed will be raising interest rates sometime this month.
The corporate tax cut has been one of the hottest topics, both in political and economic news. It points to what the GOP’s priorities are – making the rich richer in the illusion that it will eventually trickle down to the middle class. But at the end of the day, an illusion is all it is.
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