Taxing times

It's beginning to look a lot like the Grinch will steal Christmas 2017 and investors would be happy just to get the two-front teeth in their hanged stockings.

That's the feeling many an investor would get upon the reading the nasty news, exemplified by the Australian Financial Review's (AFR) 10 November report that: "Wall Street slumped with the Dow Jones shedding over 200 points after Bill Cassidy, a member of the Senate Finance Committee, said that the Senate tax proposal will delay a corporate tax cut by one year to 2019."

All major US equity indices closed lower that fateful day - the S&P 500 index fell by 9.8 points; the Nasdaq by 39.1 points; the Russell 2000 by 16.7 points - but these aren't headline material unlike the three-figure 101.4-point "slump" in the Dow Jones Industrials index that's sure to get some palpitations going.

All bad, except the reports failed to mention the absolute level of the Dow Jones index, which at 20,000-plus points render the 100 plus point drop nothing but an insignificant daily fluctuation of minus 0.4%.

The Dow's drop was so bad (not) that it's taken index's full-year gains down from 19.2% to plus 18.7% the following day before closing the 6-10 November week at 18.5%. If this is a "slump", let me have it...every day.

All these, because "Senate tax proposal will delay a corporate tax cut by one year to 2019"? For sure, the differences between the House and the Senate's tax-cut proposals entails time for compromises to be made and eventually resolved before a bill is passed and signed into law.

Trump's tax cut plan may have been delayed but, it won't be denied. Self-interest and self-preservation dictate that neither political party - Democrats and Republicans - would want to be known as the party that killed the tax cuts.

But even without a reduction in taxes, the American is doing quite nicely, thank you very much.

Despite the negative impact of hurricanes Harvey and Irma, US real GDP only dipped slightly to an annualised rate of 3% in the third quarter from 3.1% in the June quarter which is the fastest growth rate since the March 2015 quarter.

The unemployment rate dipped to a 17-year low of 4.1% in October from 4.2% in the previous month and 4.8% at the start of the year.

Forward indicators point to continued growth. While the Institute for Supply Management's (ISM) manufacturing index decreased to a reading of 58.7 in October, it was from September's 13-year high of 60.8 was the 14th straight month of above 50 readings that indicated expansion. The ISM non-manufacturing index rose to a 12-year high of 60.1 in October from 59.8 in the previous month.

These solid growth dynamics are what allowed the Fed to proceed with its policy normalisation - two 25 basis point interest rate hikes this year (with one more expected in December) and shrinking the balance sheet starting in October.

Certainly, the tax cuts would provide an extra boost to the US economy when it comes (and it will). Even the Fed acknowledged this very early this year. According to the Fed's January 2017 minutes - straight after Trump's inauguration as president - "participants continued to view the possibility of more expansionary fiscal policy as having increased the upside risks to their economic forecasts."

Had this materialised, the Fed would have been more aggressive.

Read more: USFedDemocratsISMRepublicansTrumpBill CassidyDow Jones IndustrialsInstitute for Supply ManagementNasdaqRussellS&PSenate Finance CommitteeWall Street
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