Trump manages to get some work done – what does it mean for investors?

Donald Trump's cut in the US corporate tax rate is good news for companies, but what about investors? John Stepek explains what it means for you.


Getting the US tax bill passed was Trump's first victory in office
(Image credit: 2017 Getty Images)

Friday was looking like a bit of a disaster for Donald Trump.

Markets got a real scare when it looked as though investigators had found a smoking gun in the Russia election-interference saga.

Trump's former aide, Mike Flynn, was reported by US network ABC to have said that he would testify that Trump told him to get in touch with Moscow while he was a presidential candidate. That would have looked very dodgy indeed.

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Trouble is, it was misreported. Trump was in fact president-elect at the time. So getting in touch with Russia would be a perfectly valid thing to do.

That was Trump's first piece of good news. And then he managed to get his tax plan passed...

The US tax bill Trump's first victory

That might be about to change.

On Saturday, the US Senate passed a bill to cut corporate taxes. The main point of the bill is to cut US corporate income tax to 20% from 35%. Companies will also be allowed to repatriate their foreign profits at a discounted tax rate. So that means a lot more dollars coming back onshore, potentially. It's the biggest change to the tax system since the 1980s.

The bill managed to squeeze through the Senate, as almost all of the Republican "deficit hawks" with just one exception swallowed the fact that the bill adds an extra $1trn or so to the national debt over ten years.

The next step is to reconcile the version that has gone through the Senate with one that was passed last month by the House of Representatives. Then the president can sign off on it. He's hoping to do that by the end of the year.

As I've said many times before, I'm not keen on commenting on local politics. Other people's countries do things differently, and it's hard for an outsider to grasp the nuances. From Catalonia to Brexit to Trump, we all cut and paste our own prejudices with no real grasp of what the voters actually care about.

But many of the more reliable US pundits seem to agree that the tax bill is more beneficial for the wealthy than for the middle and working classes. As well as all the other changes, it cuts back on inheritance tax and also looks set to make it harder for poorer and sicker people to get health insurance (due to knock-on effects of partially repealing "Obamacare").

Then again, there's nothing wrong with the US cutting its corporation tax rate from 35% to 20%. That headline rate is far higher than almost any other developed country.

Equally, as Hamish McRae notes in The Independent, simplifying the tax code isn't a bad thing even if it does mean that there will be some "small cuts in the tax rate for top earners the bane of the US system is the range of things the rich can do to avoid paying hardly any tax at all." Simplification makes avoidance harder.

What does this mean for investors?

And overall, the stockmarket is likely to be cheered by progress on tax reform. Wharton professor Jeremy Siegel (the anti-Robert Shiller) reckons that tax reform could boost the Dow Jones in the short term even further, to 25,000, as markets price in further earnings gains.

Meanwhile, the US dollar is likely to benefit. If the tax plan sees companies bring their profits back onshore (rather than keep them offshore to avoid tax), then that would mean an influx of dollars, driving up the value of the US currency.

The massive addition to the deficit is not something that investors are particularly worried about right now. National debt is taken for granted in our era of ultra-low interest rates and money printing. It won't end up being a problem until the day that it is, and that's one reason for owning a bit of gold as insurance in your portfolio.

So does this mean you should pile into US stocks? Well, no at current levels, most of the good news has to be in the price.

One thing you should take from the reaction to ABC's misreporting on the Flynn news is this: this is a market that can be derailed by a whisper. That means a lot of people are dancing near the door. They think they can get out at the first sign of trouble.

That means it's not the time to pull on your disco shoes and boogie. The last thing you want to do is to leave yourself in a position where others panicking can either ruin you, or lead you to panic yourself.

So if you haven't done so recently, you should take some time to look at your asset allocation, and make sure that it reflects the level of exposure you want, and the risk you want to be taking. That way, when an inevitable market panic hits, you'll be able to observe calmly and wait for opportunities, rather than frantically pound the "sell" button alongside everyone else.

John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.