I want to talk about a major tax change that is going to come into play in the earnings reports for the first quarter. Starting January 1, 2019, the Accounting Board changed the way that companies can account for their leases. Leases like office space equipment typically have been off balance sheets until now. Those are going to have to be added on to the balance sheet as liabilities from this point going forward. Typically, liabilities were just debt and bond payments. These leases coming on will add as much as three trillion dollars to the debt on corporate balance sheets. This is important to investors that use quant funds or just passive technology to manage a company’s balance sheets. What will happen is starting in the first quarter as companies report their earnings and update their balance sheet statements, any quant fund will suddenly assume that a company now has a large amount of new debt on their balance sheet. Those companies will likely be forced to sell based on the rules that are now in place. It will be very important to take a human look to see if anything within the company has changed or if it’s just re-accounting for already existing liabilities. I think it’ll be very important to watch how the market reacts to the first quarter as it may cause a little bit of headline news risk. We may see interesting volatility as earnings are reported starting early second quarter looking back at the first quarter.
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