We received a client email last week that raised the question: What are the current threats to the markets besides politics? Our response to this question was NAFTA. Right now it seems as though NAFTA talks aren’t going anywhere. This is important because NAFTA adds about 80 billion dollars to the US economy as well as over .5% to GDP. The longer these talks drag out, the more it could affect the US economy, especially manufacturing.
If Congress cuts corporate tax rates to 20%, that would result in earnings of the S&P 500 companies some $10 per share higher to $151 instead of $141 in 2018. In essence, the tax cut will add a lot to the bottom line, especially in financials.
DC is focused mostly on the positives of this tax cut. It could be that they haven’t focused enough on things like NAFTA and the risks associated. Our trading partners have not forgotten about this. For example, Canada’s prime minister is traveling to China this week to discuss a free trading agreement. If Canada has a free trading agreement with China, our largest trading partner, it could weaken our case with them. So while we are focused on tax cuts, the other countries are working hard to fight us behind the scenes.
Through the end of September the international investor has put 66.4 billion dollars into the US. This is the highest level in the last 5 years. This is one of those underneath factors we have been discussing that could potentially keep this market rally going.
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