There are 90 days left until the end of the year. Something we have been looking at is four scenarios that could play out before then. These are really binary scenarios and looking at how these two will interact. One has to do with whether tax cuts will happen and the other is if the Fed raises rates. We have seen that over the past few weeks, as tax cuts have occurred, the market has improved. The first scenario is if they make tax cuts and the Fed does not raise rates. These two things are very positive for the market and, in turn, combined, could be a favorable scenario. The second scenario is no tax cuts and the Fed raises rates. These two things could both have a negative impact on the market. The third scenario is tax cuts with a rate change. This could happen because tax cuts are positive, causing the Fed to worry about inflation, and, in turn, raising rates to slow down the growth. The fourth scenario is that you have no tax cut with no rate hike. This could completely change the way the market performs from now until the end of the year. We have recently seen that as soon as the news came out of the potential tax reform, high tax rate companies started to greatly out-perform low tax rate companies. We are seeing the market starting to price this in.
NC Tax Cuts
A great working example of what could be an explosive impact of what we are discussing is the state of North Carolina and what they have done in regards to tax cuts. In 2012, North Carolina undertook comprehensive tax reforms which applied the same four things President Trump is looking to do. The first is they cut their corporate tax rate in half. Secondly, they cut their personal income tax rate across the board to around 2.75%. The third thing they did was double the standard deduction. The fourth thing that occurred was that they eliminated their state death tax. Between 2012 and now, North Carolina has the highest personal income growth in the country for all four years. They also have the highest corporate growth in business for all four years. In addition to that, the state has created budget surpluses that they are indirectly trying to pass back in the form of more tax cuts. If you want to see how powerful the country could be, you could look at what North Carolina has done in this regard.
Last week we mentioned we were looking at the Purchasers Managers Index (PMI) that was released on Friday. That report came out very strong, especially for both the demand on products and employment. This shows that the economy still appears to be operating strongly while corporations are still bullish on the consumer and the economy. In other words, we feel that they are not only buying for today, but for the next 90 days as we go into 2018. As we head into the fourth quarter, we feel it’s important to look at some historical numbers. While there are no guarantees, the fourth quarter has historically been a better quarter then the rest, dating back to 1940. During this time frame, fourth quarter returns have averaged around 3.9% and have been positive 79% of the time.
Fi Plan Partners is an independent investment firm in Birmingham, AL, serving clients across the nation through financial planning, wealth management and business consulting. Fi Plan Partners creates strategies in the best interest of their clients using both fee based investing and transactional investing.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Economic forecasts set forth in this presentation may not develop as predicted.
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Stock investing involves risk including potential loss of principal.