by Chris Becker
As US stock markets recover from the December rout, even as the Trump shutdown rolls into its 29th day, it’s critical to look at what goosed the S&P500 to its previous highs before this latest correction.
A year into Trump’s presidency and the US economy was sailing along if measured by lower unemployment, high corporate profits and very robust GDP growth:
Any reasonable economic manager would use these good times to invest for a rainy day, when the inevitable downturn comes, so paying off debt, investing in critical but long timeline infrastucture and other essentials like education would be prudent right? Wrong. With Congress and the White House controlled by the Republicans, the time was right for a huuge corporate tax cut, sold as being “rocket fuel” to help the economy, when it was in reality just swamp gas.
Instead of the trickling down, most of the tax cuts were used for stock buybacks and increased dividends, with Goldman Sachs estimating some $1 trillion spent on buybacks, plus circa $400 billion in increased dividends. So of course the US stock market took off like a rocket in anticipation and passing of the bill thereafter:
This was all foreseen and expected, with the nonpartisan Congressional Budget Office (CBO) estimating that “(HNW) individuals…would receive about $1,125 billion in net benefits (i.e. net tax cuts offset by reduced healthcare subsidies) over 10 years, while corporations would receive around $320 billion in benefits.” The cost would be adding just over $2 trillion to the national debt stack, with the inevitable annual flow in interest payable left to future generations.
But did it help anyone else? Nope. As Bank of America/Merrill Lynch explains via BI:
“The investment boom that wasn’t.” That’s how Bank of America Merrill Lynch economists categorized what’s happened in the US economy since the Tax Cuts and Jobs Act was passed a little over a year ago. What was theoretically supposed to be a boon for US companies – and by extension, the broader economy – has not had its intended effect.
The “tax cut story” has always seemed overdone, Bank of America said, as expectations of future growth are a bigger driver of capital expenditures than the actual cost of capital – which corporate tax cuts theoretically lowered. And investors have indeed soured on growth expectations, the firm has found.
“Leading indicators of capex have been weakening for a year now, and in the fall US indicators started to turn down as well,” global economists Ethan Harris and Aditya Bhave told clients Friday. “Falling growth expectations are undercutting capital spending growth, with more weakness ahead.”
This is important on two fronts. First it’s another tail in the coffin for bullshit economics, otherwise known as “trickle down” or “if you tax the rich less, they’ll invest more” nonsense, and should provide more ammunition to opposition to these neo-liberal policies, regardless of whom suggests implementing them.
Secondly, it shows there is a huge fade effect about to roll in come the second half of 2019. With fiscal stimulus likely off the table due to a deadlocked Congress and White House – hello month-long shutdown – there’s also going to be a big slowdown in business and capital expenditure investment, with earnings expectations also cooling.
The end of the business cycle is nigh, and that means lower US stock prices as the goose is cooked and the turkey is getting dryer in the oven.