I suspect this is occurring today.
Regardless of whether you like President Donald Trump, or what is happening to the Republican Party, or whatever you may think philosophically about the new tax cuts, none of it serves as a basis for establishing an investment strategy. You may believe the cuts are a reckless, ill-timed, deficit-expanding wealth transfer to the rich; indeed, you can hate the impact of this sort of partisan policy-making approach and its long-term implications for the nation’s fiscal health. But if you manage other people’s money for a living, you should sequester your personal views, and recognize the impact of $1.5 trillion in deficit spending will have on jobs, the economy and perhaps most of all stocks.
That is a large pile of money, and it will work its way through the U.S. economy. As we discussed previously, there is a spectrum of ideas -- some new, some old -- contained in the tax plan. I have long been a fan of the accelerated depreciation of capital spending, something Trump, Barack Obama and George W. Bush all included in their tax bills; other parts of the bill I find less impressive. I will leave the analysis of how efficient the tax cuts are to the economists and policy wonks.
But regardless of what you specifically like or dislike in the tax reform bill, the bottom line remains the sheer amount of deficit spending it contains -- and all those dollars probably will be good for the stock market during the next few quarters, or even years.
The U.S. was the epicenter of the financial crisis. The country led the global economy to the edge of the abyss as the nation’s credit system froze up and markets collapsed. But the U.S. under Obama and former Federal Reserve Chairman Ben Bernanke also provided the fastest and most vigorous response to the threat. The Fed’s policy of zero interest rates and asset purchases (quantitative easing) lead the recovery from the depths of the Great Recession. Japan and then Europe followed the U.S.’s example, and now they too are growing at a respectable pace.
What was missing from all of those monetary responses was some good old-fashioned Keynesian fiscal stimulus. The new tax cut provides that, albeit rather late in the economic cycle. We can argue whether such a cut would have been more appropriate when the economy was really weak in 2009 or 2010. I certainly believe that was a better time for such a stimulus.
But allowing your partisan views to get in the way is a mistake. The tax cut are a large and potent stimulus. There is no rational way to reach any other conclusion.
This column was provided by Bloomberg News.