We wrote more than a year ago about the steady if slow growth of the economy. Just as a slow-burning fire might last longer than a raging conflagration, we expected that the economic expansion would persist longer than some commentators believed.
Another way to say it is, a bust is less likely without a boom first. The excesses that build in boom times usually contribute to the bust that follows.
For the first time in a decade, conditions may be ripe for a boom. The improvement in small business sentiment and increased money flowing into the equity markets had us on the lookout for signs of a boom. Then the tax law passed.
The tax law has pro-cyclical features that may strongly encourage economic growth now, but plants the seeds for a later slowdown. There may be political aspects that contribute to this syndrome, too.
Businesses investing in long-lived capital investments will be able to deduct the full cost up front, instead of taking smaller depreciation deductions over many years. This increases the financial attractiveness of projects; capital spending is likely to rise. A dramatically lower tax rate on corporate income, combined with a feature to bring overseas money back to the US, are further inducements for more business activity.
For two administrations in a row, the signature achievement of each has been done on a partisan, party line vote. When the minority party becomes the majority party, that achievement gets attacked and the unwinding begins. We’ve seen it with the Affordable Care Act; some Democrats are pledging to undo the tax law as soon as they are able.
So the favorable treatment of capital spending begins to phase out in a few years, and corporations may ‘get while the getting is good’ before the law gets weakened or unwound. These conditions might begin to affect things precisely when excesses from the boom have created more potential for a slowdown.
Boom, then bust. We know how this works. Clients, we will continue to monitor all of this, and work to take advantage of our thinking. No guarantees.
If you would like to discuss any of this in more detail, or have something else on your agenda, please email us or call.
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.
The opinions expressed in this material do not necessarily reflect the views of LPL Financial.
All investing, including stocks, involves risk including loss of principal.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.