The biggest headline to start 2018 is the successful passage of the Tax Cuts and Jobs Act (TCJA) just before Christmas. The legislation was much anticipated throughout 2017, particularly by equity and corporate credit markets.
As expected, the new law reduces the corporate tax rate, from 35% to 21%, and it allows a one-time repatriation on accumulated foreign corporate earnings, just to name two reforms. For individual provisions, tax rates for most income brackets were lowered, and the framework for allowable deductions was significantly altered. ContentMiddleAd
One notable surprise is the law’s official effective date. The general expectation was a second quarter 2018 effective date, but the TCJA became law on Jan. 1, potentially resulting in a positive economic impact sooner than originally expected.
Analysts are still dissecting the details of the final legislation in an effort to hone forecasts, but initial estimates suggest an annualized GDP impact of 20-30 basis points over the next two years. These estimates are driven in part by expectations for increased consumer spending in response to $100 billion to $150 billion of reduced individual tax liabilities this year.
The positive momentum in risk markets should persist in the first half of 2018. Economic fundamentals have been solid, and the most obvious headwind at this point is the ongoing reduction in central bank accommodation. While the Federal Reserve and Bank of England are the only G4 central banks actually tightening policy currently, the European Central Bank is now reducing its quantitative easing (QE) program. Credit markets remain in bull-market mode, but most would agree that it is late in the cycle (i.e., closer to the end than the beginning).
With reduced central bank presence in the global financial markets, will long-end bond yields and asset spreads be able to hold at current levels? Regarding the former, inflation readings remain tame, and absent a surge in consumer prices, a significant curve steepening remains a less likely event, particularly if the Fed progresses with its projected rate hikes. That said, supply squeezes in long-term global government bonds, particularly German debt, could be alleviated with less central bank demand (ECB QE tapering and reduced Fed reinvestments).
This market overview is provided by ALM First Financial Advisors, LLC, the investment advisor for Trust for Credit Unions. Read more from ALM First about the latest economic data releases and overall market trends at Trustcu.com.