Adjust Your Sails to Build Wealth
How do you modify your investment portfolio now that tax reform passed?
Love it or hate it, tax reform is here to stay – at least for corporations. With change comes opportunity. While change and opportunity will arrive directly with the tax reform bill for both corporations and most individuals, it will also come indirectly to the economy and financial markets. William Arthur Ward stated, “The pessimist complains about the wind; the optimist expects it to change; the realist adjusts the sails.” Now that tax reform has passed, the economic environment has been altered. How do you modify your investment portfolio to take advantage of the winds of change?
First, it is important to understand the change itself. The most significant shift in the tax reform bill is a decrease in the top corporate tax rate from 35 percent to 21 percent – a monumental decline by any standards. There are many additional business-friendly changes in the bill as well.
On the individual side, most Americans will see a decrease in taxes from lower tax brackets across the board, an increased child tax credit and higher standard deductions.
Of course, summarizing a 429-page tax reform bill in a paragraph is impossible. The bottom line is Americans will have more money in their pockets and a windfall has been created for corporations.
Tax reform has historically occurred in times of a stagnant or struggling economy. With the latest tax reform bill, this couldn’t be further from the truth. Almost every aspect of the American economy is doing well. The economy is at full employment, wages have started to rise, housing prices are increasing, gross domestic product (GDP) is steady and the S&P 500 index is on track to return nearly 20 percent this year while reaching multiple all-time highs. The tax reform act is like putting the economy on steroids, which may be great in the short-run, but may also create lasting long-term side effects for investors.
The single biggest winner with the new tax reform bill is corporate America. Major corporations historically taxed at higher rates will see a windfall, which may be passed on to employees, projects and infrastructure – though that remains up for debate. This windfall will most certainly provide corporations greater profits and pay out higher dividends to stockowners. Hence, boosting stock prices.
Which corporations are in the highest tax rate? After all, they will see the greatest benefits of corporate tax cuts.
Many of these companies are in the energy and health-care sectors, greatly influenced by external factors including the price of energy and the changing face of health-care. This complicates the pure impact of corporate tax cuts making corporations in other sectors more attractive.
While the landscape is always changing and companies are constantly impacted by nuances in consumer spending and the economy, opportunities exist with companies such as Amazon (AMNZ), Juniper (JNPR) and Broadcom (AVGO) which pay among the highest corporate tax rate in the U.S. Still more opportunities exist in more traditional retailers such as Nordstrom (JWN), whose stock price has struggled – like so many retailers – creating value, but benefiting from both corporate tax cuts and individual tax cuts.
Investors can make more subtle changes by over-weighting portfolios in equities, shortening the duration of bonds and looking at commodities in an environment with rising interest rates and inflation.
Common sense and the embrace change create opportunities. While talking heads debate the merits and consequences of the new tax reform bill, opportunists will be seeking ways to create wealth. Winston Churchill stated, “A pessimist sees difficulty in every opportunity, an optimist sees opportunity in every difficulty.” How will you seize the opportunity?