Comprehensive tax reform is now a reality and we are already seeing the benefits at both the corporate and individual level. As a result of lower corporate tax rates, many companies have been providing their employees with bonuses and I even read where a utility company was going to lower rates for its customers due to the lower corporate tax rate. In addition, most Americans will get some type of tax relief through lower individual brackets and that, combined with rising wages, could be the much needed boost the economy needs to break through the 3% GDP barrier we experienced for the last 8 years. There is also talk of an infrastructure-spending package that could be in place this year that would also boost the economy through more jobs. By the end of 2018, it would not surprise me to see our economy exceed 4% GDP growth, which would be a huge accomplishment for President Trump. From my point of view, I have not been this optimistic on the economy in over a decade, so I am excited to see how this year plays out.
With the economy now juiced with tax cuts, I think stocks could react favorably to what I expect will be improving economic data throughout the year. While I doubt that we will see the same type of performance that we saw in 2017, I do think that stocks could perform at the higher end of their historical returns for this year.
For bonds, I think the Fed will be more confident in raising rates with an accelerating economy and rising inflation, which is my outlook for 2018. This could cause some headwinds for bonds, especially those bonds that are not tax efficient like government bonds. Municipal bonds have also come under recent pressure with the passage of the tax reform, which is a common reaction in this sector of the bond market. It seems like every time there is a reduction of individual Federal tax rates, municipal bonds experience short-term selling pressure. However, tax reform did not eliminate taxes, so I think that municipal bonds should come back into favor for investors who are looking to reduce their tax liability, even with lower rates. Right now, I think there is a buying opportunity in the municipal bond market while there is short-term selling pressure in response to the tax reform.
Just a Thought
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