As the US economic engine grows, it will pull the rest of the world along for the ride.
By AARON KATSMANGermany's Chancellor Angela Merkel (L) and Ivanka Trump speak during a roundtable discussion between U.S. President Donald Trump and German and U.S. business leaders on vocational training at the White House in Washington, March 17, 2017(photo credit: REUTERS)
As we approach year’s end I have been asked by numerous clients about what I think the year ahead will be like in the financial markets. As I have written so many times in this column, I always preface my answer by quoting my mother of blessed memory, who said that “A naár is a navi” or in English “prophecy was given to fools.”There is no way to know what will happen to the stock market in the next 12 months. Do a quick Google search and you will see headlines predicting everything from the biggest market crash known to mankind to a continuation in the current market rally. It goes without saying that investors who own stocks in their portfolios should be fully aware that markets can drop and can drop significantly and that stock market investing should be only for those with a long-term investment horizon. Now that I have fulfilled my quota for disclaimers, I’ll tell you all what I think will happen.Crystal ballI am not going to give a prediction on how the market will do. Rather what I do see happening is the beginning of a global economic boom not seen for decades. Why? Because of the Trump tax cuts. Now while I think it’s not a perfect piece of legislation, especially for not cutting all individual rates enough, the most important part of this bill is the massive cut in corporate tax rates. While the US currently has one of the highest corporate tax rates in the world, the drop down to just 20% is huge for corporations. Not only does this mean that they will keep more of their profits, but trillions of dollars will be repatriated from other countries. I also think you will see foreign companies start to incorporate in the US to take advantage of the lower rates. This should boost economic growth to 4-5% annually in the US. Larry Kudlow, economist and one of the advisers to President Trump on the tax cuts wrote, “So I can say with confidence that the current tax package is directly aimed at reducing the current high tax cost of capital and increasing after-tax returns from investment. Incentives matter. If it pays more after tax to build new capital stock and generate more business-equipment investment, people will do so. This is standard economics. There may be disagreements on the numerical effects, but the principle has worked in the past (JFK and Reagan) and will work in the future.”As the US economic engine grows, it will pull the rest of the world along for the ride. Countries like Brazil, Australia and Canada that have huge supplies of natural resources will benefit from “feeding the beast.” They will provide the resources necessary for the global expansion.Then what I think will ultimately happen is that in order to remain competitive with the US, countries all over the world will need to cut taxes as well. Heck, even in Israel where our Minister of Finance Moshe Kahalon, who is referred to in some circles as Santa Claus for always bearing gifts to every special interest that complains, has spoken a bit about the possibility of cutting taxes. That being said, the odds of a massive tax cut in Israel aren’t too high.OutlookWhat does all of this add up to? Well I don’t know other than to say that corporate profits are going to soar and that is generally a big positive for the stock market over the long-term.Nonetheless, make sure that your exposure to the stock market is based on a long-term perspective. Use this time of the year to reassess goals and needs and make sure your portfolio is allocated correctly based on those goals and needs.The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc. or its affiliates.
Aaron Katsman is author of the book Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing (McGraw-Hill), and is a licensed financial professional both in the United States and Israel, and helps people who open investment accounts in the United States. Securities are offered through Portfolio Resources Group, Inc. (www.prginc.net). Member FINRA, SIPC, MSRB, FSI. For more information, call (02) 624-0995 visit www.gpsinvestor.com or email aaron@lighthousecapital.co.il.