Reflecting on October: US tax reforms

Progress on US tax reform sparks life into the US dollar and supports US equity markets

What has happened?

A vote on the 26th October by the US House of Representatives to approve a budget blueprint for the 2018 fiscal year has paved the way for changes to tax legislation in the United States. The decision to pass the budget bill means that changes to tax regulation can now be made without any Democratic support, and led to strong performance from both the US dollar and US equity markets during October.

 

Why?

Donald Trump was elected as the US President in part on the back of his promise of an expansionary fiscal policy, including increased infrastructure spending and tax cuts for corporates and the American middle-class. The initial market reaction to Trump’s election in November 2016 was for the dollar and US equity indices to rally as the prospect of looser fiscal policy was seen as being positive for economic growth in the US. Trump’s failure to garner sufficient support to repeal Obamacare led to doubts about his ability to fulfil his campaign promises and the US dollar in particular stalled over the summer months. Recent progress on changes to tax regulation has reignited the so-called “Trump trade”. However, it remains to be seen exactly what form changes to US tax regulation take and the impact they will have on the US economy. A draft tax bill published this week has drawn criticism and will be the subject of fierce negotiations before it is finalised towards the end of the month.

 

What should you take away from it?

Political events continue to have significant influence on financial markets but remain difficult to predict, and this uncertainty serves to reinforce the importance of diversification, not just by asset class but also by geography. Exposure to a diverse range of companies located in different countries can reduce the political event risk of a portfolio. Please speak to your Investment Manager for more information.