What is Different This Time – Financial Markets:
The 2017 Tax Law has numerous positive benefits. In this case, we are going to focus just on the values of stocks and other financial instruments.
In our last blog, we talked about how higher interest rates should lead to lower asset values and quantified that impact on the real estate arena. You will recall that higher interest rates could mean a reduction in values of approximately 25%.
If the financial markets, including publicly traded stocks, suffered a 25% decline, that would be called a financial panic. The stock market volatility over the last few weeks reflects the stock market attempting to calculate the impact of higher interest rates on stock values.
If the 2017 Tax Law did not exist, the higher interest rates appeared to be permanent, and nothing else changed, then the impact would be a financial crisis similar to the Great Recession or perhaps even the Great Depression. Fortunately, the 2017 Tax Law was passed.
We are experiencing the potential problems of transitioning away from QE, Quantitative Easing. Raising interest rates as part of normalization simply exacerbates the effect.
Therefore it is critical to understand one of several IMMENSE BENEFITS of the 2017 Tax Law is the reduction in corporate taxes. That single event dramatically increases corporate profits. The increase in profits could easily offset the increased cost of money, called interest rates. The result…the stabilization of stock values. That is not the same as removing volatility from the stock market.
Whereas normally rising interest rates would mean lower stock prices, because of the 2017 Tax Law we have enjoyed both rising interest rates (Normalization) and a rising stock market. The result is a VERY STRONG possibility that the financial markets may remain stable contrary to every other transition out of Quantitative Easing that has occurred in the economic history of the world.
The group that designed the 2017 Tax Law were Absolutely Brilliant. I am not saying it is perfect, but the 2017 Tax Law provides our economy with a reasonable chance to transition back to normal without a financial catastrophe. Pray it works, because the alternative is total collapse.
It is critical to remember that land is the source of all wealth. Every product that we humans consume originates with land. Not all tracts of land are equal in quality and portfolio management requires every investor to hold some cash for liquidity. But historically, long term the best investment is land.