Presenters Laurie King, Paul Christopher, and Dr. Brian Jacobsen from Wells Fargo Investment Institute and Wells Fargo Asset Management provide combined commentary to help investors understand economic and market implications of tax reform.

Audio: Addressing Tax Law: The Economy and the Markets (Audio)

Transcript: Addressing Tax Law: The Economy and the Markets (Audio)

Presenters: Laurie King, Paul Christopher, Dr. Brian Jacobsen

Laurie: I’m Laurie King, and you are listening to On the Trading Desk®. With tax reform passed into law we’re providing perspectives on the economy and the markets. And we introduce a new voice to the podcast—joining us from St. Louis is Paul Christopher, Head of Global Market Strategy with Wells Fargo Investment Institute. Paul welcome.

Paul: Thank you Laurie, it’s great to be here.

Laurie: We’re also joined by frequent contributor, Dr. Brian Jacobsen, Senior Investment Strategist with the Wells Fargo Asset Management Multi Asset Solutions Team—he’s just outside Milwaukee, if you’ve been curious all these years.

Brian: Heh, heh!

Paul: Ha!

Laurie: Brian Welcome.

Brian: Thanks for having me!

Laurie: Well, let’s talk about what’s most relevant, from each your perspectives and then some ideas investors can walk away with. So Paul, let’s start with you.

Paul: Okay.

Laurie: What’s the main focus of your attention from an economic perspective?

Paul: Well Laurie, the final bill has front-loaded the stimulus and actually will deliver about 200 billion dollars of extra juice to the economy in 2018, in our view. That’s about double what we had previously expected. So, look for some faster economic growth. But really the central feature of this bill is the incentive for corporations, businesses, generally, to add plant and equipment—especially on the equipment side. There a 100% expensing of equipment for the next five years. We think this will be very significant in helping firms to increase their amount of capital spending and improved productivity going forward. We think that will benefit the sectors that were already doing well with the economy, including what we call the cyclicals—industrials, consumer discretionary, financial also do well, and if there’s some repatriation of foreign earnings accumulated and stashed abroad, then that should help sectors like healthcare, and in particular, pharmaceuticals.

Laurie: And how about company size—in terms of who might see the most benefit?

Paul: There are some international features, besides the repatriation that might be a little bit of a headwind for multinational companies. That’s the tax that’s going to be due on previously accumulated foreign earnings. So with that bit of a headwind; and if you consider also that those companies might also give up more inn terms of the restrictions on interest deductibility, it means that smaller companies especially domestic companies, might have the upper-hand over their larger brethren.

Laurie: Alright. Brian, well with what’s ahead, what’s your multi asset solutions perspective?

Brian: We still believe better long-term valuation opportunities in the equity markets lay outside the U.S. What we’re looking for is a shift from a general rise of the market to more of a game of catch-up from areas that have lagged, but should benefit disproportionately from tax reform. We agree that firms delivering consumer experiences should benefit, but it also involves looking for companies that can compete with the on-line giants by competing on the basis of experiences rather than just price. With the deemed repatriation of accumulated foreign earnings, we could see a new wave of acquisition activity—benefiting smaller cap stocks that Paul was talking about.

Laurie: Okay.

Brian: The provision that allows for full expensing of investment spending over the next five years—that should likely benefit industrials and firms in the capital equipment industries. And while there are provisions that limit the deductibility of interest by some businesses—that should only adversely affect a very small number of debt issuers. Generally, lower taxes will likely make it less attractive to issue debt to finance growth, as opposed to using retained earnings or issuing equity, so we could have some relative scarcity in the corporate debt market. To us, that means, on the fixed-income side, we could continue to see narrow credit spreads.

Laurie: And how does this translate to potential for opportunity?

Brian: From a broader markets perspective, it’s really hard to find a lot not to like. It’s just a question of how much of this was already priced into the markets going in. With the underperformance of small caps, consumer discretionary, and financials all year, it looks like the market either wasn’t pricing it in, or, it was pricing it in, but, into the wrong parts of the market. That really, we believe, should create some good opportunities for active managers that can identify the relative winners and losers.

Laurie: Okay. Paul, in the weeks ahead, where’s your focus?

Paul: Well the main thing to remember is that we don’t think that capital markets have completely priced in tax reform yet. There’s been a lot of back and forth; a lot of different trial balloons floated out of Washington and the markets have not had the opportunity to get a clearer view until probably now. So over the next weeks, we think markets will be moving to price in, and there will be opportunities, we think, for investors. We have conviction that the economy has been improving and will continue to improve in 2018. And tax reform should provide the stimulus that reinforces that improvement in the next year.

Laurie: And Brian, your brief outlook?

Brian: Global growth is improving. A little extra oomph out of the U.S. is likely going to help the global outlook, and not just the U.S. outlook. People may think that this economic and market run is long in the tooth, but the economy and the markets, they don’t obey the calendar or the clock. We think that things can keep running for longer than many people thought. And this tax reform bill is likely to help that. We’re just watching the Fed like a hawk to see how they react to this. They’ve typically been the ones to short-circuit things, in past economic expansions, but the early indicators out of the Fed are that they’ll just view this as a transitory stimulus and not something they need to react to. And we find that encouraging.

Laurie: Before we leave, a quick parting thought? Paul?

Paul: Look for those opportunities in those companies that are most oriented to the economy’s continued improvement.

Laurie: And Brian?

Brian: Even with tax reform, we think it’s important to not get too excited or to get too unbalanced with allocations. The tried and true wisdom of staying diversified and keeping patient will still hold.

Laurie: Very good. I’ll remind our audience to visit our blog AdvantageVoice® to stay informed on this topic and others. But for now, Paul Christopher, thank you!

Paul: Thank you very much, Laurie.

Laurie: And Brian, thank you!

Brian: Thank you!

Laurie: Until next time, I’m Laurie King; take care.