Tax Reform 2.0, Stocks Find Their Footing

August 2018 Market Commentary:

Tax Reform 2.0, Stocks Find Their Footing

By Paul Hoffmeister, Chief Economist

• House Ways and Means Committee released outlines of another round of tax cuts.

• Key features of Tax Reform 2.0 could be to make permanent the recent individual income tax cuts and index capital gains for inflation.

• We believe, at the present macro trajectory, tax cuts can buy more growth, but monetary policy will ultimately determine the duration of the recent economic resurgence.

Tax Reform 2.0: S&P 500 Reaches Five-Month High

More news has emerged during the last month about another round of tax cuts. On June 26, House Ways and Means Chairman Kevin Brady said in a Washington Post interview that he hoped to soon unveil a framework for additional tax relief and see votes held in the House during the fall.1 Brady expects the various tax reforms to be parceled into three or four separate bills, instead of a single piece of legislation.2 Soon thereafter, on June 29, National Economic Council Director Larry Kudlow told Maria Bartiromo:

“The President would like to see a Tax Reform 2.0 -- some of the leaders on the Hill, Kevin Brady and so forth. We’re all discussing it. We’ll wait for specifics to be released later in the year. It may be more of a guideline, a directional signal of what we intend to do. But, yeah, there’s stuff we can do. And I hope we get to it.”3

On schedule, the Ways and Means Committee released on July 24 a “listening session framework for Tax Reform 2.0”. The framework is meant to be a starting point for conversations between lawmakers and constituents about key aspects of another round of tax relief. According to the release, Brady and Republican members of the Committee are hoping to: 1) make permanent the individual income tax cuts and pass-through deductions contained in last December’s tax legislation; 2) create new retirement savings plans; 3) create new family savings plans, such as universal savings accounts and expanded 529 accounts; and 4) increase write offs for startups.4

On the heels of the framework’s release, stocks hit post-February highs. Based on the S&P 500’s closing price on July 25, the S&P 500 jumped nearly 1.4% compared to its close on July 23.