Tax Overhaul and Your Investments

The US Senate passed the tax reform bill by a margin of 51:48 on Tuesday, 19 December 2017. This is one of the most sweeping, and comprehensive bills to US tax legislation in several decades. The rewrite of current tax legislation is the most crushing victory for President Donald Trump. Fierce opposition from Democrats was nullified by the House and Senate votes. Treasury Secretary Steve Mnuchin, Senate Majority Leader Mitch McConnell, House Leader Paul Ryan and other Republicans celebrated this ground-breaking legislative victory. After multiple attempts to repeal and replace Obamacare, the Trump White House has finally scored the touchdown it was seeking before Christmas.

Hook, Line & Sinker

On Tuesday, the House voted 227 – 203 in favour of the legislation, but technicalities required a revote in the house. The $1.5 trillion tax reform package will impact all American taxpayers across the economy. Middle and low-income families will also be impacted by the tax cuts, particularly with the first $12,000 of their earnings. While many naysayers believe that the current tax proposals will push the US economy further into debt (the US national debt is currently around $20 trillion), the stimulus package is geared towards boosting investment in the US, productivity, and long-term growth.

While lawmakers voted largely along party lines, it was the Republicans who ran a victory lap ahead of the Christmas weekend. However, the celebrations will continue well into the new year. One of the most important inclusions in the tax reform bill is the measure to repeal the Obamacare tax on individuals and businesses that do not wish to pay healthcare insurance. This effectively kills Obamacare by not penalizing people for not having health coverage.

Windfall Gains for Financial Stocks

The hope is that US corporations, particularly banks and financial institutions will pay less tax, and use those tax savings to reinvest in the US economy, drive up wages, and spur economic growth. If this comes to pass, it will be a tremendous boon to the US economy. On a personal level, there are opportunities for everyday investors to benefit from the tax breaks. For example, lower taxes on banks like Morgan Stanley, Goldman Sachs, Citigroup, Bank of America, Wells Fargo & Corporation, Chase etc. will mean that bank stocks will rally in 2018. Coupled with an increased federal funds rate, there is plenty of upside potential for these banks. Wilkins Finance trading expert, Edward Rothschild believes that the best is yet to come,

‘… Like them or loathe them, banks are going to benefit, and traders can cash in on the windfall earnings by going long on bank stocks. Whether this ends up being a short-term or a long-term value proposition is up for debate, but the trajectory is clear. The bolus that has been injected into the financial markets is evident in the trifecta: increasing interest rates, deregulation, and sweeping tax reform. Anybody with an eye to profiteering will go long with call options on leading bank stocks moving into the new year. Dividends are likely to increase to shareholders, and financial stocks are going to benefit across the board. Derivatives trading activity is also on the up as we march towards a new year.’