Growth Next Year

The Trump tax cut became law this year.  Most of America got a tax cut.  I was glad to see the SALT subsidy go away.  If you are feeling the pain of losing the subsidy, contact your local politicians. They can lower taxes you know.  The biggest part of the tax bill that is totally unquantifiable is how corporates will react to lower tax rates.

I think the market has priced in a lot of corporate activity, and I think it’s a bit ahead of itself.  Corporate budgets for 2018 are done and were done before the tax bill passed.  In the first two quarters of this year, corporations aren’t going to redo budgets.  Instead, they will strategize.  McKinsey etc ought to be busy.  If I were an investment banker, I’d be strategizing who I could put together to create a nice transaction for myself.

Corporates are notoriously slow to act.  Ask a startup CEO what the corporate sales cycle is like.  It will take them a year to digest the real effect of the tax cut on operations and formulate a strategy to take advantage of it. The small bonus checks you currently see are window dressing.  They are nice and they are a start, but there are big moves to be made.  I would not underestimate what it’s like to get an unexpected $1000 check from your employer.  Small rewards can reap big dividends.  See behavioural economics.

If I were a startup CEO that was targeting corporate America, I’d beat a path to their door and initiate my sales cycle now.  Target the right size company.  Using a consultative sales model to help them plan will allow you to insert your startup into those plans. Right now, they are trying to figure it all out.  This is an opportunity to help them.  You won’t get a sale in the first half of this year but you might get one on the back half and if you do your job right you will do well in 2019.

I have blogged about it before, but it pays to remember that corporations only have a few options with excess cash on the balance sheet.

  • They can send a dividend to shareholders, but even after the tax law was amended there is still extra taxation on dividends.
  • They can buy back stock.  This is a really crappy use of capital in most cases.  Some may make the case they are buying stock to increase the value of their currency.
  • They can invest in property, plant and equipment (including software).  American corps will do this, but they won’t do it big time until 2019.  They got to plan and 2018 budgets are in the bag.  In 2019, look for big time investment and look for it to be inside America.  Right to work states will benefit.
  • They can raise salaries.  They have more flexibility in this area to combat competition, but I don’t think you will see across the board increases until 2019.  I also don’t think you will see double-digit percentage gains in base salary increases.  More likely to be 2%-4%, unless inflation rears its ugly head. Bonuses might be a different story.
  • They can buy other companies.  Companies flush with cash will look a lot better.  M+A will be done using stock as a currency since tax loss carryforwards aren’t as attractive given the new tax plan.  This is all the more reason for startup unicorns to go public if they want to be acquisitive.  The back half of 2018 will be busy.
  • They can sit on the cash and let it accumulate.  However, this is risky because another company can use that cash to purchase them.
  • Multinational corporations will bring cash home, but I’d be willing to bet it’s only as large as 33% of the total amount of cash overseas.  In other words, it will be less than anyone has projected.  If there is $3.4 Trillion, only $1 Trillion of it will repatriate.
  • It won’t be until 2019, but more likely 2020 that you will see any movement by companies to unwind corporate tax machination that allowed them to book and hold profits at lower rates overseas.  2018 is all about seeing how everything flows through the system and strategizing to beat competitors.

Another big wild card is deregulation.  That will change how companies compete more than the decrease in corporate rates.

Predicting the actual rise of the stock market is always a crapshoot.  My gut says it will be lower in 2018 than anyone projects.  2019 could be a big up. But, I like to be contrarian.  Oh, and I have been seeing tweets on how commodities need to rally because they are underpriced relative to stocks.  That’s correlation without causation.