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What's good for Wall Street in the tax cuts may not be equally good for Main Street

  • Markets usually tell us months in advance whether the economy will grow or shrink.
  • The stock market, up sharply in 2017; the bond market, where rates are rising, and the commodity markets all suggest that economic growth may accelerate sharply from here.
  • It is not automatic that labor will benefit to any great extent. Nor is it a given that the small tax savings for households will encourage people to aggressively ramp up their spending.

For over three decades I have learned that the collective wisdom of the markets dwarfs that of any individual analyst, economist or market-watcher.

I wrote a book in 2000, "The Message of the Markets," that forcefully makes that case.

The central premise is that as an anticipatory mechanism, the market discounts future economic growth and, thus, tells us many months in advance whether the economy will grow or shrink. That's equally true of bond and commodity markets.

Right now, the stock market, up sharply in 2017; the bond market, where rates are rising, and the commodity markets are all suggesting that economic growth will not only be sustained going into 2018, but may even accelerate sharply from here.

So if I am to remain intellectually honest, and remain true to my beliefs about markets, I have a key question to ask myself.

Am I wrong about how the tax bill will affect not just Wall Street but Main Street?

I have been a vocal opponent of the tax bill that is about to become law. Having suggested, months ago, that there would be a "reverse Robin Hood effect" from this bill, I have argued that lower- and middle-income families will shoulder the costs of very large tax cuts for the wealthy and for corporate America.

Further, I have argued that the tax bill was a solution in search of a problem in so far as it promises to create jobs when the U.S. has 6.1 million open jobs but not enough workers to fill them.

I have also claimed that companies, flush with cash thanks to lower tax rates, would not immediately pass those increased profits on to workers in the form of higher wages.

The stock market, to a large extent, is saying that I am wrong in my assessment. Certainly, with companies raising their own profit guidance for 2018, and stocks extending their gains as a consequence, the benefits of lower taxes will be seen immediately by Wall Street.

I still have doubts that the good fortune among large companies will be broadly shared with their workers, or will result in a rapid acceleration in economic growth.

Companies may buy more equipment and increase the efficiency of their operations, getting a huge tax benefit in the process.

But they may also use their excess cash to buy back stock, raise dividends and buy other companies before they pay out higher wages. That is borne out by examples in recent economic history.

Those activities benefit the shareholder class, investment bankers and select industries that supply labor-saving, productivity-enhancing systems.

It is not automatic that labor will benefit to any great extent. Nor is it a given that the small tax savings among those who make less than a fortune per year will lead them to aggressively ramp up their personal spending.

I stand at a philosophical crossroads. I have long believed that markets accurately forecast future economic trends. I also believe that Wall Street and Main Street may diverge further where what's good for Wall Street may not be equally good for Main Street this time around.

The 60 percent of Americans who directly or indirectly own stock through their brokerage accounts or pensions are certainly better off as stock prices rally. But even that fact may not make people "act" richer. They might just "feel" richer.

It is a conundrum with which I will grapple for months to come.

I hope that any additional prosperity that comes from tax reform will be broad-based, but I fear that, this time, Wall Street is only forecasting the future of Wall Street, not the future of the street where you live.