U.S. Stocks Shed as Tax Factor Fades

By Joyce Yu

Any feel-good factor from U.S. tax reform faded on Wednesday after the Senate approved the final version of the biggest tax bill in over 30 years. U.S. stocks, however, backed away from record highs on Tuesday.

The Dow Jones industrial average shed 0.2%, while the S&P 500 dropped 0.3% and the Nasdaq lost 0.4%. Analysts at Goldman Sachs estimate the S&P 500 could fall to 2,450 if the tax bill doesn’t pass.

While Wall Street cheers the passage of tax bill by the Senate, critics say the bill is heavily weighted to ease the tax burden of businesses rather than the middle class. The bill, which allows interest payment deductions on mortgage debt up to $750,000, a revision down from the current $1 million, will also make housing less affordable, according to nearly half of the property market experts polled by Reuters.

“Losing the tax deduction of mortgage payments and property taxes – of having deductibility limited – makes housing less attractive and less affordable,” Robert Brusca, chief economist at FAO Economics, told the Reuters.

“We think there’s a possibility that if the tax bill is successful in generating economic growth, housing affordability could take a turn for the worse,” noted Ralph McLaughlin, economist at Trulia in San Francisco. “This is because the housing market has a supply, not a demand problem, so any policies that generate growth without boosting supply could make homes even more expensive than they already are.”

It has been a satisfactory year for U.S. stocks investors. The upward procession for the S&P 500 has been so strong that there is no single day when it fell by 2%. But the U.S. stock market has been bolstered simply by demand for stocks, which has pushed valuations higher, the Financial Times noted. A quarter of the S&P 500’s gains this year can be attributed to a surge in the share prices of Apple, Microsoft, Amazon, Facebook and Alphabet.

With 2018 just around the corner, global stock markets are faced by many uncertainties despite strong economic growth. It is a question mark whether the enthusiasm in stock markets is broad based and sustainable. Credit investors polled by Bank of America Merrill Lynch for a survey published in December named a bubble as the biggest risk to the asset class, followed by higher inflation and rising yields.


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