Paige Tyson:

“How do tax changes impact stocks? Many people might assume tax cuts are automatically a boon for stocks, and tax hikes are a burden to businesses. This sounds pretty intuitive, right? Well, after decades of study, we’ve learned intuition can often lead investors astray. So let’s take a closer look at the data. Historically, tax changes have not impacted stock market returns in a predictable way. Some tax hikes have been followed by higher stock returns, and some tax reductions have been followed by lower returns. And there’s a lot of noise in between. This holds true when looking across corporate, personal and capital gains taxes. So, why does this happen? Well first, tax changes in any one country, even a country as big as the United States, are only one of many drivers impacting global stock markets. Markets also price in all well-known information, and the thing that can cause the most volatility—both to the upside and downside—is when something unanticipated happens to surprise markets. Said differently, the more something is discussed, the less surprise power it has. Tax changes are often the opposite of surprising. They are publicly debated in Congress, widely discussed in the media and implemented far enough in advance that markets are able to digest and adjust to the changes before they happen. This helps mitigate the surprise, sapping the power to move markets much when the change goes into effect. That said, we always review any tax changes in depth and if we feel a change in the tax code creates a risk or opportunity to certain parts of the business landscape, we can adjust the portfolio. But ultimately, tax changes by themselves don’t seem to have much influence on the stock market one way or the other. It’s one of many important factors to watch and consider, but by themselves aren’t a reason to assume better or worse days are ahead for stock returns.