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Income investment expert Bryan Perry shares the impact of the pending tax reform.


Tax Reform Pulls Capital Off Sidelines

Income investment expert Bryan Perry shares the impact of the pending tax reform.

The notion of a tax package finding actual passage sparked a fresh rally for stocks that saw the energy, financial, industrial and transportation sectors lead the market higher.

The Dow enjoyed its best day of the year, rising 1.4% and clearing 24,000 for the first time. Other bullish developments fueling the fire under the market included OPEC and non-OPEC members agreeing to extend the production cuts until the end of 2018, as well as news of Aetna and CVS coming closer to striking a merger.

Seeing bond yields tick higher showed for the first time in a while what I view as normalized behavior in which stock prices rise and bond prices fall in reaction to perceived economic growth. Most of the recent economic data points are showing a clear expansion of the U.S. economy.

Just in the past two weeks, New Home Sales (685,000 vs. 629,000 consensus), Q3 GDP Second Estimate (3.3% vs. 3.2% consensus), Pending Home Sales (3.5% vs. 0.6% consensus), Personal Income (0.4% vs. 0.3% consensus), Chicago PMI (63.9 vs. 63.0 consensus), Construction Spending (1.4% vs. 0.5% consensus), Leading Indicators (1.2% vs. 0.8% consensus) and the University of Michiganâ??s Index of Consumer Sentiment (98.5 vs. 97.9 consensus) have supported the bullish thesis of strong earnings expectations for the fourth quarter of 2017 and Q1 of 2018.

It is my view that, regardless of whether the tax reform passes, the organic strength of the broad economy is such that record highs for the indexes have been a byproduct of the great business conditions, labor conditions and consumer sentiment. With no major piece of legislation passing Congress in 2017 and the S&P 500 rising year-to-date by 18.3%, it tells me that as tax reform is passed by year-end, it sets up 2018 as a year that could see earnings for the S&P 500 get a 20% boost. If so, the current forward P/E of 18 times earnings for the S&P would contract to about 13-15 times earnings, making this earnings-driven market look pretty attractive.

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