One of the promises many proponents of the Tax Cuts and Jobs Act of 2017 made was that the more companies saved on Federal taxes, the more they would spend to grow their businesses. Unfortunately for those who were looking for more of an economic boost on Main Street, the lion's share of the tax savings have gone to Wall Street and shareholders in the form of share buybacks and increased dividends.
Apple (NASDAQ: AAPL ) is a great example of this phenomenon. It currently has plans to buy back $100 billion of its own stock, and Corporate America collectively is on track to buy back as much as $1 trillion in stock. This is great news for anybody who owns these shares, as buybacks tend to push stock prices higher, but asset-price inflation on Wall Street hasn't trickled down to Main Street.
The Bureau of Economic Analysis (BEA) updated its first-quarter 2018 gross domestic product (GDP) numbers today and revised the annualized growth rate of the United States for the quarter down from 2.3% to 2.2%. While this isn't a huge decline, it certainly doesn't show economic growth accelerating like many had hoped for in the wake of the tax cuts (see Fig. 1).
Fig. 1 - U.S. Quarterly GDP (source: ZeroHedge)
Part of the reason for the lower-than-anticipated levels of corporate spending seems to be based on the situation companies had prepared for and found themselves in before the tax cuts were enacted. The economy had already been doing relatively well for the preceding few years, companies had already made the investments they felt were necessary to keep up with current demand and management teams had already found themselves with extra cash that they were plowing into share-buybacks and dividends.
Since most of the tax cuts were targeted at corporations and wealthier individuals, and not at lower- and middle-income workers and consumers, we just haven't seen a large enough increase in demand for the products that Corporate America is selling to spur more investment and spending from those companies.
The Bottom Line
The positive news for investors is that tax cuts going toward share buybacks have provided some much-needed stability on Wall Street. This comes as traders have been forced to grapple with the resurgence of the potential sovereign debt crisis in Italy, the instability that situation has caused in Europe and the back-and-forth in "trade war" rhetoric we have seen between the U.S. and China. Plus, the U.S. economy may not be growing as fast as some would like, but it is still doing well enough to support the current market conditions.
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