The Tax Trade | November 17, 2017

The week was little changed when you look at the open on Monday and the close on Friday. There is more to it when you look at how tax reform moved the markets.

The lack of movement is a bit deceiving, however, as markets ebbed and flowed on news related to tax reform all week. Some of the volatility came from risks of a delay to reform passage and major differences between the senate and congressional bills. As the congressional bill passed on Thursday, we saw a resurgence of positive sentiment in the markets. The differences in the two bills remains a concern that needs to be tackled.

One of the key market impactors of tax reform is its impact to small corporations. Tax treatment for them is seen as a major benefit, so each development in tax reform seems to cause upheaval in small corporation pricing. So, in a week where the S&P 500 saw modest losses (.13%) and an uptick in volatility (VIX @ 11.6), small caps managed to ink out a nice profit, gaining 1.09% on the Russell 2000. It remains to be seen if the differences in the bills can be resolved before year end. Should they come together, look for small caps to outperform as tax reform moves closer to fruition.

 

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