Marching to Different Drummers
The changing and at times volatile political landscape has been one of the primary catalysts in influencing asset values over the past several yeDespite some of the weakness we have seen since yesterday’s tax proposal announcement, we would characterize the market in a generally risk tolerant mood. The positive outcome (at least from the market’s perspective) of the first round of the French elections and anticipated changes to the U.S. tax code have driven much of the risk taking, as we have seen stocks and yields move higher, while the USD has been weaker over the past several days. Dissecting each of the catalysts, the polls in France proved reliably accurate with Macron and Le Pen advancing to the second round as polls had been indicating all along. Given that these same polls continue to expect Macron to handily beat Le Pen on May 7th, concerns over France holding a referendum to leave the Eurozone have greatly subsided. As for U.S. tax reform, expectations have run high, with leaked information focusing on a reduction in the corporate tax rate to 15% from current rates that can presently reach 39.6%. These levels were ultimately confirmed yesterday, along with other broad aspects of the plan that would raise revenues from a lower repatriation rate while moving corporate taxation towards a “territorial” system. On the individual front, the 7-tier tax rates would be reduced to just three, with 35% replacing the 39.6% as the top tax rate. The standard deduction would also be increased, but all itemized deductions would be eliminated except for mortgage interest and charitable deductions. Finally, the AMT and estate tax would be eliminated.