Merry Christmas and Happy New Year, folks. The Trump & GOP tax plan is in, and stocks couldn’t be happier about it. But should we take pause as this bull market rolls on?

Before I begin on that, let me first say that I think in the short-term this is GOOD for stocks. Obviously, the after tax earnings of US companies should go up, considering the drop in the tax rate from 35% to 21%. Plus there is the added benefit of expensing 100% of capex day 1, though the impact of this may need to be seen, since bonus depreciation scheme today allows for 50% of capex to be expensed. But is this benefit priced in? Is there any warranted skepticism?

My concern, not to be a bear, is how late this fiscal stimulus is coming into the economic recovery. Along with central bank stimulus, we needed something like this in the 2008-2011 time frame, not 10 years after a recession when employment is at near “full” levels. Moody’s has a good chart that contrasts these tax cuts with those in prior administrations. Bottom line: this stimulus, not even considering the $1 trillion infrastructure plan Trump has outlined, is coming very late in the cycle and when our debt to GDP is already at high levels.

 While its entirely possible stocks continue to march higher, just consider the possibility that this tax plan either boosts demand higher for goods, which means higher inflation and bonds go lower/ interest rates higher (think demand pull inflation from a boost to economy), or the market gets concerned about the deficit and treasuries go lower / interest rates higher. Frankly inflation has been stubbornly low for so long that it almost makes me think it has to happen (expect the unexpected…).

In either case, this means cost of capital goes up which could hurt valuations for stocks and in the worst case, wipe out any benefit from tax reform. Just something to consider going into 2018 as we review our portfolios.

-DD