Did the New Tax Cuts and Jobs Act Caused Dow Jones Index to Collapse?

A market stock photo

Proposing a bill that would introduce several tax cuts to personal and corporate incomes was one of the big promises of Mr. Trump’s election campaign.

The new act, signed by Mr. Trump on December 22, 2017, included many tax reduction measures like raising the standard deduction (i.e. the first amount of income that no tax is paid on), doubling the estate tax exemption, doubling the child tax credit and others.

The most important measure that we believe of the most impact on the Americans is the corporate tax cut. The corporate tax cut reduced the corporate tax rate from 35% to 21% in a big step similar to what Ronald Reagan did.

Reagan reduced the corporate tax rate from 48% to 35%; decreased the public spending growth, governmental regulations, the federal income tax; and tightened the money supply in an unprecedented move that initiated the popular term: Reaganism.

As a direct “Thank You” to Mr. Trump and the Republicans, big behemoths like Walmart, AT&T, and AccuWeather showered their employees with bonuses, wage increases, and extended benefits. That was good in-principle but harmful in the results.

Generally, the U.S. economy and stock market are similar to huge machines that should be fine-tuned carefully. Combined with the other new tax credits and exemptions, the new tax act combined with the big companies’ reaction (the wage increases) probably was not that fine-tuning but a very shaking move with drastic and unpredicted effects to the U.S.

Suddenly on Monday, February 5, 2018, the unpredicted happened and the Dow Jones Index plunged by 1175 points! It was the biggest intraday crash in the history of the United States! It was not totally unseen since the index was keep heading south since January 25, 2018 (just a month after signing the new tax bill).

We believe that it was a direct consequence of the new tax act. Quickly rising salaries and expecting the other companies to follow suit led the investors to fear the quicker-than-expected wage appreciation hence higher inflation and the possibility of fast interest rate hikes by the Federal Reserve. That is one of the recipes for a fast stock crash and reverting to other inverting venues like bonds.

It is hard to predict exactly what will happen in the coming days. However, drawing the trend-line from the peak point in Jan 25, 2018 until for example, Feb 22, 2018, shows a downward trend that may give us a rough futuristic outlook.

Some people would called that market correction; others called it a crash. The coming days will show.