When good news is bad news for investors and vice versa
We’re in a situation where good news is being treated as bad news by the market and vice versa. While this can be a bit confusing to the casual investor, there is some logic to how stock markets are currently behaving.
Three bits of news in the past few weeks have triggered the opposite reaction to what you might expect at face value.
US jobs data was very strong for February, with the creation of 379,000 new jobs versus 166,000 additions in January and the loss of 306,000 positions in December.
At first glance, this seems like good news because it means the state of employment in the US is improving and so we’re on the right path coming out of the pandemic.
In reality, the jobs figures caused another wobble in the stock market as investors took the view that it strengthened the argument for the US Federal Reserve to raise rates sooner rather than later as the economic recovery is picking up pace.
At the UK Budget on 3 March, chancellor Rishi Sunak made two important announcements on company-related tax. He said the widely expected rise in corporation tax wouldn’t happen for another two years. Sunak also said companies would be able to cut their tax bill by up to 130% for investments made in the business.
The market cheered both pieces of news even though they are both less attractive than you think. First, pushing up corporation tax from 19% to 25% means companies will have less profit after tax which could have a negative impact on dividends paid to shareholders.
Remember that the stock market is forward looking, and it won’t be long until the higher tax rates will start to be priced in to stock valuations. The erosion of both earnings and dividend growth are negative for investors, but one cannot help feel this factor has been ignored by large parts of the market.
As for the tax cuts relating to business investment, a lot of the commentary around the Budget applauded this action and said it would really help companies. However, if you dive into the Budget document, you’ll see it says the tax cut is only applicable to investment in plant and machinery. A lot of people assumed it also covered intellectual property, such as technology research and development.
The chancellor’s tax cut is only in place for two years, thereby creating a rush among companies to invest heavily in the near-term. From 2023, we’ll not only have the big tax hike, but it is feasible to suggest the economic recovery could have peaked, certainly when you consider the OBR forecasts much more subdued economic growth from that year onwards.
Investors shouldn’t be put off the market because everything is not what it may seem. It simply pays to keep an open mind and not be caught off guard because you’ve misread a situation.