President Trump has been saying for some time that he's going to implement the largest overhaul and biggest tax cut in the history of the United States. In fact, the White House released its aggressive plans to push Trump's tax reform bill through the House as early as October - and clear the Senate by the end of November.
This has largely been the reason the stock market has risen to all-time highs, with the Dow breaking 22,000 last Wednesday. But it's also caused a lot of media chatter this week, with some of the so-called "experts" calling for a market crash in two weeks.
Now they're entitled to their own predictions, of course...
But the latest "advice" they're giving to anyone who will listen is downright disturbing - and could wipe out all of the profits you've made this year...
Tax Reform Isn't Guaranteed - and Neither Is the Next Market Top
Part of President Trump's tax reform plans include dropping the business tax rate from 35% to 15%. The idea behind this is that the resulting growth will pay for this astronomical tax cut. After all, if companies are taxed less, then they should be able to reinvest those monies back into business, which would lead to more job creation and hiring.
Now, this belief about a lower tax rate isn't anything new... People will have more disposable income to spend on consumer goods and services (which also helps businesses). They'll also have more after-tax money to invest in the stock market and store away in savings accounts. All of these things, in theory, would only boost the markets and the overall economy.
And for that reason, the pundits all over mainstream news networks are now claiming to have identified the next market top (the highest price at which the markets can reach before reversing) - and are telling how they should be adjusting their portfolios because of it.
But here's the thing...
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A 65-year study conducted by the Congressional Research Service revealed that economic growth isn't particularly affected by how much the wealthy actually pay in their taxes. So any tax cut that favors the wealthy might not actually affect the economy that positively.
When taxes are cut, it reduces the amount of revenue to the government, which creates a budget deficit or increased sovereign debt. To counter that, the government then needs to cut spending, which often leads to a heated debate about which programs to cut and how much to cut them by. Those who are for it champion the idea that the economy will grow faster when more after-tax dollars are available to consumers while those against it believe it will lead to drastic cuts in the programs and services that are heavily used for those with lower incomes. When all is said and done, it basically comes down to where the cuts are made.
That's why the theory of lower taxes equals stronger growth is not shared by all - and it's not one in which you should be basing your trading decisions on, either - especially when attempting to pick a market top. There's no guarantee that Trump's tax reform plans will actually be implemented and signed into law by November, so you shouldn't assume that this market top the pundits are calling for will actually happen (think of the healthcare debacle in Congress).
Right now, the expectations of tax cuts for businesses are spurring a lot of companies to be more optimistic about their future earnings, which we've seen in their future revenue and earnings outlooks. This confidence has also carried over to Wall Street. But until these tax cuts actually happen, it's not wise to step in front of a moving train. That means don't try to pick a market top, no matter what the pundits on TV say.
Now, I am an advocate of having some balance between bullish and bearish positions (maybe not an exact 50/50 balance), but it's absolutely prudent to have some bearish positions in the event of a rollover or correction of some kind. Even if those bearish positions take an occasional loss from new highs taking out your stops, you're still not wiping out your account because you've got the right money and risk management strategies in place. You're not just winging it. The same applies to having a balance of bullish and bearish positions in place in the event of a market downturn.
This is how you set yourself up for more winning trades than losing trades over time without risking your entire portfolio on one assumption or prediction. I know this because I've been doing it for nearly three decades and learned the hard way when I first started. And I learned quickly to not trade based on the economy or these predictions from the pundits on the news. You win by trading trading using rules and high-probability patterns.
So trust in your analytical tools, charts, and the other technical available to you. Don't fall for the media hype.
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The post This Investing "Advice" for Trump's Tax Plans Could Destroy Your Portfolio appeared first on Power Profit Trades.
About the Author
Tom Gentile, options trading specialist for Money Map Press, is widely known as America's No. 1 Pattern Trader thanks to his nearly 30 years of experience spotting lucrative patterns in options trading. Tom has taught over 300,000 traders his option trading secrets in a variety of settings, including seminars and workshops. He's also a bestselling author of eight books and training courses.