Wall Street is starting 2003 with a bang, albeit a low-volume one. Apart from the usual start-of-year optimism, two other top-down factors are playing a role. Firstly, the economic news has improved compared to the weakness seen through October and November. Secondly, equity investors are being cheered by the upcoming fiscal package. President Bush will announce his plans in a speech on Tuesday night (US time). I’ve explained many times before why I think the economy will likely disappoint expectations, but there’s obviously a question whether the fiscal package will significantly change the outlook. The short answer is no. While the details haven’t been finalised – and the President’s package may be modified by Congress – the fact is it looks likely to have a fairly modest demand impact.
plus ABN view
ABN AMRO: Why the stimulus package won''t work Tuesday, December 31, 2002.
Wall Street is starting 2003 with a bang, albeit a low-volume one. Apart from the usual start-of-year optimism, two other top-down factors are playing a role. Firstly, the economic news has improved compared to the weakness seen through October and November. Secondly, equity investors are being cheered by the upcoming fiscal package. President Bush will announce his plans in a speech on Tuesday night (US time). I’ve explained many times before why I think the economy will likely disappoint expectations, but there’s obviously a question whether the fiscal package will significantly change the outlook. The short answer is no. While the details haven’t been finalised – and the President’s package may be modified by Congress – the fact is it looks likely to have a fairly modest demand impact.
The President’s spokesman, Ari Fleischer, said overnight that the package will bring forward the personal income tax cuts scheduled for 2004 and 2006, as well as cutting the tax on dividends. The 10 year cost of the package is around US$600bn, with the Wall Street Journal suggesting that the 2003 impact would be $80-100bn. A $100bn boost is equivalent to 1% of GDP. Remember, however, that 2002 saw one of the largest-ever expansions in fiscal policy, adding 2½%-plus to GDP growth. In other words, in simple dollar terms fiscal policy will be less supportive for growth this year than it was last year.
Moreover, it seems likely that the income tax cuts will be skewed to upper-income groups, which will likely lessen the short-term demand impact (because rich people consume smaller slices of their bigger pies). Likewise, the dividend tax cut, while a sensible structural reform, is likely to create little short-term stimulus. (Double-taxation of dividends is likely to be removed for individuals only. If the cost is of the order of $30bn, then it would add 6% or so to fair value for stocks at the current PE of 17 times. Or, put another way, given that the market looks expensive at 17 times, it would be less overvalued if the double-tax were removed. The removal, however, would be more important at the stock-selection level.) Most investors were banking on another dose of fiscal stimulus in 2003, and what looks likely to be delivered is not dramatically different to what was expected. And it will prove to be far too small to prevent weaker growth if the consumer rolls over – which is the key issue.
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In light of previous post by other mbrs i thought this might be interesting reading and pompt discussion on what may or may not be outlined tonight cheers!
