Legendary investor Mario Gabelli says that investors trying to figure out what’s driving this market need only remember the “Four T’s.”
Tariffs. The ten-year. Taxes. Technology.
Asked Wednesday in an exclusive interview on The Final Round on Yahoo Finance about what was driving stocks back to record highs, Gabelli said the “Four T’s” create a “fairly obvious” positive backdrop for investors right now.
And of these four positive catalysts for markets, Gabelli sees taxes as the factor that the most folks do not understand. And the one that creates the biggest fundamental positive for U.S. corporates.
“The most important part is that most analysts don’t understand taxes,” Gabelli said. “Most observers don’t understand taxes...they don’t understand that you get [a] 100% write off from September 27th of 2017 on any equipment you buy.”
As part of the Tax Cut and Jobs Act signed into law by President Donald Trump in December 2017, the immediate expensing of many business investments was allowed.
Under previous tax laws, companies were allowed to deduct the cost of a piece of equipment over several years according to preset depreciation schedules. This potentially left the companies earnings tax deductions over time that did not meet the value of the investment. Immediate expensing — which will phase out by 2023 — thus incentivizes companies to invest more now.
In the first half of 2018, capital spending among U.S. corporates jumped by the most in 25 years while investment in R&D increased by the most in a decade, according to data from Goldman Sachs.
Gabelli added that the change in the U.S. corporate tax code to territorial from global — which is aimed at preventing U.S.-based companies from being double-taxes on their foreign earnings — “means that businesses look at the United States as a good place to be.”
And while Gabelli notes that the headline U.S. corporate tax coming down to 21% from 35% is “important,” it is these oft-overlooked parts of the tax bill that really bolsters not just the immediate but medium-term outlook for U.S. businesses.
Myles Udland is a reporter and anchor at Yahoo Finance. Follow him on Twitter @MylesUdland