Another day, another record.
On Tuesday, each of the major U.S. indexes hit a new record. These included the small-cap Russell 2000, which has staged a huge rally over the last few weeks. The most positive piece of economic data on Tuesday was the September report on auto sales, which showed a big bounce back after August’s numbers disappointed.
U.S. auto sales hit an annualized rate of 18.47 million in September, well above expectations and which Bespoke Investment Group noted was the best since the post-crisis “cash for clunkers” initiative.
On Wednesday, investors will get their first of three days of labor market data with payroll processor ADP reporting its latest monthly numbers of private payroll growth, which economists expect came in at 135,000, down from 237,000 in August.
Also in economic news on Wednesday, Markit Economics and the Institute for Supply Management will report their latest readings on service sector activity, which is expected to continue to show growth.
On the corporate side, Wednesday will feature two high profile earnings report from S&P 500 members, with both Monsanto (MON) and Pepsi (PEP) set to report results.
Warren Buffett on taxes
Warren Buffett spoke to CNBC on Tuesday to discuss, among other things, the stock market, Berkshire Hathaway’s investment in truck stock operator Pilot Flying J, and corporate taxes.
And while Buffett’s commentary on the stock market, as usual, garnered headlines, it was his commentary on corporate taxes that, if you listen a bit more closely, outlines a pretty negative scenario for markets in 2018.
Buffett suggested that he thinks right now, there are a lot of businesses and investors that are sitting on gains they haven’t yet sold in anticipation of tax rates potentially being lower in the future.
“We may or may not have a change in the tax code,” Buffett said. “We have lots of stocks with lots of gains, we have a few stocks with losses and here we are, in October, and if something happens that changes the tax rate on January 1…it would pay me to sell the losses now and defer the gains until next year. And I think there’s a lot of that going on.”
Buffett added that, “I think there’s an expectation that [if Congress] has a tax act they will cut rates, certainly corporate rates, and it’d be kind of foolish to have a gain now and pay 35% tax on it when if by waiting a few months you’d have a 20% rate on it,” Buffett said.
Tax considerations “seldom play into our thinking,” Buffett added, but said that right now Berkshire Hathaway is sitting and waiting for an answer.
And no matter what happens, Buffett says he will be ready to act next year.
So while right now, a lot of the recent return of relative optimism in markets has been attributed to renewed hopes for tax reform — read: tax cuts — getting done this year, Buffett’s outline is slightly more negative for markets. Because in this sketch, tax reform — whether it happens or not — would be a catalyst for folks to sell stocks or businesses that have appreciated in recent years.
Inverting a common market trope that there exists pent up demand to buy stocks, Buffett is laying out a scenario in which there is pent up demand to sell.
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Myles Udland is a writer at Yahoo Finance. Follow him on Twitter @MylesUdland
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