Markets Thrive on Tax Cut Hype, Not So Much After Signed as Law

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(Bloomberg) -- Buy the rumor, sell the news.

The phrase may get tossed around a fair amount, but that’s exactly what’s happened when past presidents have implemented tax cuts. Case in point: The S&P 500 Index’s reaction to almost every tax-relief bill signed into law since President John F. Kennedy.

Looking at the S&P 500’s performance during the year before previous tax cuts, the market returned more profit than during the year following the bill signing. That applied to returns before and after tax bills signed by Presidents Lyndon Johnson (thought up under Kennedy’s tenure), Ronald Reagan and George W. Bush. The only time this wasn’t the case was following President Bush’s second bill attempt in 2003, when the market performed better after it was signed into law.

Equities have been in for a ride the past couple of weeks as the House and Senate wrangle over tax bill details, with the S&P 500 up nearly 15 percent this year. Some market strategists attribute the optimism partly to the prospect of a pro-growth fiscal policy, along with a synchronized global economy and strong earnings. A final vote on the House’s version of the tax-overhaul is expected on Thursday.

“A tax cut has been anticipated by the market,” researchers with James Investment Research in Xenia, Ohio, including Barry James, president and portfolio manager, wrote in a note. “Looking at previous tax cuts from Kennedy, Reagan and Bush, it is normal for stocks to run-up before a tax signing. However, once signed, the initial stock impact is usually disappointing.”

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