In the lead up to the tax plan announcement, I made the point that if Trump was vague about his plan, stocks would rally on hope. Trump was vague, but it didn’t boost stocks because he was vague on the most important point stocks care about which is the repatriation tax holiday. Stocks care about the income and corporate tax rates, but the repatriation holiday affects short term equity prices the most. We saw that result play out after the disappointment as the stocks with the most cash overseas, namely Apple, Microsoft, and Alphabet sold off. It makes sense that stocks would care the most about a measure which would directly lead to more buybacks since buybacks are the backbone of this entire rally.

The administration doesn’t want firms to plow this money into buybacks, but that’s what has historically happened. It’s worth keeping in mind that the administration wants firms to invest in new initiatives to grow the amount of jobs in the economy and boost wage growth. This is like a scenario where a parent gives a child $20 to get lunch. The parent knows the child has enough money to buy candy, but doesn’t put any restrictions to prevent it from buying candy. Hope isn’t a good strategy as the child will buy the candy and firms will use the repatriated money to buy back stock. Firms can argue that they must work in the best interests of their shareholders.

I don’t think buying back stock at record highs in the best interest of shareholders, but it certainly depends on which firm we’re discussing. The point I’m making is there’s a possibility some restrictions to prevent buybacks are put in place. I wouldn’t call it likely because it’s the corporations’ money, but the fact that they won’t be using the money to invest in new initiatives must upset the Trump administration. I mentioned that the infrastructure plan was tied to the repatriation plan where firms would reinvest money into America to pay a lower rate than the already low holiday rate. This was the incentive which could have stopped the buyback parade which will do nothing to improve productivity growth or boost hourly earnings. This infrastructure plan clearly won’t happen by the time tax reform passes given struggle to get anything done. To recap, the repatriation tax cut will funnel to buybacks, which is great for short-term stock performance and bad for productivity growth.