Here’s Why Tech Keeps Moving Up
Yesterday, President Bush signed into law a $350 billion tax
cut, his third
so far, in a effort to stimulate the economy. Although the efficacy of some of
the bill’s provisions are being hotly contested by some demand-side market
observers, there is one area of the economy, in my view, which stands to benefit
the most from the new measures–technology. And, judging by this week’s 5.8%
gain in technology despite any significant fundamental data–using Goldman
Sach’s I-Share Tech Index
(
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PowerRating) as a proxy–certain investors would agree.
How Will Tech Benefit From The Bill, You Ask? Through Increased Business
Spending…
Small business cash flows will see a boost as a result of the current tax
bill. The reason is twofold : First, until this bill was passed, most small
businesses were being taxed at the owner’s personal tax rate, which in
many instances was as high as 38.6%–almost 4% higher than the highest corporate
tax rate. This discrepancy will now be eliminated and will therefore leave these
small, but economically significant, businesses with more cash. Second, the
tax-cut also increases the amount of deductible expenses for businesses to
$100,000 from $25,000, further encouraging businesses to spend.
But Does A Boost In Cash Flows Mean That Businesses Will Spend Money?
Yes. According to the National Federation of Independent Business Survey
taken back in April, a healthy 33% of small businesses planned to increase
investment in the next three to six months–remember, technology represents
upwards of half of all capital spending. The survey is particularly meaningful
because it was taken both before the conclusion of the Iraq war (when overall
business sentiment was depressed) and before the tax-cut measures were
introduced. As a result, sentiment and spending will be further buoyed in the
months ahead as the new fiscal developments make investment more attractive for
businesses.