Tax cut to boost small caps?
Morgan Stanley's strategist says yes; CS First Boston guru isn't so sure From Correspondent Rhonda Schaffler August 4, 1997: 1:43 p.m. ET
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NEW YORK (CNNfn) - Large-capitalization stocks
have typically outperformed smaller company stocks
for the last few years.
Now, some say that trend is about to reverse.
The main reason why: Washington's recent decision
to cut the capital-gains tax from 28 percent to 20
percent.
"I don't think there's any question that if you cut
taxes and you let people keep more of their gains, it's
going to be very good for small stocks generally, and
small growth stocks specifically," says Peter Canelo,
chief investment strategist for Morgan Stanley.
The logic goes like this: large-cap stocks
traditionally provide more than one-third of investor
returns through dividends. Dividends are taxed as
regular income, now at a maximum rate of nearly 40
percent.
But small growth stocks, on the other hand, tend
to provide few, if any, dividends. Instead, they
provide more returns through capital gains, which are
taxed at a maximum rate of 20 percent.
"Lower tax rates, better values; it's pretty
straightforward," Canelo said.
Canelo says history bears out the trend. His
research demonstrates that lower tax rates have
coincided with rallies in growth stocks going back to
1970.
But not everyone agrees that there's a cause-
and-effect relationship.
"We don't see that the capital gains tax rate has
been a trigger for change in the behavior of small-cap
stocks," says Christine Callies, chief investment
strategist at CS First Boston. "In our opinion, the
actual triggers for these changes in behavior are more
like valuations or interest rates."
Another factor arguing against a small-cap
advantage is that larger companies have
de-emphasized high quarterly dividends.
The dividend yield on the S&P 500 stands at
1.63 percent, just one quarter of its 1982 level - and
its lowest level ever |
