Stocks continued climbing higher this week with the Dow index exceeding 22k for the first time ever. Boeing was the largest driver of the index, adding ~35% of the 1,000 points between 21k and 22k. The Dow index is a strange index in that it is weighted by the share price of the member companies instead of the total value of the company. This means that Boeing, which is the most expensive stock on a dollar price basis, has the most impact on the Dow’s performance, even though it is only the 20th largest company of the Dow’s 30 companies. For the week, the Dow gained 1.2% while the S&P 500 gained 0.2%.
Strong Jobs Report for July – The economy added a net 209k jobs in July, exceeding the consensus estimate of 180k. The unemployment rate dropped to 4.3%, matching a 16-year low. This is the 82nd straight month that combined public and private employment has increased. That’s almost three years longer than the second-best streak from 1986-1990.
Potential 401k Changes – A huge potential source of government revenue involves eliminating the tax-destructibility of 401k contributions. This change has been mentioned again recently during the tax reform discussions. CNBC estimated the other day it could be worth almost $600 billion in additional taxes through 2020. 401k plans are a major source of retirement savings for most Americans. In theory the tax deduction encourages people to save. 401k plans work similar to a traditional IRA, where you get a tax deduction in the current year, but when you withdraw money in retirement you pay taxes on withdrawals as if it was regular income. If you have a 401k/IRA with $1 million, you really have approximately $750k because the government has a tax claim on the rest. The potential change would generate significant revenue for the government currently, but has met sharp resistance. Personally, I think this could be a big benefit to investors over the long-term. This would convert 401k plans going forward into Roth 401ks. In a Roth, there is no current tax deduction, but future withdrawals are not taxed. Even if people save slightly less in a Roth 401k, they will likely finish out ahead in retirement. It’s the same reason I recommend a Roth IRA over a traditional IRA for people who qualify. The ability to have tax-free withdrawals in retirement is more valuable than the current benefit for most people. Read More
Oil pulled back slightly this week, dropping 0.6% to close at $49.45/barrel. The yield on the 10-yr Treasury moved lower, closing at 2.27% from 2.29% a week ago. The average rate on a 30-yr fixed rate ticked higher this week, to 3.93% from 3.92% last week.
|10-yr Treasury (∆ in bps)||2.27||(2)||(18)|