- Volatile Week Driven by Fed Selling, Bond Yields and Walmart Earnings
- Senate Bill Provision Could Impact Investors
Stocks continued lower again in a volatile trading week. Stocks were down sharply early in the week before a strong rebound yesterday. For a week that ended down only slightly, it was a bouncy path to get here. Early in the week there was concern about the Fed reducing its balance sheet and the flattening of the yield curve. The slope of the yield curve is based on the difference between short-term rates and long-term rates. As that difference shrinks, it’s called a flattening yield curve and can mean the economy is heading for a slowdown. This action in bond yields contradicts other economic indicators that suggest the economy is heating up. Yesterday’s strength was largely driven by strong earnings by Walmart that carried over into better optimism about the overall economy. Walmart’s earnings continued what has been a good earnings quarter, with earnings in aggregate growing better than expected. For the week the Dow was down 0.3% while the S&P 500 was down 0.1%. Next week will likely be relatively quiet on the news front with the Thanksgiving holiday. Markets will be closed Thursday and will close early on Friday.
An interesting provision in the Senate version of the tax reform bill could have a big impact for certain investors. The change would standardize how shares are sold for tax purposes. Currently, when you sell a portion of a position, you can select which specific shares you want to sell. This is important for tax purposes because there might be times you want to minimize or maximize your investment gain/loss. The current Senate plan eliminates that flexibility and requires investors to sell the oldest shares first. For example, consider someone who bought an equal number of shares in Company A three times over the course of a year. For the first purchase the price was $20, the second $25 and the third $30. If they wanted to sell a third of the position for say $35, the Senate plan would force them to sell the shares purchased at $20, creating a $15/share gain. Currently, an investor could decide to sell the $30 shares, creating a smaller taxable gain, if they wanted too. This provision is a a revenue raiser for the government as most shares increase over time, so forcing investors to sell the oldest shares, should, on average, increase taxable gains. This change has no impact on IRAs, Roth IRAs or 401k accounts as those accounts are allowed to grow tax-free. Read More
Oil declined slightly this week, decreasing 0.4% to close at $56.59/barrel. The yield on the 10-yr Treasury ticked higher, up to 2.34% from 2.33% last week. The average rate on a 30-yr mortgage held increased to 3.95% from 3.90% a week ago.