12/22/17 – Tax Reform Signed Into Law

Stock declined slightly today after President Trump signed the tax reform bill. This is a little of the ‘buy the rumor, sell the news’ theory. Stocks have increased five straight weeks on optimism of a large reduction in the corporate income tax rate. From my perspective, the corporate tax cut is the most significant portion of this bill. The federal rate was decreased from 35% to 21%, in line with the EU average (21%) and 6 percentage points below Germany (28%). This will make the US economy even more attractive for US and foreign investment.

On the heels of the bill passing, numerous large companies announced wage and investment increases and one time bonuses for employees. AT&T announced it would invest an additional $1 billion in 2018 because of the new tax law and would pay all ~200k employees a $1,000 bonus before year end. Other companies such as Wells Fargo and Fifth Third Bank announced they would raise their minimum wage to $15/hour for all employees. I’m sure some portion of this is a nice PR effort by these companies, but I also believe lower corporate taxes are a net benefit to the economy. The tax savings are available for increased investment, wages, dividends or simply higher profits. All of those options provide positive benefits to the economy. Read More & More

Apple admitted this week that its iPhone systems are designed to slow down as the phones age. The company claims the process is in place to help keep older phones, with older batteries, working at peak performance. Many consumers are concerned it was done to encourage people to upgrade to a newer phone. Apple’s view makes some sense as batteries age and usage demands increase over time, but some consumers feel this should have been disclosed or set up as a option that a user could pick instead of having no control over the slowing. There is now a lawsuit against the company in California over this issue. Read More

Oil increased 1.7% this week to close at $58.32/barrel. The yield on the 10-yr Treasury moved sharply higher, up to 2.49% from 2.35% last week. The average rate on a 30-yr fixed rate mortgage ticked higher to 3.94% from 3.93% a week ago.

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12/15/17 – Tax Reform Keeps Pushing Markets Higher

The final tax reform bill is scheduled to be released at 5:30pm eastern and it appears that Republicans in the Senate have enough votes for passage. The final details aren’t known, but it appears the corporate rate will be reduced to 21%. The individual tax code is seeing less significant reductions, but is being simplified through the doubling of the standard deduction. From an investing standpoint, the reduction in the corporate rate is the key aspect of the bill. While many companies don’t pay the full statutory rate, a tax cut will free up capital for investment, dividends or share repurchases. Every capital investment decision has to include a provision for taxes. If the tax rate is lower, additional investments will start to make economic sense. Read More

One thing that remains interesting to me is the bond market reaction to tax reform. I’ve written about this over the last year, but it still surprises me how different the bond market seems to think about the economy and future economic growth versus the stock market. The 10-yr Treasury is at 2.35%. At the beginning of the year it was 2.45%, essentially the same level. The stock market seems to believe economic growth is going to start exceeding 3% annually, but the bond market isn’t believing that, otherwise the 10-yr Treasury would be trading significantly higher than it is. The gold market seems to agree with the bond market. Gold is up 9% this year, but it has largely traded in the $1,200-1,300/oz range for the past two years. That means the market isn’t expecting a sharp increase in inflation in the near term. If growth is able to get above 3% consistently, we would likely see higher inflation.

The latest Star Wars movie officially opened today, but many theaters showed the movie last night. Remarkably, the movie made $45 million last night and expects to be around $100 million by the end of the day today. This could end up being the most lucrative opening weekend in history. In addition to Disney winning from the latest Star Wars release, it announced this week it was buying a number of asset from Fox, one of which is the remaining Star Wars assets it doesn’t own. If this deal goes through, Disney will now own all of the Star Wars franchise and Star Wars appears poised to be a business success for years to come. Read More

Oil declined slightly this week, decreasing 0.1% to close at $57.32/barrel. The yield on the 10-yr Treasury moved lower, down to 2.35% from 2.38% last week. The average rate on a 30-yr fixed rate mortgage ticked lower to 3.93% from 3.94% a week ago.

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12/8/17 – Market Recap

Friday Rally Following Jobs Reports Lifts Stocks Higher for Week

  • November Jobs Reports Better Than Expected
  • Still No Tax Bill
  • Both the S&P 500 and Dow Were Up 0.4% This Week 

The November jobs report came in stronger than expected. The Bureau of Labor Statistics announced this morning the US economy added 228k net new jobs in the month. The unemployment remained at 4.1%. The last two months have been a nice divergence from the rest of 2017, with an average of 236k jobs created during October and November. For the year, we are averaging 174k new jobs per month. Monthly job creation in the current expansion peaked in 2014 at 249k, but has dropped each year since then. Wages grew at a 2.5% annualized rate in the month. This is slightly higher than we saw for much of last 5-6 years, but still below what one would expect given the low unemployment rate. I believe wages remained constrained because there is a lot of slack in the labor market. People sitting on the sidelines, not counted in the formula for unemployed people, that keep coming back into the labor force as new jobs are added. This is a lot of ‘shadow’ supply of labor that is balancing out continued higher demand, thus wage growth remains relatively stagnant. Read More

Negotiations for the tax bill continued this week, but no resolution has been found. Major differences continue to exist on state and local income tax deductions, the Alternative Minimum Tax and various other issues. Additionally, the need to avoid a partial government shutdown is taking center stage with Trump negotiating with Congress on a stop-gap continuing resolution. For some reason, Trump signed a continuing resolution to fund the government through Dec 22nd. Yes, that’s just two weeks from today. It makes no sense to me why they couldn’t fund this at least through mid-January. It remains to be seen what comes of the tax reform bill, but negotiations will continue next week.

Oil declined this week, decreasing 1.6% to close at $57.36/barrel. The yield on the 10-yr Treasury ticked higher, up to 2.38% from 2.37% last week. The average rate on a 30-yr fixed rate mortgage increased to 3.94% from 3.90% a week ago.

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12/1/17 – Market Recap

Tax Reform Optimism Sends Stocks Higher

  • Reports Thursday that Republicans had Votes for Tax Reform Propelled Markets Higher
  • Real Earth Elements Discovered in US Coal Basins
  • S&P 500 was up 1.5% this week, Dow up 2.9%. 

Stocks took off Thursday when John McCain committed to voting for the Republican tax plan, signalling the Republicans should be able to get the 50 votes needed to pass tax reform. Markets are mostly responding to the corporate tax cut portion of tax reform, which would reduce the rate from 35% down to 20%. A reduction to 20% would bring the US corporate tax rate in line with other developed nations. The bill would also reduce taxes on foreign earnings, although the exact rate isn’t clear yet. Earlier versions of the Senate bill included a 10% tax on repatriated earnings. The US is the only developed country to tax foreign earnings.

Both of these policies seem very positive for US companies and the US economy. Lower corporate taxes will lead to some combination of lower prices, higher earnings and wages, and increased dividends/share repurchases and/or investment. All of those things benefit consumers and investors. Even if all the tax cuts goes straight to higher profits, I still think that’s a win for the overall economy. Pension funds, 401k plans, etc. benefit from higher corporate earnings and millions of Americans depend on pensions and 401ks for retirement income.

Lowering taxes on foreign earnings should encourage companies to bring back to the US some of the $2.8 trillion US corporate cash being held overseas. Personally I would preferred a 0% rate on repatriated cash. Some critics of this argue that the money will likely be used for share repurchases or dividends instead of additional investment. That might be true. There is ample capital available for investment right now, so that doesn’t seem to be limiting investment. However, I think having the cash in US banks, whether still in corporate accounts, or in investor accounts, is still a positive versus leaving it trapped overseas. As I’m writing this, there still hasn’t been a vote on the Senate bill, but it appears it will occur later this evening. After it passes it will head to committee to reconcile with the House bill. Read More

The Department of Energy reported this week that high concentrations of rare earth elements have been discovered in coal basins in Appalachia and Colorado. This could be a very important discovery. Rare earth elements (REE) are critical in the manufacturing of numerous high tech devices including cell phones, computers and even national security devices. The US currently has no REE mines. The only one we did have filed for bankruptcy in 2015 leaving us dependent on foreign supplies. China is a leading REE miner and provides essentially all US supply. Discovering a large domestic supply of rare earth elements could significantly reduce our need for China to provide these critical materials. Read More

Oil declined this week, decreasing 1.1% to close at $58.31/barrel. The yield on the 10-yr Treasury ticked higher, up to 2.37% from 2.34% last week. The average rate on a 30-yr fixed rate mortgage declined to 3.90% from 3.92% a week ago.

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11/22/17 – Market Recap

Stocks Higher in Holiday Week

  • NAFTA Back in the News
  • America Creating Lots of Millionaires

I wish you all a Happy Thanksgiving filled with good food, family and friends.

The weekly recap is arriving early due to the Thanksgiving holiday. Markets will be closed tomorrow and only open half day on Friday. Stocks moved sharply higher this week, with most of the gains coming on Tuesday. So far this week, the Dow and S&P 500 are up 0.7%.

The North American Free Trade Agreement (NAFTA) was again in the press this week as the 5th Round of negotiations concluded yesterday with no real solutions. NAFTA was signed into law by the Clinton administration and has opened up markets between the US, Canada and Mexico for 23 years. The Trump administration has repeatedly threatened to leave NAFTA if we don’t get better terms in the deal. I’m a believer in free trade and global trade. I think consumers worldwide do better when products and services can be produced in the most effective and cost-efficient manner. That reality does have downsides though. Low-skilled labor in this country is much more expensive than in other countries. This can cause a lot of low-skilled employment to be outsourced to lower cost countries. That hurts parts of the US economy. However, it also benefits parts of the US economy because cheaper consumer goods means people can 1) consume more and 2) free up money to invest in other productive ventures. There is no perfect answer, but overall, I hope we stay in NAFTA and continue to be a global example of what free trade should be. Read More

A new study shows that 1 in 20 Americans are now millionaires. It’s remarkable to think that 5% of our population has a net worth in excess of $1 million. So far in 2017, 1.1 million households have become millionaires. There are now over 15 million US households with a $1 million net worth. The US accounts for roughly 5% of the global population, but has 43% of the world’s millionaires. Much of the recent gain has been from the stock market, which has continued its long bounce-back from the financial recession. Total wealth in the US now stands 30% higher than in 2006, the last full year before the financial crisis started. While some in the US have done very well, the US ranks a somewhat disappointing 21st in median net worth, with a median net worth of almost $56k. Median means half the US population has a net worth over than amount while the other half is below that amount. Switzerland leads the world in median wealth, with an impressive $230k figure. Read More

Oil declined rose this week, increasing 2.5% to close at $58.02/barrel. The yield on the 10-yr Treasury ticked lower, down to 2.32% from 2.34% last week. Freddie Mac hasn’t yet released the weekly change in mortgage rates.

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11/17/17 – Stocks Lower for 2nd Straight Week

  • 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.

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11/10/17 – Stocks Lower for First Time in Last Nine Weeks

  • Stocks Down as Tax Reform Questions Linger
  • How Will Tuesday’s Election Impact GOP Agenda?

Stocks saw an eight-week winning streak broken this week, largely on questions surrounding tax reform. Stocks initially sold off sharply yesterday as headlines hit that the reduction of the corporate tax rate would be pushed to 2019. Corporate tax reform has helped drive stocks this year, although I’ve argued the market hasn’t priced in the entire benefit and that much of this years growth has been fueled by stronger economic growth and corporate earnings. For the week, the Dow declined 0.5% while the S&P 500 declined 0.2%.

Tax reform was a major focal point this week for a few reasons. The Senate released its tax plan which has some key differences with the House plan, most notably it pushes the reduction of the corporate income tax into 2019. Senate rules allow a simply majority vote for tax reform if the 10-yr deficit from the changes is less than $1.5 trillion. The CBO scored the House bill as having a $1.7 trillion cost, so pushing the corporate income tax out a year helps close the gap.

One of the things I find interesting about the CBO scores is how many variables are involved and how different the numbers can be with small changes in assumptions. The CBO has been using a 1.9% annualized growth rate. That’s essentially the average since 2000, so it’s not an unreasonable assumption. However, Republicans have argued that tax cuts, especially corporate tax cuts, can help growth approach or exceed 3%. If a 3% growth figure is used, which was the US average from 1946 to 1999, then the tax cuts can are significantly less expensive. You might hear people talking about static vs dynamic models and this is what they are talking about. In a static model, constant variables are used. In a dynamic model, analysts give future growth credit for changes in tax law. Dynamic models are much more complex and subjective, because analysts have to decide how much various changes will positively or negatively impact future economic growth. In theory though, they are better because they recognize policy changes impact future growth.

The other big issue with tax reform is the results of Tuesday’s election. The outcome in Washington and New Jersey doesn’t tell me much about the countries opinion on Trump and the Republican agenda. The Virginia governor race also doesn’t say much to me. Democrats have won four of the last five Gubernatorial races in VA and Obama and Hillary both easily won the state. The VA House of Delegates, however, is an interesting story. The Democrats took control for the first time since 1999 and many rural and suburban seats thought to be safely Republican either flipped or turned out very close. This is somewhat analogous to the 2009 Virginia election which foretold what would happen in the 2010 midterms when Republicans rode a wave to major national victories. It will be interesting to see how Republicans react to this election. In 2010, Democrats put aside their differences and passed Obamacare and other legislation before the midterms flipped the House majority. Will Republicans do the same and rush to push through legislation while they can, worried that Democrats have a very real chance to retake the US House next November? There’s been a lot of disagreement about tax reform among Republicans, but if they want to get something done, it seems they need to get it done soon while they still control both houses of Congress.

Close Weekly YTD
Dow Jones 23,422.21 (0.5%) 18.5%
S&P 500 2.582.30 (0.2%) 15.3%
Oil 56.82 2.1% 5.4%
10-yr Treasury (∆ in bps) 2.33 (1) (12)

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11/3/17 – Stocks Higher, New Fed Chair Nominated & Trump’s Tax Plan

  • Stocks slightly higher as earnings continue
  • Jerome Powell nominated for Fed Chair
  • GOP tax plan released

Stocks finished the week slightly higher in a busy week for financial news. This week marked the last busy earnings week for larger companies and saw companies such as Starbucks, Facebook and Apple exceed expectations. For the week the Dow gained 0.4% while the S&P 500 increased 0.2%.

As expected, President Trump nominated Jerome Powell to be the next Fed Chair. Powell is a Republican who was appointed Fed Governor by President Obama. I thought Janet Yellen was doing a great job, but this is a good replacement choice. Over the last five years, Yellen and Powell have voted the same on all policy change issues. I would expect Powell to continue the course Yellen established. This seems like Trump was able to replace Yellen with someone very similar while still appeasing some of his base by replacing Yellen who was appointed by Obama. Yellen becomes the first Fed Chair to not serve a second term since Warren Miller in the late 70s. It’s unfortunate that she appears to be a political victim in a position that really should be non-partisan. Read More

The GOP released its tax plan this week. The tax bill includes a large cut to corporate income tax rates. The current corporate rate is 35% while this bill proposes a 20% rate. I’ve written many times how we need to lower our corporate tax rate. We have the highest corporate tax rate among developed countries by a wide margin. A 20% rate would bring us close to the average rate of advanced economies. The changes to the individual tax rates are less clear. The plan proposes fewer tax brackets, a larger standard deduction, but allows for fewer deductions. The income brackets are also different, so it’s not a cut and dry tax cut for people, although almost everyone will see some sort of tax deduction. The top 20% of taxpayers pay almost 95% of all personal income taxes, so it makes sense that more affluent Americans will see a bigger benefit from any tax cuts. I’m neither here no there on changing the personal tax code, but I do believe reducing the corporate rate would be beneficial to economic growth, investment and employment. Read More

Oil rose sharply again this week, increasing 3.2% to close at $55.65/barrel. The yield on the 10-yr Treasury moved lower, down to 2.33% from 2.42% last week. The average rate on a 30-yr mortgage held steady at 3.94%.

Close Weekly YTD
Dow Jones 23,539.14 0.4% 19.1%
S&P 500 2,587.84 0.% 15.6%
Oil 55.65 3.2% 3.3%
10-yr Treasury (∆ in bps) 2.33 (9) (12)

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10/27/17 – Stocks Higher As Economic Growth Remains Strong

  • 3rd quarter GDP better than expected
  • Retail sector down sharply today, led by JC Penney sell-off
  • When will the new Fed Chair be announced

Stocks finished the week slightly higher on strong earnings and a potential Fed Chair announcement. The market was also buoyed by a better-than-expected first report on 3rd quarter economic growth. The economy grew at an estimated annual rate of 3.0%, well above the 2.5% consensus estimate. The 3rd quarter is often strong as companies build inventory into the holiday shopping season. Last year, the economy grew at a 2.8% annualized rate in the 3rd quarter. The 2nd quarter of this year grew at a 3.1% annualized rate. The two quarters are the best consecutive quarters we’ve seen in three years. For the week the Dow gained 0.5% while the S&P 500 increased 0.2%.

The retail sector has been under assault for several years by Amazon and other online retailers. More and more consumers choose to order online. I order plenty online because I know I’ll get it quicker even with shipping versus when I’ll have time to go to the store. Within the retail sector, traditional department stores seem to be getting hit really hard. Department stores need huge inventory levels yet are facing declining foot traffic. JC Penney’s reduced its 2017 earnings forecast and the stock was hit hard, closing down around 15%. The news hurt the rest of the sector as well as Macy’s declined 8% while Kohl’s was down 5%. Retail shopping is going to continue to decline, but there has to be some floor of consumers who like going to the physical mall to buy clothes. We haven’t found that level yet. Read More

Speculation around the next Fed Chair has been going on for months, but today the White House Press Secretary said an announcement was coming next week. Reports suggest Trump will appoint current Fed Governor Jerome Powell. Powell was appointed to the Board in 2012 by President Obama. I think Janet Yellen has a done a nice job as Fed Chair. She’s taken a prudent, measured view to raising interest rates, resisting some calls for a quicker progression. I’ve been of the view that rates should rise at a slower rate than many have predicted. The economy is growing, but not overheating, and inflation is largely at bay. What company has pricing power right now to drive higher inflation? Very few. Mr. Powell isn’t that different from Ms. Yellen, so it’s unclear to me why Trump wouldn’t appointed Yellen to a second term. Potentially he just wants to make a change, but if Powell is appointed, I think we’ll continue to see a more measured increase in interest rates. Read More

Oil rose sharply this week, increasing 4.4% to close at $53.95/barrel. The yield on the 10-yr Treasury moved higher, up to 2.42% from 2.38% last week. The average rate on a 30-yr moved higher, to 3.94% from 3.88% last week.

Close Weekly YTD
Dow Jones 23,434.19 0.5% 18.6%
S&P 500 2.581.07 0.2% 15.3%
Oil 53.95 4.4% 0.1%
10-yr Treasury (∆ in bps) 2.42 4 (3)

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10/20/17 – Stocks Higher as Dow Closes Above 23,000 for First Time

Stocks Higher as Dow Closes Above 23,000 for First Time

  • Thursday was the 30th anniversary of the Black Monday stock market crash
  • Could tax reform affect retirement savings?

Stocks finished the week higher as earnings reports kicked into high gear. So far, earnings have been mixed with companies like Johnson & Johnson and IBM exceeding expectations while GE, Proctor & Gamble and Philip Morris International disappointed. On the week the Dow gained 2.0% while the S&P 500 increased 0.9%.

Thirty years ago yesterday, the Dow fell 22.6%. That’s incredible. The index lost almost a quarter of its value in one day. Dubbed Black Monday, it remains the single largest daily drop in history by almost a 2:1 margin. A 22% drop equates to a loss of approximately 5,200 Dow points today. Fortunately, I don’t see anything in the current market suggesting we’re in for another crash. Bank balance sheets are strong, the labor market remains healthy, we’re beginning to see real wage growth and Europe/Asia are trending in a good direction. We are at all-time highs on the stock indices and it’s natural to think we must be at a peak. There have been a variety or articles and commentary making that same point recently. However, people have made those arguments for the last five years and yet stocks kept climbing. With interest rates near historic lows, stock valuations look okay to me, even though valuations are above the historic average. We continue to hold a slightly higher than normal cash balance, but overall I’m happy with how we’re positioned for the current economic and market situation. Read More

As the tax reform discussion continues talk about reducing the deduction for retirement savings is back in the news. Currently, individuals are allowed to contribute pretax money into 401k and IRA accounts. The 401k limit is $18k a year for people under 50 and $24k a year for those 50 and older. For Traditional IRA accounts, the limits are $5,500 and $6,500 for the same age brackets. The financial services industry will vigorously fight this change, but I think it could be a good thing for individual investors. If you reduce or eliminate the tax deduction for 401k’s and IRAs, these accounts would essentially be treated like a Roth 401k or  Roth IRA. With a Roth account, there is no tax deduction in the current year, but withdrawals in the future are tax-free and the accounts grow tax-free. Some will argue that people will save less without the deduction. That’s probably true, but people will need to save less since there will be no future tax liability on the accounts. This is why the financial services industry will fight it. They would rather have more assets under the management today because they can make more money and won’t be paying the taxes in the future anyway. Read More

Oil rose this week, increasing 0.5% to close at $51.66/barrel. The yield on the 10-yr Treasury moved higher, up to 2.38% from 2.28% last week. The average rate on a 30-yr moved lower, to 3.88% from 3.91% last week.

Close Weekly YTD
Dow Jones 23,328.63 2.0% 18.0%
S&P 500 2,575.21 0.9% 15.0%
Oil 51.66 0.5% (4.1%)
10-yr Treasury (∆ in bps) 2.38 11 (6)

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