We have reviewed the income tax bill released by the House Ways and Means Committee – titled Tax Cuts and Jobs Act. It is complicated with its 460+ pages being too voluminous to recount here. And, it will be changed as Congress goes hither and thither to finalize. Importantly, more likely than not, an income tax bill will be passed.
As to investment management, we do not see our investment research providers making any significant changes to their economic moat ratings or fair value estimates because of the income tax bill in its current form. We will continue to monitor its development.
The headline corporate tax rate proposed in the Tax Cuts and Jobs Act is 20%, lower than our current 25% assumption..However, many revenue-related parts of the tax reform bill have been scaled back from initial proposals. For example, the latest bill allows the partial deduction of mortgage interest and property taxes. These alterations mean the current bill would likely raise federal debt levels more than many had initially projected. To attain the votes of spending hawks, the aggressiveness of the bill may have to be scaled back. The overall corporate tax rate remains a key lever for negotiation, as effective tax rates truly determine the competitiveness of the U.S. relative to other countries. Industry groups will certainly push to keep their tax credits, and to the extent these credits lower effective tax rates, a modestly higher headline rate can keep the U.S. competitive with other countries.
The U.S. stock market has jumped since the November 8th election. We identified 4 initiatives on which the U.S. stock market is speculating to be successfully accomplished early in the Trump administration. What will happen next? It is still to be determined!
The 4 initiatives will have a tremendous influence on the “Heat Map” which forms the basis of our forward looking view of the U.S. economy. We consider the success or failure of the 4 initiatives to be “leading” indicators for the Heat Map.
Below are the 4 Trump administration initiatives upon which the stock market is speculating and what progress, if any, has been made:
Tax cuts and tax reforms benefiting most individuals and businesses. SIGNIFICANT PROGRESS HAS BEEN MADE RECENTLY. CUMULATIVE PROGRESS TOWARD GOAL: 70%
Infrastructure spending of up to $1 Trillion over the upcoming 7 to 10 years. PROGRESS MADE ON TAX REFORM POINTS TOWARD PROGRESS IN THIS AREA, TOO. CUMULATIVE PROGRESS TOWARD GOAL: 25%
Affordable Care Act amendment, reform or reorganization. CONGRESS HAS STUMBLED EVERY TIME IT TRIED TO ACT. CUMULATIVE PROGRESS TOWARD THIS GOAL IS 0%.
Roll back of government regulations and Executive Orders considered to be difficult for businesses. ROLL BACKS HAVE CONTINUED. CUMULATIVE PROGRESS TOWARD GOAL: 50%
As the action happens in Washington on these 4 initiatives, don’t be surprised if the political “tug and pull” contest results in a wilder than normal stock and bond market.
We will continue to report in future issues on the progress on each initiative.
Most of the time, the U.S. stock market looks to 3 factors (call them the “pillars” which support the stock market) to support its upward trend – let’s grade each of the pillars.
CONSUMER SPENDING: This grade is a B+ (favorable).
THE FED AND ITS POLICIES: This factor is rated C- (Below average).
BUSINESS PROFITABILITY: This factor’s grade is A- (very favorable). So far, earnings reports for the 3rd quarter have been solid.
OTHER CONCERNS: The “Heat Map” is indicating the U.S. stock market is in OK shape ASSUMING no international crisis. On a scale of 1 to 10 with 10 being the highest level of crisis, we rate these international risks collectively as a 5. These risks deserve our ongoing attention.
Last week, U.S. stocks, Foreign Stocks and Bonds all increased. During the last 12 months, STOCKS outperformed BONDS.
Returns through 11-3-2017
1-week
Y-T-D
1-Year
3-Years
5-Years
10-Years
Bonds- BarCap Aggregate Index
.4
3.4
1.0
2.5
2.1
4.1
US Stocks-Standard & Poor’s 500
.3
17.5
26.4
11.0
15.3
7.9
Foreign Stocks- MS EAFE Developed Countries
.9
22.2
24.8
6.6
8.5
1.3
Source: Morningstar Workstation. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. Three, five and ten year returns are annualized excluding dividends.
The show airs on WDIY Wednesday evenings, from 6-7 p.m. The show is hosted by Valley National’s Laurie Siebert CPA, CFP®, AEP®. This week Laurie will discuss: “Planning for and with children”
Laurie will take your calls on this topic and other inquiries this week. Questions may be submitted early through www.yourfinancialchoices.com by clicking Contact Laurie. This show will be broadcast at the regular time. WDIY is broadcast on FM 88.1 for reception in most of the Lehigh Valley; and, it is broadcast on FM 93.9 in the Easton and Phillipsburg area– or listen to it online from anywhere on the internet. For more information, including how to listen to the show online, check the show’s website www.yourfinancialchoices.com and visit www.wdiy.org.
The stock market, by all appearances, has become a perpetual motion machine that won’t even let a controversial tax plan or a change atop of the Federal Reserve derail its momentum.
And what momentum it is. The Dow Jones Industrial Average rose 105 points, or 0.4%, to 23,539.19, last week, while the Standard & Poor’s 500 index advanced 0.3%, to 2587.84. The Nasdaq Composite gained 0.9%, to 6764.44. All three benchmarks closed at record highs.
We know the headlines have all been about the Republican tax plan—which may help some stocks and hurt others—and the appointment of Jerome Powell to replace Janet Yellen as Fed chair. But the real story is that the best-performing stocks keep dragging the major indexes higher, meaning that this truly is a momentum-driven market.
On the Street, momentum is the strategy of buying the market’s best-performing stocks and ignoring all the rest. It’s been a winner this year, as highfliers like Boeing (ticker: BA), HP (HPQ), and MasterCard (MA) have helped it outperform. The MSCI USA Momentum Index returned 33.9% through the end of October, outpacing the MSCI USA Index’s 17% return. That 16.9-point performance gap is the best for a full year since 1999, when momentum outperformed by 17.2 points.
“It’s been an amazing run of outperformance,” says Oppenheimer technical analyst Ari Wald.
But has the gap between the performances of the two indexes grown too big? MKM Partners technical analyst Jonathan Krinsky compared how big that gap is relative to its 200-day average, and found it’s at a level that often signals a peak in momentum. Sometimes it’s simply a pause—that was the case in 2005—but sometimes it can signal an impending peak, as it did in 2008. “Momentum names are stretched relative to the market,” Krinsky says. “But they can become more stretched.”
The question is how much more. Andrew Slimmon, a portfolio manager at Morgan Stanley Investment Management, notes we’re at that time of year when investors ride their winners and dump their losers for tax-loss purposes. And this year, the inclination to hold winners might be even stronger than in the past, thanks to the Republican’s tax-reform plan—and the off chance that capital-gains taxes—left untouched so far—head lower in the final version. “Momentum works at this point in the year,” Slimmon says. “And it’s accentuated by the change in tax policy.” That suggests at least another month of outperformance.
But that seasonal boost is followed by the so-called January Effect, the name given to the period when investors finally take profits in the market’s winners. It used to happen in January—hence the name—but has moved to mid-December as market participants responded to the anomaly by selling even earlier. This year, it happens to coincide with Congress’ holiday recess, but also with the Federal Open Market Committee meeting on Dec. 12 and 13. Don’t be surprised if momentum hits a brick wall around that time. “We could see a reversal just as everyone wants to go on holiday,” Slimmon says.
