Thomas Lee, head of research at Fundstrat Global Advisors, notes that the S&P 500’s rise has gone parabolic. Its 6%-plus gain this month trounces the 2% average monthly advance from September to December 2017 and the 1.2% average monthly gain from January through August 2017. Rather than being worrisome, these accelerations into a new year have historically led to even more upside. Only eight years have played out like this since 1928, and just two—in 1929 and 1946—were followed by big drops in the market. The other six times—in 1936, 1951, 1989, 1997, 2006, and 2017—resulted in an average gain of 20% over the remainder of the year. If that scenario plays out, the S&P 500 could close the year near 3350, Lee says.
The new tax law knocks out the itemized deduction for interest paid on home equity loans. That’s right, a taxpayer may not claim an itemized deduction for mortgage interest paid or accrued on any home equity debt of any qualified residence of the taxpayer for tax years beginning in 2018 through 2025.
Tax Tips you can use
Mortgage interest related to home office. A self-employed taxpayer who reports his or her trade or business on Schedule C of Form 1040, and who uses a portion of his or her residence as a qualified home office will continue to be able to deduct the share of mortgage interest related to the home office, without regard to the mortgage limitation. (Note: The home office deduction is subject to limitation, based on the income earned by the taxpayer in the related activity).
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. THE MOST SIGNIFICANT TAX LEGISLATION IN A GENERATION WAS SIGNED INTO LAW LAST YEAR. CUMULATIVE PROGRESS TOWARD GOAL: 100%
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: 35%
Affordable Care Act amendment, reform or reorganization. THE TAX REFORM LAW REMOVED THE REQUIREMENT EACH INDIVIDUAL OBTAIN HEALTHCARE COVERAGE. PROGRESS TOWARD THIS GOAL IS 35%.
Roll back of government regulations and Executive Orders considered to be difficult for businesses. ROLL BACKS HAVE CONTINUED. CUMULATIVE PROGRESS TOWARD GOAL: 55%
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 increased toA+ (extremely favorable). Consumer spending grew at a 3.8% clip in the 4th Quarter 2017. That could get even stronger if individuals with lower tax rates spend their windfalls.
THE FED AND ITS POLICIES: This factor is rated C- (Below average).
BUSINESS PROFITABILITY: This factor’s grade is A- (very favorable). Corporations are in the midst of releasing 4th quarter earnings. Earnings season has been stellar, with S&P profits growing at a 12.7% clip, with a quarter of companies reporting.
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 and Foreign Stocks increased. Bonds were unchanged. During the last 12 months, STOCKS outperformed BONDS.
Returns through 1-26-2018
1-week
Y-T-D
1-Year
3-Years
5-Years
10-Years
Bonds- BarCap Aggregate Index
0.0
-.9
2.6
1.4
2.0
3.7
US Stocks-Standard & Poor’s 500
2.2
7.5
27.6
14.1
16.2
10.4
Foreign Stocks- MS EAFE Developed Countries
1.5
6.5
28.9
9.7
8.2
3.6
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 and guest host Attorney Dennis Pappas of the law firm Vasiliadis Pappas Associates LLC, will discuss:
“Tax and cash flow planning as part of the Estate Plan.”
Laurie and Dennis will take your calls on this or other topics. 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 market is having a feel-good moment—maybe a little too good.
The Dow Jones Industrial Average gained 544.99 points, or 2.1%, to 26,616.71 last week, while the Standard & Poor’s 500 index rose 2.2%, to 2872.87. And the Nasdaq Composite climbed 2.3%, to 7505.77. All three indexes closed at all-time highs Friday. For the S&P 500, it was the 14th record high of the year, setting a record for the number of new highs in January.
And why shouldn’t the market feel good? Credit sparkling results from the likes of Intel (ticker: INTC) and Caterpillar (CAT). Fourth-quarter economic growth was lighter than expected, but strong enough, especially given that tax cuts could provide a boost in the quarters ahead. The Davos elite came away feeling relieved after President Donald J. Trump loudly proclaimed that “America is open for business,” and his administration is said to be readying a $1.7 trillion infrastructure plan that could be revealed next week. Party on, right?
That very well could be.
But there’s also a point where feeling good leads to bad behavior. U.S. gross domestic product rose at an annual rate of 2.6% during the fourth quarter, missing economists’ forecasts of 2.9%. But dig into the numbers and you see one area of major strength—consumer spending. Not everyone is celebrating. Gluskin Sheff’s chief economist, David Rosenberg, notes that rising markets have made Americans feel wealthier, so they’ve been spending more and saving less. “This is a classic late-cycle development,” he says.
Consumers aren’t just spending money on clothes, cars, and whatever else catches their eye—they’re also buying stocks. Investors have put $24 billion into equities during each of the two most recent weeks, notes Bernstein strategist Inigo Fraser-Jenkins, a big change from 2017, when they withdrew $9 billion during the last six months of the year. That’s not worrisome—yet—but if investors buy stocks at just half that rate in the next four weeks, it would be. “We are not saying that will happen, but it quantifies how sentiment can change,” Fraser-Jenkins says.
