Massive Tax cuts become a reality for 2018

We have seen phenomenal stock market performance despite horrific corporate tax structure and onerous regulations. One might think deregulation and now the passing of the largest corporate tax cut in history would guarantee an even stronger stock market in 2018.

As my grandma might say “just hold your horses”!  I’ve written of how unpredictable the stock market is and a strong economy does not guarantee a strong stock market.

Historically, from a data perspective, this stock market is very much due for a reversion to the mean. A reversion to the mean would be represented by a severe pullback in stock prices so the far out-sized performance over the past 8+ years would be offset by relative underperformance in the next decade.

Analytical data supports a very high likelihood of a recession in the next three years. Of course, past performance and data cannot guarantee anything!

There were a couple items tucked in to the tax bill that I believe are very significant for low income earners and under-reported.

The repeal of the “Obama mandate”. This was a tax levied on any person who chose not to buy health insurance. Think of how awesome it would be if you owned a company that made a product the government forced people to buy or pay a tax!  Insurance companies flourished under this mandate while 80% of those people paying the tax, made less than $50,000 per year. The abolition of this regressive tax is good for low income earners and we will see if insurance company profits come back down to earth without the support of the government.

Republicans have failed for a couple decades to open up energy exploration in the Artic National Wildlife Reserve (ANWR). This was approved in the tax bill with barely a peep from Democrats. This coupled with oil pipeline approvals earlier this year may unleash tremendous domestic energy production.  This could have long-term ramifications for the environment, how we deal with terrorism, jobs, and the overall cost of goods sold (inflation). Energy costs also have a regressive cost impact as our poorest citizens spend much more of their money on energy, as a percentage of their budget, than do wealthier families. Lower heating oil, gas and electricity costs would disproportionately help low income earners.

The ultimate outcomes may not be predictable but the rules of the game have been substantially changed.

LANDMARK FEDERAL TAX CHANGES SLATED FOR 2018

Congress passed the Tax Cuts & Jobs Act last week, and President Trump signed the bill into law on Friday. The new legislation authorizes major changes to the Internal Revenue Code. On January 1, 2018, the corporate tax rate will be reduced to 21%, most pass-through businesses will be allowed to claim a 20% deduction on earnings, the estate tax exemption will double, the individual standard deduction will rise to $12,000, and personal exemptions will disappear. At the start of 2019, the health insurance requirement for individuals set by the Affordable Care Act is scheduled for repeal. Most of the reforms are slated to sunset at the end of 2025.1

HOME SALES STRENGTHEN

The National Association of Realtors reported a 5.6% rise in residential resales in November, complementing last month’s 17.5% gain in new home buying announced by the Census Bureau. In a separate report, the Bureau found housing starts up 3.3% for November, with building permits down 1.4%.2

CONSUMER SPENDING JUMPS 0.6% IN NOVEMBER

Beside this noteworthy gain, the Department of Commerce also documented a 0.3% rise in personal income last month. Turning to consumer sentiment, the University of Michigan’s final December index declined 0.9 points from its preliminary reading to 95.9. In further consumer-linked news, the Bureau of Economic Analysis issued its last estimate of Q3 GDP, reducing it 0.1% to 3.2%.2

SMALL GAINS ON WALL STREET

As last week’s performance of the S&P 500 demonstrated, tax reform was already priced into U.S. equities. The benchmark advanced but 0.28% across five days, settling Friday at 2,683.34. In quiet trading, the Nasdaq Composite gained 0.34% for the week while the Dow Jones Industrial Average rose 0.42%. The Nasdaq finished the week at 6,959.96; the Dow, at 24,754.06. Bitcoin took a 27% intraday dive Friday, falling to $11,833 before recovering to $14,241 by Wall Street’s closing bell.3,4

This Week:

U.S. financial markets are closed on Christmas Day. Trading resumes Tuesday, which is also the release date for the October S&P/Case-Shiller home price index. Wednesday, the Conference Board’s latest consumer confidence snapshot arrives, along with the NAR’s November pending home sales index. A new initial jobless claims report surfaces Thursday. Friday, nothing major is scheduled.

% CHANGE YTD 1-YR CHG 5-YR AVG 10-YR AVG
DJIA +25.26 +24.27 +17.53 +8.40
NASDAQ +29.29 +27.27 +26.08 +15.85
S&P 500 +19.85 +18.68 +17.53 +8.08
REAL YIELD 8/11 RATE 1 YR AGO 5 YRS AGO 10 YRS AGO
10 YR TIPS 0.54% 0.60% -0.71% 1.84%

Sources: wsj.com, bigcharts.com, treasury.gov – 12/22/173,5,6,7

Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly. These returns do not include dividends. 10-year TIPS
real yield = projected return at maturity given expected inflation.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. The information herein has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All market indices discussed are unmanaged and are not illustrative of any particular investment. Indices do not incur management fees, costs and expenses, and cannot be invested into directly. All economic and performance data is historical and not indicative of future results. The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. The NASDAQ Composite Index is a market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System. The Standard & Poor’s 500 (S&P 500) is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. NYSE Group, Inc. (NYSE:NYX) operates two securities exchanges: the New York Stock Exchange (the “NYSE”) and NYSE Arca (formerly known as the Archipelago Exchange, or ArcaEx®, and the Pacific Exchange). NYSE Group is a leading provider of securities listing, trading and market data products and services. The New York Mercantile Exchange, Inc. (NYMEX) is the world’s largest physical commodity futures exchange and the preeminent trading forum for energy and precious metals, with trading conducted through two divisions – the NYMEX Division, home to the energy, platinum, and palladium markets, and the COMEX Division, on which all other metals trade. Additional risks are associated with international investing, such as currency fluctuations, political and economic instability and differences in accounting standards. This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. MarketingPro, Inc. is not affiliated with any person or firm that may be providing this information to you. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional.

 

Citations.

1 – cpapracticeadvisor.com/news/12388205/2018-tax-reform-law-new-tax-brackets-credits-and-deductions [12/22/17]

2 – investing.com/economic-calendar/ [12/22/17]

3 – markets.wsj.com/us [12/22/17]

4 – washingtonpost.com/news/the-switch/wp/2017/12/22/bitcoin-tumbles-nearly-30-percent-in-volatile-trading/ [12/22/17]

5 – bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=12%2F22%2F16&x=0&y=0 [12/22/17]

5 – bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=12%2F22%2F16&x=0&y=0 [12/22/17]

5 – bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=12%2F22%2F16&x=0&y=0 [12/22/17]

5 – bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=12%2F21%2F12&x=0&y=0 [12/22/17]

5 – bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=12%2F21%2F12&x=0&y=0 [12/22/17]

5 – bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=12%2F21%2F12&x=0&y=0 [12/22/17]

5 – bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=12%2F21%2F07&x=0&y=0 [12/22/17]

5 – bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=12%2F21%2F07&x=0&y=0 [12/22/17]

5 – bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=12%2F21%2F07&x=0&y=0 [12/22/17]

6 – treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyield [12/22/17]

7 – treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldAll [12/22/17]