The stock market performance has been similar to a broken record of late so………
It appears sweeping tax reform is likely to pass this week, so I will share several thoughts. I will be reviewing the final form details assuming it passes.
The highest corporate tax bracket is being reduced from 35% to 21%. It’s not zero, but it is a significant improvement for corporations.
It is notable that people own corporations that hire other people to work at the corporations. When you make an investment in stock or mutual funds, you are putting your money at risk while trusting a corporation will do well. A corporate tax is a tax on people.
A corporation has certain financial realities that government does not. If a corporation does not bring in more money than it spends, then eventually the corporation fails. However, prior to failing, a corporation will attempt not to fail by raising prices, so that they are not losing money. In a corporation, money must come from people voluntarily giving money to that corporation in exchange for a good or service.
Governments may print money, as they produce nothing. Survival of the fittest is the world corporations operate in. Success or failure is an economic reality and failure leads to people losing money, jobs and often suffering in interrelated ways.
As you tell people to put down the Marshall Fields Frango mints and smile while pointing your Kodak camera, purchased at Montgomery Ward this holiday season, remember that corporations are not government entities guaranteed to persist. As you stop at Texaco to fill up on the way to catching your TWA flight to see relatives, consider that a reduced tax burden is good for corporations generally but will not stop poorly run companies or old technologies from failing.
For everyone who pays income tax, your tax bracket is going down. For those that do not pay income taxes, it is possible to receive a tax credit effectively putting you in a negative bracket. Everyone wanting special interests removed from the tax code, the bill has some success but mostly fails. Deductions and credits, in the tax code, are set aside for various special interests and very few have been removed. There is a tax advantage to being married versus single, having a mortgage versus renting, having children versus not and on and on.
FED MAKES ITS FINAL RATE MOVE OF 2017
As expected, the Federal Reserve raised the benchmark interest rate by 0.25% last week. The Federal Open Market Committee voted 7-2 to take the target range for the federal funds rate up to 1.25-1.5%. Fed officials made little change to their dot-plot chart – they still see three rate hikes in 2018, and their consensus projection has the federal funds rate at 2.1% a year from now. They did elevate their 2018 GDP forecast from 2.1% to 2.5%.1
CORE INFLATION LAGS HEADLINE CPI ADVANCE
According to the Department of Labor, consumer prices rose 0.4% in November – but the core Consumer Price Index, which removes food and energy costs, only saw a gain of 0.1%. This left the 12-month increase in the core CPI at 1.7% compared with 2.2% for the headline number, a gap that may complicate matters for the Federal Reserve as it considers the pace of 2018 interest rate adjustments.2
BUYING, BUYING, and MORE BUYING
Retail sales climbed an impressive 0.8% in November following a strong 0.5% rise for October. Factoring out auto purchases, the November gain was 1.0%. Recent Department of Commerce data shows core retail sales (which do not include building materials, gasoline, and food) advancing at their best pace in three years.3
WALL STREET RALLIES
With the possibility of reduced corporate tax rates just ahead, institutional investors were notably bullish last week. Across five trading sessions, the S&P 500 gained 0.92% to 2,675.81; the Dow Jones Industrial Average, 1.33% to 24,651.74; Nasdaq Composite, 1.41% to 6,936.58. All that confidence helped send the CBOE VIX down to a Friday close of 9.42.4
No major economic indicators or earnings announcements are scheduled for release on Monday. Data on November housing starts and building permits emerges Tuesday, plus earnings news from Darden Restaurants, FedEx, Micron Technology, Navistar, Red Hat, and Steelcase. On Wednesday, the Street considers November existing home sales and earnings from Bed Bath & Beyond, Blackberry, General Mills, and Winnebago. The last estimate of Q3 GDP comes out Thursday, along with a new initial claims report and earnings from Accenture, CarMax, ConAgra Brands, Finish Line, Hovnanian, Nike, Paychex, and Rite Aid. Reports on November personal spending and hard goods orders, the November PCE price index, the final December University of Michigan consumer sentiment index, and November new home sales appear Friday.
|% CHANGE||YTD||1-YR CHG||5-YR AVG||10-YR AVG|
|REAL YIELD||8/11 RATE||1 YR AGO||5 YRS AGO||10 YRS AGO|
|10 YR TIPS||0.47%||0.70%||-0.84%||1.90%|
Sources: wsj.com, bigcharts.com, treasury.gov – 12/15/174,5,6,7
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
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1 – bloomberg.com/news/articles/2017-12-13/fed-raises-rates-while-sticking-to-three-hike-outlook-for-2018 [12/13/17]
2 – reuters.com/article/us-usa-economy-inflation/u-s-core-inflation-slows-puts-spotlight-on-2018-interest-rate-outlook-idUSKBN1E71QM [12/13/17]
3 – bloomberg.com/news/articles/2017-12-14/u-s-retail-sales-increased-0-8-in-november [12/14/17]
4 – markets.wsj.com/us [12/15/17]
5 – bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=12%2F15%2F16&x=0&y=0 [12/15/17]
5 – bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=12%2F15%2F16&x=0&y=0 [12/15/17]
5 – bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=12%2F15%2F16&x=0&y=0 [12/15/17]
5 – bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=12%2F14%2F12&x=0&y=0 [12/15/17]
5 – bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=12%2F14%2F12&x=0&y=0 [12/15/17]
5 – bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=12%2F14%2F12&x=0&y=0 [12/15/17]
5 – bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=12%2F14%2F07&x=0&y=0 [12/15/17]
5 – bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=12%2F14%2F07&x=0&y=0 [12/15/17]
5 – bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=12%2F14%2F07&x=0&y=0 [12/15/17]
6 – treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyield [12/15/17]
7 – treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldAll [12/15/17]