Market Update
(all values as of 09.30.2020)

Stock Indices:

Dow Jones 27,781
S&P 500 3,363
Nasdaq 11,167

Bond Sector Yields:

2 Yr Treasury 0.13%
10 Yr Treasury 0.69%
10 Yr Municipal 0.84%
High Yield 5.77%

YTD Market Returns:

Dow Jones -2.65%
S&P 500 4.09%
Nasdaq 24.46%
MSCI-EAFE -8.92%
MSCI-Europe -10.53%
MSCI-Pacific -6.19%
MSCI-Emg Mkt -2.93%
 
US Agg Bond 6.79%
US Corp Bond 6.64%
US Gov’t Bond 8.04%

Commodity Prices:

Gold 1,892
Silver 23.37
Oil (WTI) 39.88

Currencies:

Dollar / Euro 1.17
Dollar / Pound 1.28
Yen / Dollar 105.60
Dollar / Canadian 0.74

Trump Tax Proposals – Fiscal Policy

Trump’s proposals aim to simplify taxes by reducing the number of brackets from the current seven, to three. Some argue that this simplification may actually raise taxes for single filers, rather than lower them. The current brackets, which have been in place for sometime, scale up from 10% to 40% over seven brackets, while Trump’s brackets scale up from 12% to 33% over three brackets.

Affecting almost all taxpayers is the standard deduction, which Trump proposes to raise from $12,600 currently for married couples to $30,000. For wage earners that are employees and not self-employed, the standard deduction can be the sole and largest deduction on tax returns.

The tax exemption on municipal bond interest has been broached as a possible elimination and is a fairly contested subject. The loss of the municipal interest exemption could make municipal bonds less desirable, making it more difficult for local counties and state governments to raise capital. Hence, this has become a highly politically charged decision.

In addition to Trump’s tax proposals, the Republicans under the House plan, have proposals of their own. The question is, on which proposals will the Trump and the House plan overlap and disagree.

Both plans propose doing away with AMT and the 3.8% Medicare surcharge on high income earners. The Medicare surcharge was essentially put in place to help subsidize the Affordable Care Act (ACA).

The elimination of itemized deductions are a mutual goal for both the House and Trump tax plans. The House plan would only retain two critical deductions: mortgage interest and charitable contributions. All other deductions would be eliminated, including the deduction for state and local income taxes, property tax, and sales tax. The Trump proposals would retain most of these deductions, but cap them at the $200,000 level.

Both the House and Trump plan would repeal the estate tax, which allows families to pass along assets to heirs free of estate tax. The current maximum estate tax rate is 40%.

Small business owners would benefit immensely from proposals presented by the House and Trump. The House plan would limit the tax rate for pass through entities, such as S-Corps to 25%, while the Trump plan proposes a rate of just 15%. The Tax Foundation estimates that about 95% of U.S. businesses in the United States are considered pass throughs such as S-Corps. A Trump proposal for a cut in the corporate tax rate would reduce the rate from 35% to 15%.

Sources: donaldtrump.com, taxpolicycenter.org, taxfoundation.org

 

U.S. Tax Revenue – Fiscal Policy Review

With tax season upon us, the Federal government’s ability to tax comes into full force. The dynamics of tax revenue is a combination of economic prosperity, tax rates, and the existing population of taxpayers. Ongoing discussions surrounding tax rates have been a focus of how to increase tax revenue. However, the other two components include economic conditions and the number of individuals paying income taxes.

As new hires enter the workforce, either out of school or as immigrants, additional tax revenue is derived from their incomes. As economic conditions improve, companies may hire additional employees and eventually start to issue pay raises.

For the past 40 years federal tax receipts have increased an average of 6.76% each year, including year-over-year decreases in 1983, 2001, 2002, 2003, and 2009.

Sources: CBO, Tax Policy Center

 

Auto Sales May Have Peaked – Industry Overview

Low interest rates and aggressive leasing programs have made some fairly expensive cars affordable. Rather than struggling to get approved for a new home loan or refinance, Americans have instead financed cars, where getting a loan approval has been easier. The abundance of attractive loans has helped elevate auto sales throughout the country over the past few years. Recent auto sales have been slowing across the country as dealer incentives have become less effective.

The end of 2016 saw auto loans outstanding reach $1.1 trillion, propelled by continued low interest rates. Federal Reserve data revealed that the average rate on a typical 4 year auto loan was 4.45% in the 4th quarter of 2016. The same auto loan in February 1982 was 17.05%.

As expensive as some automobiles have become for consumers, an auto loan is the only method of actually affording the pricey cars of today. Over the years, several automobile companies have established their own financing thus allowing buyers to buy and borrow directly from them.

A growing concern among analysts are the number of auto loans that have been securitized over the past few years. The ultra low rate environment has created incredible affordability for consumers as well as attractive high yielding securities for risk seeking investors. An increase in rates may lead to an increase in auto loan defaults as payments become less affordable.

Source: Federal Reserve