The Trump Plan
Market Update
(all values as of 10.30.2020)

Stock Indices:

Dow Jones 26,501
S&P 500 3,269
Nasdaq 10,911

Bond Sector Yields:

2 Yr Treasury 0.14%
10 Yr Treasury 0.88%
10 Yr Municipal 0.94%
High Yield 5.72%

Commodity Prices:

Gold 1,878
Silver 23.72
Oil (WTI) 35.71

Currencies:

Dollar / Euro 1.17
Dollar / Pound 1.29
Yen / Dollar 104.44
Dollar / Canadian 0.75
 

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

 
Brexit, The Big Picture and Estate Tax Rules

First Brexit……….Now Frexit – International Update

A similar sentiment that encouraged British voters to exit the EU is now influencing French voters to possibly do the same. Upcoming Presidential elections in France on April 23rd will determine the country’s future in the EU, as a popular candidate, Marine Le Pen, is an advocate of having France exit the EU.

A growing concern in Europe is that a domino effect may take hold as the sentiment to exit the EU spreads to other countries. Upcoming elections in Lithuania, Austria, Netherlands, and Germany may yield additional candidates that also favor an EU exit. Of the 28 EU member countries, France currently has the third largest economy after Germany and the UK, which voted to leave the EU in 2016.

A flight to safety following uncertain political ramifications in Europe drove yields on two-year German government bonds into negative territory in February.

Sources: Eurostat, Bloomberg

 

Macro Overview – February 2017

 

A change in sentiment was prevalent throughout the markets as new rules and regulatory reversals began to take effect. Volatility rose as markets tried to discern President Trump’s policies.

Equity markets propelled to new highs in January as optimism fueled U.S. equities, sending the Dow Jones Industrial Average to a new milestone level of 20,000. The S&P 500 Index and the Nasdaq Composite Index also reached new highs during the month.

Executive orders undertaken by the President were able to derail several rules signed into law by the Obama administration, yet fiscal policy initiatives proposed by President Trump such as tax cuts and tax reform need Congressional approval. The Congressional Review Act (CRA) will allow the Republican led Congress to reverse a number of regulations enacted by the prior adminustration.

Among President Trump’s first actions as president was to withdraw the U.S. from the Trans-Pacific Partnership, strengthen border parameters with Mexico and temporarily disallow certain immigrants from entering the U.S. Two highly contested oil pipeline projects were granted the ability to advance, the Keystone Pipeline and the Dakota Access pipeline.

Pharmaceutical companies became a Presidential target, as President Trump approached drug makers to lower their prices and manufacture their products in the U.S. The President’s agenda of repealing portions of the Affordable Care Act may also affect premium and medical costs.

Brexit became more of a challenge in January as the highest court in the U.K. ruled that Prime Minister Theresa May must seek a parliamentary vote in order to continue on with exiting the EU.

A continually strong dollar is creating headwinds for U.S. multinationals which post a large portion of their earnings from over sea’s sales. A weaker dollar would be beneficial to U.S. exporters making their products less expensive internationally.

Fiscal concepts presented by the President may encourage companies with ample cash to invest in capital rather than buying back their own stock or issuing heftier dividend payouts. A lagging key component of GDP has been capital spending.

The National Federation of Independent Business released their survey of small business optimism, which soared 7.5% to its fifth highest level in over 40 years of survey results.

President Trump nominated 49-year old Neil Gorsuch for a lifetime job on the U.S. Supreme Court. Gorsuch, the son of a former Reagan administration official, is the youngest nominee to the nation’s highest court in more than a quarter century, and could influence the direction of the court for decades.

Sources: Fed, Eurostat, NFIB, Dow Jones, S&P

 

Estate Tax Portability Rules – Tax Planning

When a spouse passes, the surviving spouse has the ability to claim the used portion of their spouse’s federal estate tax exemption and add it to their own exemption. To transfer the unused portion, an election is made termed as a “portability election”. The portability election must be made on a timely basis by filing a federal estate tax return known as the “United States Estate Tax Return” also known as Form 706. The filing of Form 706 is due on or before nine months after the deceased spouse’s date of passing. An automatic six-month extension to file Form 706 may be requested by filing Form 4768 on or before the due date of the estate tax return. The portability election first went into effect for the estates of individuals that passed on or after January 1, 2011.

Source: IRS

 
A new High for the Dow

Market Indices March 2017 (all values as of 02.28.2017)

Stock Indices: Dow Jones 20,812 S&P 500 2,363 Nasdaq 5,825

Bond Sector Yields: 2 Yr Treasury 1.22% 10 Yr Treasury 2.36% 10 Yr Municipal 2.30% High Yield 5.66%

YTD Market Returns: Dow Jones 5.31% S&P 500 5.57% Nasdaq 8.22% MSCI-EAFE 4.10% MSCI-Europe 2.98% MSCI-Pacific 6.04% MSCI-Emg Mkt 8.59% US Agg Bond 0.82% US Corp Bond 1.34% US Gov�t Bond 0.98%

Commodity Prices: Gold 1,248 Silver 18.30 Oil (WTI) 53.94

Currencies: Dollar / Euro 1.05 Dollar / Pound 1.24 Yen / Dollar 112.25 Dollar / Canadian 0.76 Dollar Nears Parity With Euro – Euro Update

The Details –

Continued weakness with the euro has become a focal point with currency markets as the central bank of Europe continued with its stimulus efforts by keeping key rates at historical lows in Europe. The combination of Brexit and ECB stimulus efforts have gradually been adding downward pressure on the euro throughout the year. The ECB commitment to buy government and corporate bonds in Europe has greatly influenced the ultra low rate environment.

A weak euro may bring about inflationary pressures in those countries that rely on imports, while countries relying on exports, such as Germany, could benefit with a weak euro allowing for greater exports and economic activity.

Sources: ECB, Eurostat, Bloomberg

Change At The Helm – Market Fact

When President Obama assumed the presidency on January 20, 2009, the financial markets were in the midst of turmoil and tremendous uncertainty. Economic growth and prosperity had reversed from earlier years of expansion during the 2000’s.

Unemployment stood at 7.8% in 2009, and fell to 4.7% by the time President Trump took office. Yet average annual household income remained stagnant for eight years, increasing a dismal $1,140 per year from $55,376 to $56,516, resulting in a drop of wage growth from 3.6% per year to 2.9% per year.

The economic environment that President Trump assumed requires assistance from the administration to garner any fundamental improvement. GDP stood at 1.7% when Trump took office on January 20, 2017, lagging due to minimal capital investing by companies.

The one item that may continue to offer headwinds is the amount of debt as a percentage of GDP. The increase in Federal debt from 77.4% of GDP to 104.8% of GDP can be alleviated with an increase in GDP, since Federal debt is expected to rise under Trump’s fiscal policies.

Sources: BLS, Labor Dept, Federal Reserve

 

Dow Jones Reaches 20,000 – Domestic Equity Update

The Dow Jones Industrial Average hit the milestone 20,000 mark in January. The 120-year old index took 103 years to reach 10,000 in March 1999, then another 18 years to reach 20,000 in January 2017. The move from 19,000 to 20,000 took just 42 trading days, the second fastest 1,000 point gain in history for the index. The single fastest 1,000 gain occurred during the dot com boom in 1999 when the index jumped from 10,000 to 11,000 in only 24 days. Two other notable equity indices also reached new highs in January, the S&P 500 and the Nasdaq.

Equity markets pulled back at the end of January as uncertainty surrounding various administrative policies and some disappointing corporate earnings fueled a retraction of major indices. Earnings were mixed in January as earnings were reported for various companies across different sectors.

A number of industries that have been laggards for the past 4 to 8 years have now become candidates for growth and expansion: oil & gas drillers, metal & glass containers, fertilizers & agricultural chemicals, tankers, and mining.

A common complaint about stock market growth has been the fact that most companies found it easier to simply issue debt at low interest rates and buy back their own stock, rather than investing in capital with the constant tide of regulatory resistance discouraging expenditures.

Sources: Dow Jones, S&P

 
Global Equities

As Trade Confrontation Looms With China….Japan Passes China As Largest Owner Of U.S. Treasuries – International Trade

U.S. Treasury Department data released in December revealed that Japan has surpassed China as the largest foreign holder of U.S. Treasuries. For years, China has held more U.S. Treasury debt than any other country, making it the single largest foreign creditor. As pressure has mounted for China to allow its currency to float freely, it has gradually been selling Treasuries in order to raise liquidity and help elevate its currency.

China has been careful not to create any perceived issues with its currency since the yuan became part of the International Monetary Fund’s (IMF) special drawing rights in October 2016. This will allow the yuan to become a legitimate reserve currency along with the euro, pound, and dollar. China’s position in U.S. debt is at its lowest levels since 2010.

Sources: U.S. Treasury, IMF,Bloomberg

Equity Markets – Global Stock Market Overview

Despite starting 2016 off to a rough start, equity markets propelled towards the end of the year. The Dow Jones Industrial Average was up 13.42%, the S&P 500 Index increased 9.54%, and the technology heavy Nasdaq Index gained 7.5% for the year.

Because fiscal and regulatory changes expect to engulf the markets in 2017, the environment has evolved into a stock pickers market. The search for specific companies in specific sectors that may benefit from fiscal and regulatory changes is considered superior to just buying a passive index of broad stocks.

The potential for economic growth due to a combination of personal and corporate tax cuts, government spending, and less regulation could eventually boost earnings for stocks.

With U.S. companies having reduced expenses and minimized debt exposure over the past few years, any increase in profitability margins have become difficult. This is why revenue growth will be essential for many U.S. companies in 2017 while contemplating a higher dollar, lower tax rates, and fewer regulations.

A validation that we are heading into a stock pickers market is the decrease in correlation that has occurred among stocks. When stocks are highly correlated it’s a sign that investors are all buying or selling the markets, but when correlation is low it’s a sign that investors are buying or selling specific stocks for specific reasons. Recent dynamics such as a higher dollar, rising rates, and possible import tariffs have created obstacles for certain companies. Deregulation, lower corporate tax rates, and infrastructure spending have created new opportunities for a host of other companies.

The dynamics of sector rotation engulfed the equity markets in the final two months of trading in 2016. Healthcare, utilities and consumer sectors saw an exodus as financials, energy, and industrials saw an in flow.

Sources: S&P, Bloomberg, Reuters, Dow Jones