Macro Overview November 2017

An improving economic environment and earnings optimism propelled markets higher, along with prospects that there might be some agreement on tax reform in Washington.

The House of Representatives released a draft of tax policy proposals known as The Tax Cuts & Jobs Act. The prospect of lower taxes for corporations and individuals are part of the proposals, while also targeting tax avoidance by multinational U.S. firms, reassuring markets that fiscal reform could prove possible.

Effects of hurricane influenced rebuilding efforts underway in Texas and Florida are expected to become more visible via labor and materials data over the next few weeks. Economists expect an increase in job placements and material costs as insurance claims start to pay out. Hurricane Harvey destroyed over 15,500 homes in Texas, while Hurricane Irma damaged 90% of the homes in the Florida Keys.

Apart from hopeful tax reform passage, equity markets have soared due to stronger global demand, improving earnings, and fewer regulatory hurdles. Internationally, global growth surpassed 4.5% in the second quarter, following a 3.9% increase in the first quarter. The data suggests that global production and consumption is increasing, eventually translating into higher earnings for global equities. The International Monetary Fund (IMF) issued increased growth estimates for 2017 & 2018 following better than expected growth data. Repatriation of corporate cash is a top priority of tax reform where U.S. companies generating profits overseas are currently paying upwards of 35% tax. Large U.S. multinationals that have significant revenue generated outside of the U.S. stand to benefit the most from repatriation. Technology stocks alone hold over 60% of cash held overseas from profits. Should a reduced tax rate become effective on such large cash portions, companies could use the money to increase dividends, expand capital investment, hire employees, and make acquisitions.

The U.S. economy posted two consecutive quarters of GDP growth above 3% in the second and third quarter, marking the best six-month consistent period of growth in three years. Gross Domestic Product (GDP) grew at a 3.1% rate in the second quarter and 3% in the third quarter, per Commerce Department data. The subdued third quarter results are believed to be attributable to Hurricanes Harvey and Irma as economic activity came to a halt for portions of Texas and Florida. Economists believe that rebuilding efforts following the storms will give GDP growth a boost in the fourth quarter. Historically, U.S. GDP has averaged around 3% annual growth.

Proposed business tax reforms are expected to increase business investment, which has lagged in recent years. The Federal Reserve Bank of St. Louis released data showing that business investment rose 6.7% in the second quarter and 3.9% in the third quarter, a decline most likely caused by the hurricanes. Overall, a rising trend in business investment is a confirmation of improved confidence held by companies on economic and tax reform prospects. (Sources: House.gov, Commerce Department, Federal Reserve)

Sinister Month Of October Rebuffed – Equity Markets

This October marked 30 years since the market drop of 1987, when the Dow Jones Industrial Average fell to 1,738, losing 508 points. The 22.6 percent collapse in 1987 is equivalent to a drop of about 5,200 points in the index today. The benchmark U.S. S&P 500 index plunged 20.5 percent on that same day in October 1987, equal to a drop of over 520 points today, and the Nasdaq dropped 11.4 percent, comparable to a drop of about 750 points. Another historical note is that October has been recognized as the most volatile month of the year. This past October was an exception, with the least amount of volatility of any October going back to 1928.

Earnings, the single most important factor for stock prices, have been rising in sync with stock prices, meaning that improved earnings validate higher equity prices.

International markets are following the rise of U.S. equity markets, reflecting optimism about world economic growth. Steady buying in U.S. markets has transitioned over to European, Asian, and emerging markets over the past few trading sessions. Broad-based economic growth internationally is fueling stock market appreciation as well as inflationary pressures. A weak dollar has also continued to buoy large U.S. multinationals allowing their products to be priced more competitively worldwide. (Sources: Dow Jones, S&P, Nasdaq, Bloomberg)

Social Security Payments Increasing By 2% – Retirement Planning

Social Security recipients are due to receive the largest increase in benefits in six years. But for many recipients, the increase in payments will go towards higher Medicare costs. The Social Security Administration announced a 2% increase in benefit payments effective in late December 2017 for disability beneficiaries and in January 2018 for retired beneficiaries. The 2% increase is the largest increase since a 3.6% increase in 2012.

Many are concerned that the 2% increase may not cover expenses that are rising at a faster rate, including other essential items such as food and housing. The latest increase also affects the premiums for Medicare Part B, which covers doctor visits and outpatient care. Medicare premiums are expected to increase at the beginning of the year, minimizing net increases in Social Security payments. As of October 2017, over 66.7 million Americans currently receive Social Security benefit payments, with 46.3 million aged 65 or older. The Social Security Administration estimates that Americans will receive over $931 billion in Social Security benefit payments in 2017. By 2036, there will be almost twice as many older Americans eligible for benefits as today, from 41.9 million to 78.1 million. There are currently 2.9 workers for each Social Security beneficiary, by 2036 there will be 2.1 workers for every beneficiary. (Source: Social Security Administration)