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%

YTD Market Returns:

Dow Jones -7.14%
S&P 500 1.21%
Nasdaq 21.61%
MSCI-EAFE -12.61%
MSCI-Europe -15.66%
MSCI-Pacific -7.42%
MSCI-Emg Mkt -1.00%
 
US Agg Bond 6.32%
US Corp Bond 6.45%
US Gov’t Bond 7.40%

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
 

Rates Commence Their Rise – Fixed Income Update

The Fed raised short-term rates in December as expected by a quarter point to between 0.5% and 0.75%, the first increase since December 2015. The Fed also announced that it expects to raise rates three times in 2017 contingent on economic growth and inflationary pressures.

Higher oil prices have actually helped the high-yield bond market, since roughly 20% of high-yield bonds are in the oil sensitive energy sector. Rising oil prices have helped stem the risk of default among the sector.

Overall bond prices fell in the last two months of the year, meaning that yields rose. Of the various bond sectors, U.S. Treasury bonds experienced the most significant jump in rates. Rates rose following the election on the premise that growth policies set in motion by the new Trump administration would generate inflationary pressures and economic expansion.

With European and Japanese bond yields still at near zero levels, the heightened yields on U.S. Treasuries has made them that much more alluring for foreign buyers worldwide. As U.S. debt lures in buyers, the yields on U.S. Treasuries is expected to level off as demand and prices return to normalized levels.

The challenge for the Fed going into 2017 is the prospect of increasing economic activity, where higher inflation may need to be harnessed by additional rate hikes. Many believe that it will be more difficult for the Fed to maintain a careful balance.

Sources: Federal Reserve, U.S. Treasury, Bloomberg, Reuters

 

 

What’s Different In 2017 For Taxes – Tax Planning

For 2017, the IRS is revising more than 50 tax provisions for both individuals and business taxpayers. Any changes or modifications made by the new administration may or may not be applicable to 2017 taxes. So for the time being, the following IRS revisions are effective for the 2017 tax year.

Standard Deduction – will increase from $12,600 to $12,700 for married couples & from $6,300 to $6,350 for single filers.

Alternative Minimum Tax (AMT) – the exemption amount will increase from $53,900 to $54,300 for individuals and increase from $83,800 to $84,500 for married couples.

Senior (65+) Medical Expense Deduction – ability to deduct medical expenses rise to 10% of AGI up from 7.5% of AGI.

Mileage Expense – is falling to 53.5 cents per mile from 54 cents per mile for business miles & 17 cents per mile down from 19 cents per mile for medical & moving purposes

No Health Coverage Penalty – increases to $695 per adult, or 2.5% of income up to a family maximum of $2,085

Estate Tax Exemption – will increase by $40,000 up to $5.49 million

Source: IRS.gov, Tax Foundation

U.S. Has Among Highest Corporate Tax Rates – Fiscal Policy Review

One of Trump’s fiscal proposals is to reduce the inherently high U.S. corporate tax rate from 35% to 15%. The United States currently has one of the highest corporate tax rates of any country worldwide at 35%. The average corporate rate globally is just over 23%.

Some countries maintain low tax rates or no corporate tax at all, such as Cayman Islands and Bermuda, in order to encourage companies to invest and hire within their countries. Some believe that if U.S. corporate tax rates drop, it might discourage U.S. companies from seeking tax havens overseas, such as tax inversions. Inversions occur when a U.S. company buys or merges with a foreign domiciled company in order to adopt a lower tax rate. A report released by the OECD raises a concern that some European countries are being used as tax havens, but with little or no benefits achieved by the underlying workforce or economy.

Source: OECD

 

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

 

Dollar Nears Parity With Euro – Euro Update

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