The Cut, Cut, Cut Act

Nov 3, 2017   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

What a week!  If hundreds of earnings announcements weren’t enough, we also had the nomination of a new Federal Reserve chair, and the GOP tax reform plan.  Trying to digest all the information was like trying to drink from a firehose.  I’ll do my best to summarize what could turn out to be the busiest week of the year.

You may have noticed the stock market continues to head higher each week.  In fact, this is the eighth-consecutive week of higher closes.  We also learned that despite this week marking the thirtieth anniversary of the Black Monday stock market crash, this October the CBOE Volatility Index recorded the lowest monthly average in its history (dating back to 1990).  You couple that bit of news with the release of the Consumer Confidence Index which increased to its highest level in almost seventeen years, and it’s no wonder the stock market keeps heading higher.  I’m not saying that we’ve hit euphoria yet, but the numbers indicate people, in general, feel good about the economy and investors are confident current economic conditions will persist.

Part of what is fueling this rally is the cash that had been sitting on the sidelines all these years.  A recent report found that mutual funds are holding only 3.3% of assets in cash.  Meanwhile, money market funds as a percent of long-term assets have fallen to 17% – also an all-time low.  A separate Citigroup study from a couple months back finds institutional cash at just 2.25% of assets.  The bottom line is that there are a lot of fully-invested bears out there.

Additionally, the Federal Reserve Open Market Committee (FOMC) met this week and in its policy statement takes note of solid economic activity despite the hurricanes, soft core inflation, and continued strength in the labor market.  There is nothing in the statement suggesting the Fed won’t hike rates again at its next meeting in December.  But while we’re on the subject of the Federal Reserve, it should be noted that President Trump nominated Jerome Powell to be the new chairman of the Federal Reserve, replacing Janet Yellen whose term expires in February.  Mr. Powell has been a Fed governor since 2012 and has consistently voted with Yellen, thus earning the moniker, “The Republican Yellen.”  One thing that could prove different is his desire to further deregulate banks.  He’s on record saying he wants to, “deregulate community banks, relax liquidity constraints on larger firms, and relax lending standards in the housing markets.”  Those measures are more in line with the Trump administration and were likely contributing factors to his nomination.

In the middle of all this news, the GOP released details of its tax reform plan.  It did not go unnoticed.  No doubt you heard some of the details in the news.  The biggest change is the effort to drop the corporate tax rate from 35% to 20%.  However, anyone with a grade school education knows this means less revenue and potentially big budget deficits, perhaps as large as $1.5 trillion over 10 years.  To offset this loss of income, Republicans came up with a number of ideas including capping the mortgage interest deduction on new home purchases, limiting the amount of property taxes that can be deducted, eliminating the deductibility of state and local taxes, medical expenses, the tax credit for adoption of a child, and student loan interest.  It also keeps the top marginal tax bracket at 39.6% for those with earned income greater than $1 million.  Just remember, to “simplify” the tax code it was necessary to write a 400-page bill.

I usually close out this weekly piece with a funny or unusual story.  This week is a more sobering reminder that money is not free and does not, in fact, grow on trees.  It was announced the Social Security Administration paid out more than $1 trillion in fiscal 2017 for the first time ever.  This amounts to 37 times the Department of State budget, 32 times that of the Department of Justice, 20 times that of the Department of Homeland Security, and 76% more than the federal government spent on the Department of Defense.  The Social Security Administration and the Department of Health and Human Services now account for 53% of all federal spending.  If nothing is done to fix the funding, the financial reckoning will be huge – some estimate as much as $11.4 trillion down the road.  Now you know.

November 3, 2017

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