Fiscal Discipline Wilts

Apr 28, 2017   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

Investors breathed a big sigh of relief this week as several potentially problematic issues were averted.  Voters in France are overwhelmingly supporting the more moderate candidate that isn’t calling for France’s exit from the European Union and Congress voted today to avoid a government shutdown, albeit for just one week.  With earnings announcements coming in generally better than expected, the market reversed the trend of the past six weeks and will finish the week higher.

While it is too soon to say what impact President Trump’s tax cut proposal will have on the economy, it has clearly drawn a line between those for it and those against it.  Unfortunately, many key details were not released when the White House made the announcement and it differs in four ways from the President’s campaign proposal.  The following are the main differences:

  • A smaller tax cut for top earners: The White House proposal would lower the top marginal rate for individuals from 39.6% to 35%, rather than the 33% proposed on the campaign trail.
  • A smaller tax cut for middle-income individuals: The proposal now calls for a standard deduction of $24,000 for couples rather than $30,000. This is still roughly twice as much as the current standard deduction.
  • Repeal of the state and local tax deduction: The Trump campaign proposal was unclear about which individual tax deductions might be eliminated. The deductions for mortgage interest, charitable contributions, and retirement savings would be maintained.
  • A territorial tax system for business income: The revised White House plan would adopt a territorial tax system, which exempts foreign earnings from U.S. tax.

Conspicuously absent was any mention of a border tax adjustment, which has been floated in Paul Ryan’s plan and widely accepted in the House of Representatives.  It also repeals the death tax and abolishes the alternative minimum tax (AMT).  Additionally, it would cut the corporate tax rate from 35% to 15%, and apply the same rate to pass-through entities which benefit most small businesses throughout the country.  I expect a long road ahead for tax legislation.  While there is a good chance that tax reform becomes law, the details will likely make this a tough piece of legislation to pass.

In other news, Gross Domestic Product (GDP) slowed more than expected in the first quarter.  The consensus was for GDP to come in at 1.2% which itself is lower than the 2.1% we saw in the fourth quarter of last year.  However, GDP came in at 0.7% which surprised many but didn’t seem to bother the market.  The culprit was consumer spending which softened considerably from 3.5% in Q4 to just 0.3% in Q1.  Spending on large-ticket items such as cars and home appliances dropped and possibly affecting results was the low level of heating due to moderate weather in large parts of the U.S.  Most economists believe Q1 is an anomaly and consumer spending will likely pick back up in Q2.

It was announced this week that China now holds the record for the world’s largest money market fund.  A Chinese money market fund set up as a repository for leftover cash from online spending has emerged as the world’s biggest, with $165.6 billion under management.  Alibaba’s four-year-old Yu’e Bao fund – which means leftover treasure – has overtaken JP Morgan’s U.S. Government Money Market Fund, which has $150 billion.  Yu’e Bao pays 3.93% and no, we can’t invest in it!

In the wake of the United Airlines beat down and the American Airlines issues with mothers traveling with children, it should come as a relief to know that both airlines are hard at work figuring out how to treat their customers like people.  Perhaps adding a helping hand, the Federal Communications Commission (FCC) is withdrawing its proposal that would have allowed air travelers to use their cellphones while in flight.  Despite new advances in in-flight communications, the value of quiet at 30,000 feet was deemed more important.  United will be able to use their slogan, “Fly the Friendly Skies” and possibly mean it.  Now you know.

April 28, 2017

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