Daily Commentary

MarketMinder’s View: This article mentions a few securities, so we remind you MarketMinder doesn’t make individual security recommendations. Our interest here is more on the general concept of tax-minimized strategies. And yes, there are funds and ETFs designed to minimize Uncle Sam’s bite of returns, but as the article spends the bulk of its time discussing, that doesn’t mean investors should rush headlong. Among the three main classes of funds it explores, one (an old strategy called an exchange fund, not to be confused with an ETF) forces investors to sacrifice liquidity for seven years in order to defer capital gains taxes on concentrated positions they want to diversify by exchanging highly appreciated stock for shares in a fund. Another uses options trades to mimic Treasury returns, only at capital gains rates instead of ordinary income rates … but leaves investors exposed to state and local taxes (which don’t apply to Treasury interest) and forces investors to be very finicky about selling the right tranches at the right time if they want to take monthly income without triggering short-term capital gains. And the last one trades an awful lot to avoid accruing dividends. Do you share our headache yet? Overall, we think this parting take is on point: “I wouldn’t rush to buy most of these funds. Running them is more complicated than managing garden-variety index funds, so their expenses are marginally higher. They also might not attract enough assets to stay in business. And, except for the exchange funds, the other funds are new to the marketplace and largely untested by the Internal Revenue Service. It could, in theory, challenge at least some of them on the basis of being tax dodges.” Friends, letting the tax tail wag the investment dog isn’t a good idea. It risks taking you into complex securities that veer far from your long-term goals and generate subpar returns.

MarketMinder’s View: As always, MarketMinder is politically agnostic, preferring no politician nor any party and assessing developments for their potential economic and market effects only. So what are the effects of the new tariffs announced Thursday, which include a 50% levy on cabinetry, 30% on upholstered furniture, 25% on heavy trucks and potentially 100% on “branded or patented” pharmaceuticals? For now, that is unclear: “‘Like all of the tariff announcements we’ve seen this year, the impact of the new tariffs … will hinge on their implementation,’ said Brett House, a professor at the Columbia Business School whose research focuses on macroeconomics and international finance. ‘It’s unclear, for instance, whether these new taxes on [U.S.] consumers and businesses will be levied in addition to already-established tariffs on … major trading partners and in contravention of existing trade deals.’” President Donald Trump has also hinted at exemptions to the pharmaceutical tariffs and EU officials reportedly believe their recently struck deal exempts them from it. So we think the primary immediate effect is to extend the uncertainty hanging over investors the past six months. Markets have learned to live with it, so we don’t see this as some bearish surprise. But uncertainty can discourage risk-taking and investment, which remains a potential economic headwind. One markets are aware of, but a possible headwind nonetheless.

MarketMinder’s View: As always, we are agnostic on politics, preferring no party nor any politician. But we bring this to your attention as a potentially noteworthy development in Japan. Currently, the Liberal Democratic Party (LDP) heads a minority government, and Prime Minister Shigeru Ishiba will step down once the LDP completes its leadership contest next month. It looked like a foregone conclusion the new prime minister would have to try to rebuild the LDP’s popularity while being constrained by political gridlock. But now the Japan Innovation Party (JIP) is signaling it is open to forming a coalition with the LDP, potentially making it easier to pass legislation—the opposite of what coalition governments ordinarily do across the developed world. There were some exploratory talks this week, where party leaders “discussed such issues as integrated reform of social security and taxes, as well as measures to counter inflation in place of the LDP’s upper house election pledge of ¥20,000 in cash handouts per person.” Markets have become very used to Japanese gridlock, which reduces legislative risk. The specter of a more active legislature could cause a bit of a rethink, making markets ponder the potential for politicians to create winners and losers. This is far from a sure thing, but keep an eye out.