A round-up of third-party news stories we believe investors should either pay attention to, or ignore, along with Fisher Investments’ point of view.

You Can Still Cut Your 2017 Tax with These Retirement Accounts

MarketMinder’s View: If you haven’t done so already, you might be able to lower your 2017 tax bill by making contributions for last year to certain types of tax-deductible retirement and health savings accounts. This article lists these accounts, contribution limits and deadlines for doing so. Enjoy!

The Biggest Beneficiary of the New Tax Changes Just Might Be the Accountants

MarketMinder’s View: Uncertain about tax law changes on this year’s returns? You aren’t alone! Especially if you operate a small business. As this article states, “of the 26 million businesses in the United States, 95 percent are pass-through entities and approximately 99 percent of those businesses have less than 10 million in annual sales.” The new law allows qualifying pass-through entities to deduct up to 20% of their income. But who qualifies? “The text explaining this deduction spans a full nine pages and cross-references more than 20 other sections of the tax code.” This isn’t for the faint of heart, so if you are wondering whether and how you may benefit, consult a tax professional. More broadly, this is more evidence that the biggest winner from a complex tax code is the tax prep industry. Simplifying the tax code would likely free up significant time, resources and money, but we learned long ago not to hope Congress passes anything on this front. Especially not when the second-biggest winners from complex tax codes are the lawmakers who like appeasing constituents and lobbyists with niche tax goodies. There is probably just too much political capital invested in a complex tax code for lawmakers to do away with it in our lifetimes.

Fed Raises Rates and Signals Faster Pace in Coming Years

MarketMinder’s View: About the only thing investors need to know about the Fed’s decision to raise the fed-funds target range by 0.25 ppt—the sixth rate hike in this cycle—to between 1.5% and 1.75% is that it remains below the 10-year Treasury yield, which closed at 2.89%. A positively sloped yield curve, where short-term interest rates are below long rates, supports lending growth and is a good leading economic indicator. Everything else discussed herein—how many more hikes are likely this year and next, what FOMC members think “neutral” rates should be, what their growth and inflation expectations are, etc.—is trivia. The Fed routinely “guides” one way but acts another due to its vaunted “data dependency.” We advise setting aside all the speculation and instead weighing the Fed’s moves as they happen.

The Paradox of European Stocks’ Failure to Catch Up With U.S.

MarketMinder’s View: European stocks outperformed last year, but some are questioning their staying power this year based on the euro’s strength, Fed rate hikes, US tax cuts, relative expansion length, sector differences and Brexit. Those are a lot of concerns! The problem is that pretty much none are reliable drivers of stocks, which move most on the gap between reality and expectations. Currently, both the US and Continental Europe’s fundamental outlooks over the foreseeable future look great to us. The salient difference for investors, in our view, is sentiment towards US stocks seems warmer than in Europe, as evidenced here by the cheer over US tax reform compared with the aforementioned skepticism toward most things Europe. (Which this article illustrates.) In our view, the potential for positive surprise is higher there. As for whether eurozone stocks “catch up” with America’s cumulative returns since 2009, maybe they don’t. It is irrelevant to the opportunity looking ahead, though, as leadership shifts back and forth—has during this cycle, too.

EU Executive Unveils Plan for Digital Tax on Tech Giants

MarketMinder’s View: “The European Commission (EC) on Wednesday presented its proposal to slap multinational tech behemoths with a special levy, dubbed as ‘digital tax,’ that is expected to raise about €5 billion ($6.14 billion) a year. If implemented, the measure will force digital companies with significant presence in Europe to pay a 3-percent tax on their EU revenue, generated through online advertising, paid subscriptions and the commercial use of personal data.” $6 billion sounds like a lot, but scaled against these companies’ revenues (and profits), it isn’t. For example, FactSet estimates a certain US tech company with an edible name earned about $46 billion last year—a digital tax bill somewhere in the hundreds of millions is tiny in comparison. Plus, this is all just hypothetical. “The proposals must still be approved by the European Parliament and the bloc’s member states to come into force. EU reforms need the backing of all member states to become law.” Tax havens like Ireland and Luxembourg have veto power, as decisions like this require unanimous member-state approval, so this thing is far from set.

Europe’s Pitch to Trump: You Already Have a Good Trade Deal

MarketMinder’s View: In the process of documenting the EU’s efforts to gain an exemption to the Trump administration’s planned steel and aluminum tariffs, this piece highlights a couple facts we believe show the risk of a full-blown US – EU trade war, which many fear, is low. First, next to over $1 trillion in annual US – EU trade, the proposed tariffs (and potential EU countermeasures of “up to €6.4 billion”) are miniscule. Second, they aren’t novel: “The U.S. and the EU each apply tariffs on roughly 10,000 different product categories.” Third, both parties have imposed higher tariffs on select products in the past without major escalation—like the US’s “levies of as much as 350% on some tobacco products such as snuff and up to 32% on some cotton apparel. European officials have shielded farmers such as citrus growers with up to 34% tariffs on products including some juices, and still maintain a 10% levy on cars despite boasting six of the world’s 20 biggest auto makers.” Despite these exceptions, “duties across the Atlantic average below 3%,” and the US and EU trade more with each other than anyone else. So while the risk of a trade war is worth watching, putting the present spat in context undercuts concerns of a broader conflict. For even more context, see Luke Puetz’s 3/7/2018 commentary, “Scaling Tariffs and Reviewing History.”

China Vows to Open Its Markets Further in Response to Trump’s Tariff Threats

MarketMinder’s View: Elsewhere on the trade beat, it appears the Trump administration may soon announce $60 billion in tariffs on “more than 100 products that the president argues were developed using trade secrets that China stole from U.S. companies or forced them to hand over in exchange for access to its massive market.” This is something US firms operating in China have long complained of and China has long promised to stop doing. Premier Li Keqiang renewed those promises today while further pledging to “slash tariffs for ‘day-to-day’ consumer goods, phase in zero tariffs for imported drugs, especially cancer medications, and even relax access to service sectors such as elderly care, health care, education and finance.” Time will tell whether China follows through—and since the US tariffs aren’t final yet either, all of this is hypothetical. But we think it is sort of interesting that the threatened tariffs seem to be goading freer US – China trade. Whether or not this is what the Trump administration intended—unknowable for those of us outside the inner circle—this is more evidence free trade and protectionism are more nuanced issues than investors seem to think these days.

Up, Up, Up Goes the Economy. Here’s What Could Knock It Down.

MarketMinder’s View: This long piece lists many alleged threats to the US economy—debt, immigration limits, tariffs, too-lax financial regulation, inflation, an overheating economy, rapid wage growth, insufficient wage growth, Fed rate hikes, delayed Fed rate hikes—too many to address here. Instead, take this as a fair snapshot of sentiment towards the US. Optimism is widespread, as folks broadly appreciate the economy’s strength (albeit occasionally for backward-looking reasons). A large number seem to be starting to project growth years into the future, which is something we’ll likely see more of as the bull market nears its end. But for now, lingering caution helps keep euphoria at bay. Despite their cheer, investors worry dangers lurk and question how long the good times can last. Predicting recessions with certainty is impossible, but articles like this one suggest the euphoria that often typifies market peaks isn’t here yet. 

UK Inflation Eases More Than Forecast

MarketMinder’s View: “Consumer price inflation slowed more-than-expected to 2.7 percent from 3 percent in January, figures from the Office for National Statistics revealed Tuesday. This was the weakest figure since last July, when prices rose 2.6 percent. Economists had forecast an annual rate of 2.8 percent. Underlying inflation that excludes energy, food, alcoholic beverages and tobacco, eased to 2.4 percent from 2.7 percent in the previous month. Core prices were expected to gain 2.5 percent.” Most coverage attributes the inflation slowdown to currency effects—as the pound’s lower value in early 2017 falls out of year-over-year calculations, cheaper imports weigh on inflation. This is a factor, but it is far from the only one, in our view. Inflation is a monetary phenomenon—it rises when too much money is chasing too few goods and services—which means monetary metrics like the yield curve, lending and money supply growth are probably more telling. Presently, none signal surging prices ahead—suggesting to us fears of a Brexit-induced consumer squeeze remain overwrought. Lastly, as always, we caution against using this report to guess whether (or why) the Bank of England will hike rates soon. Central bankers are an unpredictable bunch, and guessing right doesn’t tell you where stocks are headed anyhow. 

Taiwan's Export Orders Post First Decline in 19 Months on Lunar New Year Effects

MarketMinder’s View: “Taiwan’s export orders in February unexpectedly fell 3.8 percent from a year earlier, mainly due to Lunar New Year distortions, although broader demand for the island’s technology sector appeared to remain intact. … For January and February combined, export orders in Taiwan’s trade-reliant economy totalled $75.52 billion, rising 8.3 percent from a year earlier, the data showed, slower that the 12.7 percent growth seen in the previous corresponding period.” Monthly economic data out of Asia typically go haywire at the start of the year thanks to the Lunar New Year holiday’s shifting timing, so the combined January – February figure is more useful. Its slowdown from the same period in 2017 isn’t super, but growth is growth—and given Taiwan’s central role in major Tech firms’ global supply chains, this signals external demand for electronics components remains in solid shape.

How Lawrence Kudlow’s Rise Breathes New Life Into Indexing Capital Gains to Inflation

MarketMinder’s View: Could a capital gains tax break—which would adjust cost basis for inflation so that long-term owners of a stock aren’t “‘being taxed when they sell it on a phantom gain when a big part of it is due to inflation’”—be part of a potential bill to extend last year’s tax cuts? Several policy wonks want it, including the Trump Administration’s incoming National Economic Council chief, Larry Kudlow. But as this article shows, his presence in the White House doesn’t mean a whole lot. The George H.W. Bush White House considered it 26 years ago and decided it was probably illegal. Congress would face opposition from those inevitably arguing it is a tax break for the wealthy. If President Trump tried to accomplish it via executive order, legal challenges would probably arise. In short: Don’t overrate any one person’s ability to bring about change. 

France, Germany Seek to Overcome Differences on Eurozone

MarketMinder’s View: Quelle grande surprise—efforts to continue pushing the eurozone to “ever closer union,” supposedly spearheaded by France and Germany, remain glacial. There remains a widespread belief that without reform, the eurozone will lurch from crisis to crisis without meaningful growth, leading to frustration whenever the reform drive stalls. However, the last five years disprove this theory: Even without an overhaul of its architecture, the eurozone has achieved broad-based expansion, with GDP surpassing pre-crisis peaks in most member-states. The banking system has become far healthier, with capital ratios up, nonperforming loans down and lending on the rise. We agree, philosophically, that the eurozone will eventually have to come to grips with becoming a fiscal transfer union or head in another direction, but that is a long-term structural issue, not a cyclical one. Plus, where structural changes are concerned, a slow approach usually proves more beneficial than rushing into something.

"World Upside Down': As Trump Pushes Tariffs, Latin America Links Up

MarketMinder’s View: While this overrates President Trump’s protectionist tendencies, it is an otherwise interesting look at falling trade barriers among Latin American countries. Much as the eurozone crisis prompted UK businesses to diversify away from Europe and build stronger trade ties with the America and Asia, it seems fear of diminishing US trade ties is prompting Latin American leaders to take a similar tack. While bilateral and regional trade deals can come with their own form of protectionism, depending on the details, this does provide further evidence global trade isn’t anywhere near as endangered as most seem to fear.

European Union and the UK Agree to a Brexit Transition Period of 21 Months

MarketMinder’s View: Another bit of Brexit uncertainty has now evaporated: The post-Brexit “transition period” will last through December 31, 2020. During this window, the UK will remain subject to EU laws and in the single market, but it won’t have a say over EU rulemaking. “The transition period is aimed at giving businesses and citizens, both in Britain and the EU, more time to prepare for the U.K.'s complete departure from the bloc. It will also allow negotiators time to conclude their talks on how the relationship between the EU and the U.K. will be starting from 2021 — which at the moment is far from certain.” Though December 2020 is a bit earlier than what UK Prime Minister Theresa May initially sought, it still gives plenty of time for businesses and investors to discover any unintended consequences in the eventual Brexit agreement well before they take effect, which should help reduce surprise power. Long lead times often reduce regulatory changes’ ultimate market impact.

Congress Risks Another Shutdown as it Struggles to Nail Down Spending Bill

MarketMinder’s View: Looks like déjà vu all over again! While Congress ended the briefest of shutdowns in February by agreeing to a broad two-year spending agreement, they didn’t appropriate funding, kicking that can until this Friday, when a temporary stopgap runs out. Now all the usual sticking points are back. Leaders in both parties hope to reach an agreement tonight. Maybe they do, maybe they don’t. But whether we get an actual deal, another stopgap or another shutdown, history has repeatedly shown government shutdowns don’t cause bear markets or recessions. As we noted here when the government shut down in January, “This is probably why none of the other 18 shutdowns since 1976 brought a meaningful downturn, as the nearby table shows. Returns during the shutdowns themselves are variable, but returns afterward are positive much more often than not. No bear market ever began with or because of a government shutdown. Nor did any recession.”

'That's the Game': Tax Planners Look for Loopholes Amid Uncertainty Over New Law

MarketMinder’s View: Perhaps predictably, high-earning small business owners (think doctors, lawyers, accountants and financial planners) exempted from the 20% tax deduction for pass-through businesses are racing the clock and doing creative things to get in on the fun—really creative, like spinning their parking garages off as separate businesses. We point this out not to give you ideas, but to show how much effort tax changes’ purported losers will go to transform themselves to winners. (Exhibit B: state lawmakers’ attempts at state income tax workarounds in California, New York and Maryland.) This is just one of many reasons projecting the economic and federal budget impact of complex tax changes is guesswork—and why they have no preset market impact.

Toys R Us's Baby Problem Is Everybody's Baby Problem

MarketMinder's View: Oh demographic fears, how we have missed thee! While declining birthrates could very well have impacted Toys ‘R’ Us, whose demise saddens those of us who remain Toys ‘R’ Us Kids at heart, it is a stretch to extrapolate that into long-term economic problems for the entire country. Yes, at its most basic, economic growth is partly a function of population growth—but it is also a function of capital and technology. So it isn’t nearly as simple as this article portrays. Plus, long-term population trends are unknowable. Immigration could change the calculus wildly. So could rising birthrates in the future. Always be wary of anything relying on decades of straight-line math, and remember markets generally don’t look further than 30-ish months ahead for this very reason.

Court Overturns Obama-Era Rule on Retirement Planners

MarketMinder's View: The Labor Department’s fiduciary rule for brokers working with retirement accounts suffered another blow yesterday when an appeals court ruled against it. Much of the focus is on whether or not the rule survives and what that means for retirement investors, as this ruling contradicts another circuit court’s verdict in favor of the rule, potentially teeing up a Supreme Court battle. We think most of this debate is a distraction—the rule amounted mostly to additional paperwork and mountains of disclosures, and it had get-out clauses enabling brokers to keep doing business as usual. To us, it looked highly unlikely to improve the quality of advice investors receive (which no regulatory standard can actually do) or ensure brokers act in clients’ best interests. That said, what is most interesting to us about this is the court’s rationale: “‘That times have changed, the financial market has become more complex, and I.R.A. accounts have assumed enormous importance are arguments for Congress to make adjustments in the law, or for other appropriate federal or state regulators to act within their authority,’ the majority wrote in their opinion. ‘A perceived “need” does not empower D.O.L. to craft de facto statutory amendments or to act beyond its expressly defined authority.’” This is a pretty striking blow against a trend we call government creep, which is regulatory agencies’ increasing tendency to try to write laws without going through the legislative process—a trend that raises uncertainty and could discourage risk-taking. Seeing the courts take a stand against it could help shore up confidence.

UK Banks Face Re-Run of 'Doomsday' Stress Tests – but With Higher Hurdles to Clear

MarketMinder's View: For the first time in a while, bank stress tests will perhaps be interesting. The BoE will keep the same “adverse scenario” it used last year (falling home prices, GDP contracting by -4.7% and interest rates jumping to 4%), but in addition to setting the bar higher, it will also incorporate new global accounting standards called IFRS 9, “which require banks to recognise losses on their books earlier. This should mean banks recognising deeper losses earlier in a crash, potentially adding pressure sooner in a downturn. Theoretically it would not increase the total amount of losses over an economic cycle.” Stress tests aren’t a reliable predictor of how bank balance sheets will fare during an actual crisis, but a controlled test of the new accounting rules might be insightful. Stay tuned.

The Bear Stearns Bailout Didn't Avert the Financial Crisis, It Was the Crisis

MarketMinder’s View: In short, here is the thesis: By “bailing out” Bear Stearns in March 2008, the Fed and Treasury lulled everyone into believing all failing financial firms would receive government lifelines, removing incentives for these first to shore up their equity and capital positions and ultimately creating panic when they didn’t give Lehman Brothers a similar rescue. On the one hand, we agree with the larger point that government inconsistency drove the sheer panic in autumn 2008, but it is too simplistic to look only at Bear and Lehman. The feds also put Fannie Mae and Freddie Mac into conservatorship and, one day after letting Lehman fail, forced AIG to accept a nationalization that wiped out shareholders. Investors saw a government arbitrarily picking winners and losers and had no way to handicap the likely winners. Hence, panic. Moreover, the Fed and Treasury did not bail out Bear Stearns. Rather, when it went bankrupt, they asked JPMorgan Chase to purchase it and helped fund the transaction. Taking the supposedly toxic assets off Bear’s balance sheet was a means of assisting JPMorgan. In Lehman’s case the Fed and Treasury declined to enable a similar acquisition, this time by Barclays. Also note that in both instances, the banks were not technically insolvent. Lehman’s assets on the day it declared bankruptcy exceeded its liabilities. Rather, they were illiquid: They couldn’t access funding needed to cover short-term obligations, and they couldn’t sell assets in a pinch. Basically, these investment banks experienced bank runs. Traditional banks can usually secure funding from the Fed in this scenario, but that option wasn’t available to investment banks. This is also why Morgan Stanley and Goldman Sachs reorganized as bank holding companies and Merrill Lynch eventually merged with Bank of America—it gave them access to the Fed’s discount window, a crucial funding lifeline. As for whether the crisis would have ended in early 2008 if JPMorgan didn’t buy Bear, that is sheer speculation. We will never have a counterfactual. But it seems overly simplistic to say the vicious circle of asset writedowns and firesales—which stemmed from the imposition of mark-to-market accounting rules on banks’ illiquid, held-to-maturity assets—would have stopped then and there.