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.
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!
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.
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.
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.
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.
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.