Daily Commentary

MarketMinder’s View: As always, MarketMinder doesn’t make individual security recommendations. But we do think investors benefit from doing thorough due diligence and knowing all relevant facts about any investment they are considering, and we bring you this piece because private funds’ tax implications are a big factor … and one that doesn’t get much mention. This article highlights a study showing how much taxes can eat at these investments, knocking a full two percentage points off annualized returns. The control group, which invested in publicly traded assets, had a smaller tax burden and higher post-tax returns. “If you think about it, that makes perfect sense. An index fund holding publicly traded stocks can generate almost no tax bills for as long as you own it, especially if it’s a broadly diversified ETF. On the other hand, private-credit funds specialize in high-interest loans; many hedge funds trade rapidly, generating short-term capital gains; private-equity funds produce big payouts when they sell portfolio companies. Other alternative strategies, including private real estate, also tend to produce titanic tax bills.” Obviously, any study dealing with portfolio simulations will have some flaws, as the article concedes. And in tax-deferred accounts, the calculus changes. But private funds are spreading far beyond 401(k)s and traditional IRAs, making it important to take a cold, hard look at the tax math. “Remember that with publicly traded stocks, dividend income is usually low and you can defer capital gains at will. With private funds, however, if you’re a typical upper-income individual investor, [financial planning researcher Andrew] Ang thinks a ‘reasonable assumption’ is that your after-tax rate of return would be roughly one-third lower than the reported pretax return.” Think long and hard about how that meshes with your long-term goals.

MarketMinder’s View: Mark your calendars! UK Chancellor of the Exchequer John Healey has scheduled the next Budget for October 28, teeing up 89 days of speculation and, if recent history is a guide, Treasury trial balloons. We won’t hazard a guess as to what ends up in this fiscal policy package, but a summer full of rumors and alleged Treasury leaks would likely help markets pre-price it and raise the likelihood the final product will be milder than feared (or hoped). That is the story of the last two summers. Former Chancellor Rachel Reeves’s Treasury floated many, many trial balloons before the 2024 and 2025 Budgets, gauging markets’ and the public’s reaction—and then fine-tuning, watering down or scrapping those that received the proverbial heckler’s veto. Both Budgets ended up bringing some relief by merely tinkering with taxes at the margins. If this happens again, rumors may hit sentiment and spark volatility at times, but they help markets price probabilities and move on.

MarketMinder’s View: The common reaction to yesterday’s Fed meeting: Fed head Kevin Warsh’s credibility took a big hit because the Fed didn’t do or predict anything. “… Investors believe the Fed won’t act immediately on inflation readings that by Warsh’s account have been above the Fed’s 2% target for at least 63 months, and that it may have to act more aggressively later as the economy heats up for the long haul.” As the commentators quoted here indicate, because Warsh didn’t communicate “clearly or explicitly,” market participants don’t know what it would take for the Fed to hike even though the data supposedly indicate the central bank should—and as a result, “the bond market puked on him [Warsh].” That vivid, overwrought language aside, all this handwringing over Warsh’s words says more about central bank pundits and market analysts and their own personal (misperceived) views than anything about the new Fed head. To start, 10-year yields jumped all of six basis points Wednesday (per FactSet), which is not huge. The S&P 500 dropped 1.5% on the day but regained it Thursday (also FactSet). Moreover, this fixation on rate hikes because of the recent pickup in inflation is misguided, too, as it assumes certain categories (e.g., semiconductors and energy) drive higher prices across the economy. Wrong—inflation is a monetary phenomenon, so broad money supply growth matters more than how a handful of volatile price categories are faring. Contrary to the conventional wisdom, Fed hikes today would risk a mistake—as Fisher Investments founder and Executive Chairman Ken Fisher wrote in the New York Post this week, if the Fed and other central banks hike too aggressively, that could flatten or even invert the global yield curve, discouraging lending and weighing on growth. Don’t follow the crowd here, folks—hikes aren’t what the US economy needs right now. As for the credibility claims, what is more credible: Saying you will do X if Y happens and then changing your mind, as past Fed heads did, or remaining nimble to adjust to evolving conditions without having to U-turn?