What a long, strange year it's been!


US stocks celebrated the 30th anniversary of the 1987 stock market crash by making yet another all time high.  US stocks as represented by the S&P 500 are up 16.9% YTD, double our forecast at the start of the year. The S&P 500 made 51 new records so far this year - 25% of trading days.

Unemployment is at 4.2%, the lowest level since February 2001, while a record 146.6 million Americans are employed. In labor markets, the only reason for concern is that the participation rate remains 4% below the all time record of 67.3% set in 2000, which means that about 10 million Americans who SHOULD be working have dropped out of the labor force. 

Real median household income, which grew from $49,335 per year per family in 1984, peaked at $58,665 in 1999, declined to as low as $53,331 in 2012, finally surpassed 1999's record level in 2016 at $59,039 and is on track for a new record in 2017.

In December 2016, average home prices passed the previous record set in July 2006 (before the 2008-9 financial crisis).

As President Trump likes to brag, US stocks are up 25% (actually 23.2%) since his election. This sounds impressive until we recall that the S&P 500 is up 266.8% since the start of the Obama administration. We would love to see evidence that Trump's policies are boosting the economy, but our conclusion so far is that the President is simply taking credit for trends that had already been in place over the previous eight years. 

Everything seems great, so why do we have that "walking on thin ice" feeling? As things are now, so shall they NOT be a year from now - better or worse, but not the same.

The Trump Tax Plan

Of the 25% gains in stocks of the last year, about 10% can be attributed to a rebound in S&P 500 earnings, which is based on an upswing in the world economy. Another 5% is attributable to an increase in the value of overseas earnings from a 9% decline in the value of the dollar. The remaining 10% is based on the expectation that US Corporations will receive a huge windfall from the proposed tax cuts.

We'll write more on the topic of tax later this fall as the tax revision policies become more substantial. Our initial reaction is negative - middle class tax-payers, including most of our clients, will see a tax INCREASE if the deductibility of state and local taxes go away. Additionally, 401K contributions are reduced from the current $18K/year to $2K/year, and an increased family exemption reduces the value of the mortgage interest deduction. 

If you feel this is unfair, contact your senators and congress members through https://www.callmycongress.com/ to register your outrage.

The beneficiaries of the tax proposal include the 11,000 families who pay $20 billion annually in estate taxes. About 4.7 million families pay AMT (Alternative Minimum Tax), which is also under review. Corporations would see a reduction in the top rate from 35% to 20% while accelerating deductions. In fact, S&P 500 companies currently pay an average of 24.1% so a reduction of only 4% would not be that material.

The greatest beneficiaries are earners in the Top 1%, who would see an average tax cut of $130K. The tax plan seems tailored to benefit one family in particular. Assuming the President's net worth is truly $3.1 billion, his heirs would save about $1.7 billion in estate taxes. In the meantime, eliminating the AMT would reduce President Trump's income tax bill from 25% to about 4% (given the highly favorable tax treatments of real estate investments).

What's the probability of these tax cuts going through? 

Various estimates show that the plan as is would add $5.8 trillion (presently $20.4 trillion) to the national debt over 10 years. Economists generally regard the benefits of tax cuts - faster GDP growth, higher investment by corporations - as Voodoo. As we have commented in the past, tax cuts have correlation with economic growth - Presidents Clinton and Obama both raised taxes, yet presided over economic growth. Presidents George W. Bush and Ronald Reagan cut taxes. The Bush Presidency ended in the Great Recession, while Reagan saw mostly gains as the country recovered from the Nixon/Ford/Carter years.

No Democratic senator will vote for such a plan. On the Republican side, Rand Paul is already a hard no. If two more "deficit hawks" on the Republican side defect, the tax plan won't have the necessary 50 votes to become law. We don't see the current proposals making it past the legislative process, but much horse-trading remains between now and year end (the stated delivery date).

Stock investors who are counting on such a plan could well sell off stocks by 10% - the biggest risk we see to our clients' portfolios over the next 6 months - if no cuts materialize. We're not jumping out of stocks per se since our time frame for stock investing is always 5 years. However if a client has a financial need due in the next 1-4 years, for sure we are setting aside those funds now.

The Trump Show

Coastal elites and the majority of Americans at this point have concluded, to quote Secretary of State Rex Tillerson, that President Trump is a "f***ing moron."  With no significant legislative wins to date, our president looks very much the lame duck. Yet, he still commands the loyalty of an army of enablers and enough of his "base" to have some influence. With the administration in shambles and the President's itchy Twitter finger, who can predict how that influence will play out? So far, no harm to the stock market, but we are hardly reassured.

Updating our Market Commentaries!

For much of the last 20 years, our Market Commentaries have focused primarily on investing. We wrote 1 to 3 in-depth pieces per quarter on developments in the financial markets, each of which ran to as much as 10 to 12 pages.

In response to recent client feedback (for which we are always grateful) we are changing the format of our commentaries to shorter, more frequent newsletters. We will also include a broader selection of topics.

You will continue to receive our investment-driven Market Commentaries quarterly, written by David Edwards. In addition, we will also put out editorial content on topics from financial planning to personal finance, investment advice and retirement and estate planning. This content will be provided by Wealth Advisors Samantha Gorelick and Elizabeth Caputo, and Director of Financial Planning Shelley Fischer. We will of course continue to post bulletins to cover significant market events.