Taxes, tariffs, & bitcoin…
We separate the relevant from the noise, to bring you timely content that impacts your investment portfolio and your retirement!
This month’s newsletter starts off with a discussion of the stock market, and the wild ride that we’ve experienced so far in 2018. We then move on to the highlights of the new tax plan, a discussion about Bitcoin (all hype?), and possible tariffs. We wrap up with a couple more reasons to be positive about the economy – a capital spending boom and the U.S. continued march toward being the world’s #1 oil producer. Enjoy this month’s newsletter!
Market Commentary – Q1 2018
Stocks incurred their first significant drop in February, following 404 trading days (a record!) without a 5% correction[i]. Stocks re-tested those lows in March following the Trump administration’s announcing of trade tariffs on China.
While corrections are unpleasant, they are necessary to clear out speculative excesses (i.e. blow off steam) and reset stock values at more appropriate levels. We do anticipate more volatility in 2018, but this also provides good entry points for those with funds to invest.
We remain bullish because so many investors are cautious and economic activity is accelerating both here and abroad.The time to be worried about the stock market is if the Fed gets much more aggressive on their tightening policies, or if we start seeing consumer-driven excesses like overspending, overborrowing or overconfidence.
Stock market euphoria and “irrational exuberance” are what typically precedes a significant and prolonged downturn in stocks. Just talk to your neighbor or watch CNBC and you will notice that irrational exuberance is nowhere to be found at present. In fact, many investors are scared. $9.6 billion was pulled out of stocks between March 14th – March 21st, according to Reuters.
A concern that we hear often these days is: are stocks expensive? We definitely don’t think so. In fact, stock valuations are right in line with historical norms. Stocks are priced at 16.5x forward earnings which is only slightly higher than the 50-year average of 15.6x. To top it off, earnings are expected to grow by 16% in 2018 & 8% in 2019[ii].
Another interesting (and perhaps bullish) trend is that the U.S. stock market is shrinking. IPO activity is way down – largely due to the ease of access to venture capital funds and the regulatory burdens of bringing a company public.
The lack of IPOs and new publicly traded companies, coupled with merger and acquisition activity is shrinking the stock market base by 4% a year. Plus buybacks shrink the stock supply by another 3% a year. In all, that’s 7% of the equity base shrinking each year! It’s a classic supply and demand issue that will likely continue to play out for years to come.
New Tax Plan – Highlights
When you do your taxes for 2018, your tax situation might look a lot different than in prior years. Below, we summarize some of the key changes that take effect with Trump’s tax plan.
- A doubling of the estate-tax exemption to just under $11 million for singles and $22 million for couples.
- Most pass-through entities such as S corps and LLC’s will see a 20% deduction on income.
- The top corporate tax rate drops from 35% to 21%.
- $10,000 cap on deductions for state and local income taxes, property taxes, and real estate (previously these taxes were fully deductible). This hits homeowners and employees particularly hard in Oregon.
- Mortgage-interest deduction (effective for homes purchased as of December 15) lowers from $1 million to $750,000 and eliminates the deduction for interest on home-equity loans.
- Alternative Minimum Tax (AMT) exemption will be raised from $86,200 to $109,400 for married families. The AMT phaseout threshold raises to $1 million.
- Personal exemption eliminated.
- Standard deduction doubles, and an additional exemption of $1,550 if age 65+
Bitcoin – Just Hype?
According to Don Luskin, Chief Investment Officer at Trend Macrolytics, “Bitcoin is a bubble. Everyone is talking about it. You don’t have an equity interest in some company that profits from technology or owns that technology; it is not a company, it is not a productive asset, it is a commodity – a currency that has no expected return at all. It is not even an investment. It is just a fad”.
We tend to agree with Mr. Luskin and it will be interesting to see how the meteoric rise in bitcoin plays out over the long-term. Regarding cryptocurrencies, Warren Buffet puts it very succinctly: “I can say with certainty that they will come to a bad ending.”
Tariff talk spooked the markets and gave investors a reason to sell stocks in late March. We think this is a bit of posturing by the Trump administration, and the result will likely be a re-negotiation of trade, rather than a full-blown trade war with China. No one wants a trade war – China has a lot to lose too – so the Trump Administration must walk a fine line.
Capital Spending Boom
Top economic advisor, Larry Kudlow, recently said: “We are on the front-end of a business investment boom.” Capital spending has lagged over the last decade, but orders & shipments over the last three months are growing at a 12.9% annual rate.
Projects that were not economical at a tax rate of 35% are now economical at the new 21% rate. Plus, orders don’t count on the books until they are shipped, which means companies are ramping up equipment and projects now but taking delivery in 2018 when expensing kicks-in.
We’re the World’s Leading Oil Producer…Almost!
The U.S. is on the verge of surpassing Saudi Arabia and Russia as the world’s leading oil producer.
According to the U.S. Energy Information Administration, U.S. crude oil production exceeded 10 million barrels a day for the first time since 1970 – double what it was just a decade ago. The driving force behind this massive increase has been increased production from shale, horizontal drilling, and hydraulic fracturing.
This “fracking boom” would not have been possible without oil & gas technological advancements. In 2006, the U.S. was importing 12.9 million barrels of oil a day. Now, we are importing just 2.5 million barrels a day and exporting 1.5 million barrels a day!
We hope you enjoyed reading this month’s newsletter!
All the best,
True North Retirement Advisors
Dave, Ashley, Doug, Melissa, Naomi, & Michele