Market Overview
It is getting really hard to feel that I am not writing the exact same thing about the markets each quarter. But gains continue to roll in. The S&P 500 had a strong quarter, up 4.48% from June 30. Small cap stocks also had a good showing after weakness earlier this year, up 5.67%. Over 12 months US large and small caps are up 18.61% and 20.74%, respectively. Very little to complain about there! International markets haven’t been asleep either, with the MSCI EAFE up 5.40% for the quarter and 19.10% over twelve months. Emerging Markets continue their current run, up 7.02% for the quarter and 19.73% over the last year. Bonds barely moved for the quarter with a gain of 0.85%% for the Barclays’ Aggregate Bond and 1.06% for Barclays’ Municipal benchmark.
Market volatility has been unusually low to say the least. Any way you look at it, stocks have been steadily and quietly marching upwards. Daily market moves have been small, and we have barely had any kind of drawdown in 2017 to speak of. Like you, I’m not too sure what any of this means as investors, except that we should probably think “boy, this is nice” and “this probably won’t last forever.” It feels easy right now to make money in markets, and experienced long-term investors can remember that it isn’t always this way. There are scary times, economic calamities, international incidents and stock market disasters both in our past and in our future. So we’ll take the gains from a nice quiet period while the market offers them, and be prepared for the winds to change when they will. We’ll remain disciplined in our approach according to rules and systems previously established, and find long-term success in doing so.
Economic Update
The US economy still looks quite strong, if unexciting. I think I have been saying that for at least 5 years now. Thankfully, nonsensical discussion of looming recession seems to have disappeared, for plenty of good reasons. Second quarter real GDP growth was 2.2%, a number that has not varied significantly in some time. The labor market is in very good shape as job openings in the US reached 6.17 million in July, the highest number on record.
Real (inflation-adjusted) consumer spending has shown modest growth since the recession, a trend that steadily continues today.
After a long slide past the end of the 2008-2009 recession, real median household income has finally started to turn around, posting the highest levels over the last 30+ years.
Inflation remains subdued, with August numbers coming in at 1.9%, below the Fed’s stated target and below long-term averages.
Housing markets in the US are healthy, and prices have ticked steadily upwards for several years. In July 2017 home prices gained 6.0% nationally over the previous 12 months.
In part thanks to housing and a robust stock market, household net worth in the United States continues to surpass all-time highs (note: this is what happens over time! Markets go up).
By all accounts, things have been pretty darn good. I don’t know what happens next and we should have learned by now to expect the unexpected. Something that we didn’t see coming or something that we underestimated is going to happen eventually. It always does. We should be mentally, emotionally and financially prepared for the good times to not last forever, in the economy and in the markets.
Tax and Legislative Updates
After a fair amount of drama, two GOP attempts to repeal and replace the Affordable Care Act (aka Obamacare) have failed. It seems that for now this will no longer be a legislative priority as congress shifts focus to tax reform. The President recently released the “Unified Framework for Fixing Our Broken Tax Code,” a proposal aimed at reducing corporate and individual income taxes and attempts to simplify parts of the tax code. In broad strokes, the proposal would:
- Roughly double the standard deduction (from $12,700 to $24,000 for married filers) and at the same time eliminate the personal exemptions ($4,050 per person);
- Eliminate many itemized deductions include state and local income taxes;
- Increase the child tax credit (to an undetermined amount);
- Consolidated 7 tax brackets down to 3;
- Eliminate the Alternative Minimum Tax;
- Repeal the estate tax;
- Cut corporate tax rates from 35% to 20%;
- Introduce a cap on pass-through entity tax rates at 25%;
To be sure, this proposal includes some well-agreed upon changes (such as killing the AMT, which has evolved well past its original intended purpose) and many pieces that will be controversial and difficult to build consensus around (including the elimination of state and local tax deductions, very popular with representatives from high income tax states). Already this year we have seen Congress struggle to find consensus on allegedly popular changes to health care law, and it may be a long and difficult road to truly reform the tax code. Not everything proposed is a simplification – introducing a cap on tax rates for pass-through entities will involve complicated accounting as well as incentivize many tax filers to recategorize income. For more detail, the Tax Policy Center has an excellent writeup and review of the proposed changes: An Analysis of the House GOP Tax Plan.
Bason Asset Management 