Throughout history, people have loathed paying taxes and hated the tax collector. It’s not dissimilar to how we feel about meter maids today. You know the drill, but the consequences just make you cringe.
At the top of the Market’s Washington wishlist, all year has been tax-reform. The White House revealed an aggressive tax plan that was labeled “once in a generation”. The goal is a tax cut for all Americans and a vast simplification of the overly complicated tax code. The plan received immediate praise and criticism, to the surprise of pretty much nobody. This is the largest attempt to fix the tax code since 1986. The plan sets out three Federal tax brackets for individuals: 12%, 25% and 35%, down from the existing seven rates, which currently tops out at 39.6%. The rate on corporations would be set at 20%, down from the current 35%, and businesses would be allowed to immediately write off their capital spending for at least 5 years. Pass-through businesses would have their tax rate capped at 25%. The White House tax plan also calls for repealing the alternative minimum tax, the estate tax and the generation-skipping estate tax. There is also a proposal for a one-time low tax rate for American companies returning offshore cash. That has been an issue for years, particularly for Tech companies.
A big sticking point to this White House plan is the elimination of the state and local tax deduction. Eliminating it would raise an estimated $1.3 Trillion that could be used to offset the plan’s proposed tax cuts. The issue goes straight to California, New York and New Jersey. Combined, these 3 states account for over 20% of the US population and nearly 40% of the deductions. This tax plan under its framework would actually result in higher taxes for many Americans, when it is being billed as a tax cut for everyone. Both Republicans and Democrats, particularly in these 3 states, are digging deep into the limited details. Further details are expected in October. The White House said they are open for negotiations on the state and local deductions but the 20% corporate rate is not negotiable. Now the hard part begins. Getting enough votes to pass will come with challenges. There are proponents and opponents on both sides. Our sources believe ultimately a deal gets done, with many concessions and a corporate tax rate at 22-25% and in 2018, not this year. Let the Congressional games begin…
2017 continues to be a year with few rivals. September closed positive on the S&P for the first time since 2013. That certainly wasn’t expected. That sets up an interesting Q4, which is historically the strongest period on the calendar for stocks. As Washington keeps pushing back and forth on party politics, things are getting a little more unsettled overseas. The Spanish referendum vote is posing an increasing risk to European stability. Germany’s election secured Angela Merkel’s leadership, but the momentum has swung towards nationalism. Brexit talks continue but how the exit will go is anyone’s guess. Studies are showing that North Korea has made significant progress in their nuclear capability, which is much more sophisticated and dangerous than thought. Iran is considering abandoning the agreement in response to US comments. The world is far from stable.
This Market has found a way to stay up under any and all circumstances. It’s really quite remarkable. Investing is indeed a marathon, but there are so many sprints and lags along the way. There has been a major shift in Market leadership of late. For most of the year, the high-flying Tech sector dominated the gains. But in the last few weeks, Growth leadership has moved to Value. Tech and Health Care handed the baton to Energy and Financials. Energy was up a whopping 10% in September, by far the best performing sector. 2017 has been a tough year for Energy. But it is no longer the worst performing sector on the year and has serious momentum. Financials probably stand to benefit the most with a tax plan passage and were already moving higher with higher rates. Tech and Health Care are still the best performers on the year, but the leadership spread has shrunk. We are now 3 quarters down for 2017. The final 3 months will be eventful. Hold on for the ride. It’s been a Remarkable Market Marathon. Say that 3 times…
Our Fall Newsletter will be out next week, mapping out how we see and plan to position for year-end.
Have a nice weekend. We’ll be back, dark and early on Monday.
Mike
