Fisher Investments Editorial Staff
Taxes

Trump Releases Tax Plan

By, 04/28/2017

If tax season’s conclusion on April 18 left you feeling a little lost, perhaps wishing tax matters could remain front and center in the national conversation a while longer, Wednesday must have been a relief. Top administration officials took to the podium to announce “a once-in-a-generation opportunity to do something really big” with tax policy, and the media went wild with breakdowns, analyst roundups, predictions and opinions pro and con. While we understand the excitement, in our view, all this hoopla makes too much of a loosely sketched proposal with an uncertain future—and one that isn’t inherently bullish (or bearish) for the economy and stocks.

First, let’s get the details—and the caveats.

  • The plan trims individual tax brackets from seven to three: 35%, 25% and 10%. Simpler may be better, but income thresholds aren’t specified, so taxpayer savings aren’t certain. Then too, most deductions—including for state and local taxes—would vanish, leaving only the standard deduction (which would double) and those for retirement saving, mortgage interest and charitable giving.
  • Other proposed individual tax changes include scrapping the estate tax, alternative minimum tax and 3.8% Obamacare tax on certain investment income. There is also a childcare tax break, but no word yet on its size or eligibility requirements.
  • On the business side, the headline corporate tax rate would fall from 35% to 15%. “Pass-through” businesses (including many small firms) whose profits are taxed at the owners’ income tax rates would also pay 15%, down from a 39.6% peak. The shift would end decades of frustration over an uneven playing field between big and small businesses (and possibly spur a boom in “LLCs”).
  • While 35 to 15 may sound like a drastic cut, just a few large corporations pay the highest rate presently, as exemptions abound. These exemptions may also be on the chopping block: Policymakers generally favor simplifying the tax code over reducing corporations’ tax burden, so it seems fair to presume the plan will seek to close most loopholes. Hence, it’s unclear how much/whether corporate taxes would decrease overall—though simplifying would at least cut tax prep costs.
  • Also freeing up resources, corporations would no longer pay taxes on overseas profits, excepting a one-time “repatriation” tax on existing earnings they bring back to the US. Continuing a pattern, the repatriation tax’s size is to be determined, but officials have hinted it’ll be 10%. Whether or not this jolts business investment in the US, easing moving money around the world would be a positive.
  • Another positive: The border adjustment tax—a 20% import levy Congressional Republicans have proposed—isn’t included. Treasury Secretary Steve Mnuchin called it “unworkable” as envisioned by Congress, though he said the administration remains open to it in a different form.

Whew! That’s a lot to chew on. We wouldn’t agonize over the particulars, though. Like any tax reform, it would create winners and losers. But it’s impossible to gauge whether the winners outnumber the losers, because there just isn’t enough information. The devil’s in the details, and there is a long journey from “List of Roughly Sketched Tax Concepts” to fully fleshed-out amendments to the US tax code. It will evolve, likely a lot, as the administration drafts the whole shebang and Congress goes through it with its metaphorical red pen.

Fisher Investments Editorial Staff
Trade, Media Hype/Myths

Trump’s Tariff Tiff

By, 04/27/2017
Ratings364.361111


This timber is for homes, not walls. Photo by doranjclark/iStock.

Did the Trump Administration just fire an opening shot in a trade war with our neighbors to the north? Some media believe so after Commerce Secretary Wilbur Ross announced a 20% tariff on Canadian softwood lumber (used frequently in single-family homes). Many wonder what this all means, from US home builders worried about higher costs to dairy farmers who have soured on their own Canadian trade barriers. However, while markets frequently frown upon tariffs and other protectionist policies, this episode seems more like hot rhetoric and politicking rather than a prelude to a global trade issue with yuuuuuge negative fallout.

Lumber disputes between the US and Canada aren’t exactly new. In 2006, the countries reached an uneasy peace after decades of disputes.[i] The US returned about C$4 billion of C$5.3 billion in tariffs collected from Canadian producers since 2002 and ceased imposing additional duties. In exchange, Canadian producers agreed to cap exports or else pay a tax on goods shipped to the US. However, this agreement expired in late 2015, and tensions have been on the rise. Last fall, the US Lumber Coalition filed a complaint with the Commerce Department, accusing Canadian producers of dumping softwood lumber into the US market—and setting the stage for the Commerce Department’s announcement. Adding to the contentious environment, Trump criticized the Canadian dairy industry last week for shielding its farmers from US competition. And the North American Free Trade Agreement (NAFTA) remains a touchy subject as well.

Fisher Investments Editorial Staff
MarketMinder Minute, Media Hype/Myths

Market Insights: What Trump Rally?

By, 04/27/2017
Ratings1273.992126

In this Market Insights video, we take a closer look at the so-called Trump Rally and what it means for stocks moving forward.

Fisher Investments Editorial Staff
Emerging Markets, Politics

Emerging Market Developments

By, 04/26/2017
Ratings453.377778

While developed-world politics hog all the headlines, there is a lot happening in Emerging Markets—much of it seemingly chaotic. Yet as with their developed-world counterparts, there is more than meets the eye. In some, where headlines might see chaos, markets likely see room for uncertainty to fall. In others, they show the danger of investing on too-high hopes for reform. Even if you don’t invest in Emerging Markets, it’s worth keeping an eye on these trends and understanding how and why markets are reacting—lessons with global applicability.

Turkey Gets Less Murky

Turkish President Recep Tayyip Erdoğan—who has steadily consolidated power since becoming Prime Minister in 2003—took another step toward autocracy on Easter Sunday, when a constitutional referendum gave him sweeping new powers. Opposition groups are challenging the results, citing a host of irregularities, but given Erdoğan has largely purged political opponents from Turkey’s institutions and stacked them with loyalists, the results seem likely to stand. Meanwhile, after a failed coup last summer, Turkey remains in a state of emergency, which was extended after the referendum to July 19, and the authorities have arrested dozens of protesters in Istanbul.

Jamie Silva
Monetary Policy

Now Hiring: The Federal Reserve

By, 04/26/2017
Ratings324.28125

Have a passion for monetary policy? Time to polish up your resume, because President Trump will nominate some new Federal Reserve Board members—and possibly a new chair—in the coming months. Rumor has it he favors folks who prefer setting interest rates according to a set formula (or rule), rather than a “discretionary” approach in which Fed members’ independent judgment rules. This debate probably strikes you as esoteric and far removed from markets. But given that investors have fixated—wrongly, in my view—on the Fed throughout this bull market, the “rules-vs-discretion” divide could become an undercurrent as appointments emerge, with both sides bemoaning the possibility of a mismanaged Fed. To inoculate you against these worries, here is a discussion of why there is little distinction between rules-based and discretionary monetary policy—and thus, wherever Trump stands on this debate isn’t hugely relevant for this bull market.

Ready? Set! Rules! The best known—the Taylor rule—is named for economist John Taylor, whose possible spot on Trump’s shortlist has renewed debate over his ideas. In his own words, Taylor argues the rule would “increase interest rates by a certain amount when price inflation rises and decrease interest rates by a certain amount when the economy goes into a recession.” Sounds simple. But in calculation, the practitioner is required to know the current neutral rate of interest (more on that shortly), formulate a forecast of GDP growth and potential GDP growth (more on that later, too!) and inflation. Then, you mash them all together and, voila, the Taylor Rule shows you where the fed-funds target rate ought to be. If you don’t want to do all that math, you can see the St. Louis Fed’s estimate of how this rule compares to rates presently here.

Whatever the formula, the rule’s primary goal is to keep monetary policy stable and predictable. In opposition, discretionary fans declare there should be just one rule: No rules! Rigid, narrow formulas, they say, keep the Fed from responding flexibly to changing economic conditions. It sounds like the two sides couldn’t be further apart. But the lively debate misses something crucial: Rules or no, central bankers must make lots of judgment calls. That’s why a more rule-bound Fed isn’t practically all that different from a discretionary one—too much is up for interpretation. Consider everything they would need to sort out:

Fisher Investments Editorial Staff
Across the Atlantic, Investor Sentiment

And Then There Were Two

By, 04/24/2017
Ratings544.037037

French voters went to the polls Sunday, and as expected, they didn’t pick a president. They did, however, narrow the field from seven to two, resolving much of the uncertainty surrounding the contest. Markets welcomed the added clarity, opening Monday sharply higher. France’s CAC 40 soared 4.1%.[i] Germany (3.4%), Italy (4.8%), Spain (3.8%) and the rest of Europe rallied, too.[ii] Even though we still don’t know the ultimate winner, and even though anti-euro Marine Le Pen made it to the runoff, narrowing the field helps markets form probabilities and assess the likelihood of France’s next president pulling the country out of the eurozone. That clarity is enough, and it’s a microcosm of what investors should expect from eurozone stocks in what we expect to be a year of falling uncertainty.

Pre-election uncertainty weighed on French and European stocks in recent weeks—particularly as leftist candidate Jean-Luc Mélenchon surged in the polls in April, fueling fears that the final round would pit him against Le Pen, guaranteeing France’s next president would be an anti-euro outsider. Before the election, French stocks had lagged eurozone stocks most of the year, and both France and eurozone stocks slid from March 28 through the election.

Exhibit 1: French and Eurozone Stocks Pre-Election

Todd Bliman
Into Perspective

The ‘Passive Revolution’ That Quite Simply Isn’t

By, 04/24/2017
Ratings933.989247

These days, it’s easy to find articles in financial media arguing passive investing is “rising,” to active investing’s detriment. Far harder to find: Convincing evidence this rise is happening, or that these passive investors actually exist.

Heavy readers of financial media are no doubt aware of the alleged “passive revolution” media touts as sweeping the investment world. Virtually every major financial publication has run an article—nay, a series of articles—on the subject. Most tout index products, noting what they see as the folly of active management’s attempts to beat markets, and offer seemingly convincing evidence that passive is taking over.

Why “seemingly”? Simple. Almost all the articles discussing this revolution cite the huge increase in “cheap” index exchange-traded funds (ETFs) in both number and assets under management. Exhibit 1 shows you this—plotting total net fund flows into ETFs and mutual funds (of all types) individually and combined.

Fisher Investments Editorial Staff
Others

Investment Research Gone Wrong

By, 04/21/2017
Ratings1373.868613

To get an investment edge, you need either information others don’t see, or a better interpretation of widely available information. This is the purpose of investment research, whether in finance journals, mainstream news publications or Wall Street-focused blogs and forums. Sadly, investors turning to these sources for actionable research often find shoddy data and shaky conclusions instead. To help you separate out the noise, here are three forms of dubious investment research to watch out for.

The Tortured Data

Ever see an investment pitch declaring that the data have spoken, and such-and-such an investment strategy is a proven winner? Or why this one metric can predict market movements? The charts and statistics accompanying such claims may seem objective and ironclad, but they often suffer from what statisticians call “p-hacking”[i]—cherry-picking, slicing and dicing data until it yields a “statistically significant” result.[ii] Crunch enough numbers, chart enough trends, tweak enough equations, and you’re practically guaranteed to find some apparently rock-solid connection. But correlation without causation is a big booboo! There must be a sound, fundamental “why” behind the link, otherwise, there is no good reason the connection won’t fall apart.

Elisabeth Dellinger
Personal Finance

Ten Roads and the Eighth Wonder of the World

By, 04/21/2017
Ratings893.691011

Pssst—here’s a secret about your tax refund: It can make you rich.

Not that I’m a fan of big refunds, mind you. If you get a fat refund, it means you gave Uncle Sam a fat, interest-free loan—instead of having use of those funds all year to invest. If you get big refunds regularly, talk to your CPA about adjusting your withholdings. But! In the meantime, if you got a refund, my first sentence stands: It can make you rich. Actually, either way can make you rich.

According to the IRS, the average tax refund in 2015 was $3,120. Now, $3,120 won’t get you very far. If you live in the San Francisco Bay Area or Manhattan, it might be a month’s worth of rent or mortgage payments. It might be a down payment on a car, or several months’ car payments. If you’re hunting on the secondary market, it’s five field-level tickets for next month’s U2 gig. But don’t think of your refund in present-day terms. Think what it could become if you invest it now and don’t touch it again for 30 years. If the stock market repeats its long-term average annualized return of 10%, that $3,120 would be worth $54,442 in 2047. Assuming you get the average refund every year (you shouldn’t!) and invest it the same, in 30 years you’d have over $567,000. Even if we reduce the return to 8%, you’re talking over $384,000. Not chump change. If you adjust your withholdings, you may be able to afford boosting retirement plan contributions and enjoy similar results. (Or pay down costly debt faster and more easily.)There is a reason why Albert Einstein called compound growth the eighth wonder of the world.[i]

Fisher Investments Editorial Staff
Across the Atlantic, Politics

May Wants to Vote in June

By, 04/19/2017
Ratings564.053571

UK Prime Minister Theresa May surprised Tuesday morning when she announced her intention to call an early general election on June 8—three years before the regularly scheduled vote—to bolster her Conservative Party government’s mandate before entering Brexit negotiations.[i] As May explained, Parliamentary divisions “risk our ability to make a success of Brexit and it will cause damaging uncertainty and instability to the country. So we need a general election and we need one now.” British markets reacted somewhat negatively, with the UK’s FTSE 100 down -2.5% Tuesday and another -0.5% Wednesday (both figures in pounds),[ii] while sterling strengthened against the dollar. Though this probably increases the noise and adds another wrinkle to the Brexit saga, the election likely isn’t a gamechanger for markets. 

May cannot unilaterally call for new elections and dissolve government because of 2011 legislation fixing parliamentary terms to five years. Hence, May had to get Parliament’s approval for the move—a two-thirds majority, no less—which she did Wednesday, in a 522 – 13 vote. There was basically no material opposition to the idea. Labour voted in favor, while the Scottish National Party (SNP) abstained.

With the vote, 650 Parliamentary seats will be up for grabs come June 8. Based on current polling, most experts see May’s Conservative Party as the overwhelming favorite in a general election, believing it will add to its current 17-seat majority. Some individual polls have the Conservatives up by more than 20 percentage points, which they translate to a 100-seat majority post-vote. Much of this reflects the weakness of the opposition: Labour is polling at its weakest levels in seven years and support for the Liberal Democrats is still in the single digits. Even the far-right UKIP has floundered. The SNP is strong in Scotland, with polls showing it has a commanding lead over Labour and the Conservatives, but that isn’t a change from the present Parliament, in which it controls 56 of Scotland’s 59 seats.

Fisher Investments Editorial Staff
Politics, Across the Atlantic

Market Insights: 2017 European Elections

By, 04/13/2017
Ratings584.284483

This Market Insights video examines the 2017 European elections and what they might mean for the market moving forward.

Fisher Investments Editorial Staff
Into Perspective

Lessons From Trump's Yuan U-Turn

By, 04/13/2017
Ratings1233.853658

Photo by honglouwawa/iStockPhoto.

“On day one of a Trump administration, the US Treasury Department will designate China a currency manipulator.”

Fisher Investments Editorial Staff

Markets Don’t Discriminate Between “Hard” and “Soft” Economic Data

By, 04/10/2017
Ratings554.345455

You may have heard of big data, but what about “hard” and “soft” data? The distinction is the latest source of economic handwringing. Hard data tell you what happened. How many widgets were produced or sold (or booked for sale) for how much in this time frame and for that sector or industry. Soft data are surveys that measure emotion and businesses’ guesstimates on how things are going. But while soft data are largely soaring, hard data aren’t. Many warn this means sentiment is stretched and stocks will struggle as they’re forced to accept a reality of slower-than-expected growth, but this seems a rather hasty conclusion.

While the hard vs. soft data debate seems esoteric, it is stirring a lot of handwringing in economic circles. Soft surveys like purchasing managers’ indexes (PMI) and consumer sentiment usually come out before hard data and help form analysts’ expectations for the latter. Hence, when ISM’s manufacturing PMI zoomed to 56.0 in January and 57.7 in February—and non-manufacturing hit 56.5 and 57.6 in those months, respectively—folks cheered and expectations rose.[i] PMIs over 50 indicate expansion, and those readings were far above 50. But hard data, on the surface, didn’t keep pace. Industrial production (IP) fell -0.1% m/m in January and was flat in February.[ii] Retail sales rose 0.6% m/m in January but cooled to 0.1% in February.[iii] Broader consumer spending, adjusted for inflation, fell -0.2% m/m in January and -0.1% in February.[iv] Sad!

Stocks do move on the gap between reality and expectations, but not every hard data point must beat forecasts, and markets care more about the entire economic landscape. Hard and soft data alike paint that picture, and it is currently one of fundamentally sound economic growth. Different indicators show different magnitudes, but directionally they mostly match. Moreover, it shouldn’t be breaking news that PMIs don’t match harder data. They measure how many firms grew, but not by how much. Strong PMIs mean widespread growth, but you can’t translate that to a specific magnitude. Q1’s PMIs merely tell you first quarter growth was probably positive, which stocks already know. (Exhibit 1) Forward-looking stocks move on long before GDP figures come out.

Fisher Investments Editorial Staff
Investor Sentiment

Investing in a Maturing Bull Market

By, 04/07/2017
Ratings2544.01378

Is owning—or buying—stocks now a sucker’s move? Headlines, predictably, differ. Some argue Q1’s rally rested on a shaky foundation of overexcited retail investors, while the “smart money” wisely shied away from too-high valuations—a sign of stocks breathing their last. Others recommend piling into stocks now to capture lofty returns as euphoria takes hold. Who’s right? We’re bullish and think stocks will have a great year, but the right way to view this debate isn’t to pick a side. Rather, it’s to let your long-term financial goals determine how you invest, not a near-term forecast of the bull’s lifespan. If you need long-term growth, stocks should feature heavily in your portfolio by default, and you should veer only if you are darned sure a bear market has begun.  

We don’t think that time is now. Many cite rising price-to-earnings (P/E) ratios to argue a bear is approaching. One recent report listed 20 different S&P 500 valuation metrics, most well above historical averages. While we quibble with how many are constructed, the basic point they loosely illustrate is accurate—sentiment is warming. That is normal during maturing bull markets and nothing to fear. 

But we have nothing nice to say about gauges of retail investor enthusiasm, which supposedly show Low-Information Joes and Janes are the sole buyers—a traditional contrarian indicator of peaking markets. Nonsense! The one cited here merely shows inflows into SPY—an S&P 500 ETF—which just happens to be the most heavily traded security in the world, popular with individuals and professionals and institutions. Another popular supposed indicator—stocks’ rising share of total household assets, as reported by the Fed—is a function of market movement, not investor behavior. If you start with 70% stocks/30% bonds, and stocks outperform bonds, they will gain a larger share of your portfolio even if you don’t make a single trade. Besides, “dumb” and “smart” money are fictions. No one has cornered the market on poor investment decisions—not institutional investors, corporate insiders or retail investors.

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Recent Commentary

Fisher Investments Editorial Staff
Taxes

Trump Releases Tax Plan

By, 04/28/2017

Hold your horses, though: A one-page list of tax policy priorities is a starting point only. 

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Fisher Investments Editorial Staff
Trade

Trump’s Tariff Tiff

By, 04/27/2017
Ratings364.361111

Will a tariff on Canadian lumber lead to a broader trade war? Not in our view.

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Fisher Investments Editorial Staff
MarketMinder Minute

Market Insights: What Trump Rally?

By, 04/27/2017
Ratings1273.992126

In this Market Insights video, we take a closer look at the so-called Trump Rally and what it means for stocks moving forward.

read more
Fisher Investments Editorial Staff
Emerging Markets

Emerging Market Developments

By, 04/26/2017
Ratings453.377778

As in the developed world, falling political uncertainty is lifting some Emerging Markets.

read more
Jamie Silva
Monetary Policy

Now Hiring: The Federal Reserve

By, 04/26/2017
Ratings324.28125

Does it matter whether President Trump picks advocates of rules-based policy?

read more

Global Market Update

Market Wrap-Up, Thursday, April 27, 2017

Below is a market summary as of market close Thursday, April 27, 2017:

  • Global Equities: MSCI World (-0.0%)
  • US Equities: S&P 500 (+0.1%)
  • UK Equities: MSCI UK (-0.3%)
  • Best Country: Denmark (+1.0%)
  • Worst Country: Canada (-1.7%)
  • Best Sector: Information Technology (+0.6%)
  • Worst Sector: Energy (-1.3%)

Bond Yields: 10-year US Treasury yields fell 0.01 percentage point to 2.30%.

 

Editors' Note: Tracking Stock and Bond Indexes

 

Source: FactSet. Unless otherwise specified, all country returns are based on the MSCI index in US dollars for the country or region and include net dividends. S&P 500 returns are presented including gross dividends. Sector returns are the MSCI World constituent sectors in USD including net dividends.