Final Version of Tax Bill Expected Soon

in Market Commentary by

Stocks rallied early in the week on continued anticipation of corporate tax cuts in the United States. They reversed course Thursday when it appeared Senator Marco Rubio might oppose the bill without an increase in the child tax credit, but hit fresh highs on Friday as lawmakers reconciled most of their differences. Somewhat lost in the noise was another 0.25% rate hike by the Federal Reserve. Most major asset categories outside of commodities also ended the week higher, including foreign equities, bonds, gold, and real estate.

Weekly Returns:

S&P 500: 2,676 (+0.9)
FTSE All-World ex-US: (+0.2%)
US 10 Year Treasury Yield: 2.35% (-0.03%)
Gold: $1,256 (+0.6%)
EUR/USD: $1.175 (-0.1%)

Major Events

  • Monday – Bitcoin futures started trading on a Cboe exchange (officially starting Sunday), with trading being halted twice due to extreme price increases.
  • Monday – Comcast announced it is ending its pursuit of assets from 21st Century Fox.
  • Wednesday – The U.S. Federal Reserve raised rates for the third time in 2017, while reiterating their expectation of three more hikes in 2018.
  • Thursday – The FCC voted to end net-neutrality rules established in 2015 under the Obama administration.
  • Thursday – Senator Marco Rubio publicly stated he would oppose the GOP tax bill unless the child tax credit was increased.
  • Friday – GOP lawmakers scrambled to put finishing touches on their tax bill.

Our Take:

Congress took center stage this week, where Republicans continued their mad race to reconcile differences and push through tax legislation before the holidays. The news has completely dominated headlines, and even overshadowed the Fed raising rates on Wednesday. The final version of the bill is still up in the air (expected to be released in a matter of hours), but there have been a few notable last-minute changes.

The first is from the Senate’s bill, which attempted to eliminate the ability to select individual tax lots when selling shares. It would have subjected all share sales to FIFO accounting (first-in-first-out), which means the oldest and often most appreciated shares would have to be sold first. This would have significantly tied investors’ hands and impacted widespread practices such as tax loss harvesting. The good news is, at least at this point, the provision has been scrapped. +1 for investors.

In an effort to placate high income tax states like California and New York, the new compromised bill has also dropped the top marginal tax rate from 39.6% to 37%, and will now allow up to $10,000 of state and local taxes to be deducted. On the surface this seems appealing, but it will only really benefit the highest earners. The 10K maximum won’t be large enough to outweigh the standard deduction, meaning a large chunk of “upper middle class” earners will still see their tax bill increase. -1 for those in high income tax states.

Some other last minute changes include bumping the child tax credit to $1,400 from $1,100, and settling on a 21% corporate tax instead of 20% (which would begin the rate cut a year earlier). Of course all of this is still speculation as we await the final version. But overall it appears something will pass soon. As we’ve said in the past, the most impactful piece of this bill is the corporate tax cut, which is likely to provide a boost to economic growth. How long that boost lasts is anyone’s guess.

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Brendan Erne, CFA
Brendan Erne serves as the Director of Portfolio Implementation at Personal Capital. He has over 15 years of industry experience, spanning almost all levels of the investment process, including several years at Fisher Investments as an equity analyst covering the Technology and Telecommunications sectors. He also co-managed a large cap growth portfolio and co-authored Fisher Investments on Technology, published by John Wiley & Sons. Brendan is a CFA charterholder.

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