New Proposals: A Fed Chairman & A Tax Plan

in Market Commentary by

This week, we learned the pick for the new Fed chairman and saw the details of the House GOP tax plan. Markets continued their nonchalant attitude and moved modestly higher on low volatility. If confirmed by the Senate, Federal Reserve Governor Jerome Powell will be the 16th chairperson of the central bank. He is widely expected to maintain Janet Yellen’s approach of gradual rate hikes and a measured approach to reducing the Fed’s balance sheet. In corporate earnings news, Apple exceeded expectations on predicted strong sales of its iPhone X, while Tesla announced supply chain difficulties and reduced expectations for deliveries of its key Model 3.

Weekly Returns:
S&P 500: 2,588 (+0.3%)
FTSE All-World ex-US: (+0.8%)
US 10 Year Treasury Yield: 2.33% (-0.09%)
Gold: $1,270 (-0.2%)
EUR/USD: $1.161 (+0.0)

Major Events:

  • Monday – Lennar agreed to buy CalAtlantic group, creating the largest U.S. homebuilder
  • Tuesday – Members of the U.S. International Trade Commission recommended tariffs on solar panels to protect U.S. producers
  • Tuesday – CME Group said it aims to launch a futures contract on Bitcoin by the end of the year – a move that would make it easier for institutional investors to access the currency
  • Wednesday – The Fed left interest rates unchanged and said the economy has been growing at a solid rate despite the hurricanes
  • Wednesday – Facebook reported a 79% jump in earnings, but the stock reaction was muted as the company said it would dramatically increase spending on security
  • Wednesday – The White House indicated it would nominate Fed Governor Jerome Powell as the next Chairman of the Federal Reserve
  • Thursday – Apple said earnings rose 19% and indicated strong demand in China and for its iPhoneX. The stock briefly passed $900 billion in market cap
  • Thursday – Starbucks lowered its long-term growth forecast and said it would sell its Tazo tea brand to focus on Teavana
  • Friday – Hiring rebounded in October and the unemployment rate fell to 4.1%, a 17-year low
  • Friday – Broadcom was said to be planning a takeover of Qualcomm, which is currently valued at $90 billion

Our Take
The House’s Ways and Means Committee previewed its proposed tax bill this week. It is important to remember this was just the House version and it will likely change significantly before passage, if it passes at all. That said, a few things stood out to us. In the proposed plan, the corporate tax rate drops to 20%, which would appease the market – which seems to be expecting at least some corporate tax cut. Also, unlike previous plan descriptions, there appears to be a legitimate, broad tax cut for the middle class (unless you live in a high state tax state). Because it lowers the 15% bracket to 12%, raises the income range for that bracket to $90,000 for married couples, and increases the standard deduction, this would be especially beneficial to retired people who have meaningful RMDs but no real earned income.

The bill would also impact the decision on going with a Roth vs. Traditional account, but in which direction would be a case-by-case situation. It makes Roth accounts more or less attractive because current taxes will be lower for most, but less attractive because tax rates would also be lower in retirement for most. As always, it largely depends if you believe tax rates will go back up in the future.

This proposed bill would also increase the deficit even further, which suggests taxes should go back up in the future, but people have believed that for a long time and the trend has remained for lower rates. There are still a lot of details to work out around state tax deduction, AMT, mortgage interest, and so on. There will be new news before the end of the year, so it probably doesn’t make sense to change tax strategy quite yet – but it’s certainly getting more interesting.

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Craig Birk, CFP®

Craig Birk, CFP®

Craig Birk is a member of the Personal Capital Advisors Investment Committee. He also serves as Vice President of Portfolio Management. Prior to Personal Capital Advisors, he was an integral leader within the portfolio management team at Fisher Investments. During Craig’s time there, the company increased assets under management from $1.5 billion under management to over $40 billion. His responsibilities included risk management, portfolio implementation oversight, and management of all securities and capital markets research analysts. Mr. Birk graduated from the University of California at San Diego and has earned the Certified Financial Planner® designation.

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