Market Commentary, 09/28/17
The major US market indexes finished mixed last week, the Dow closed up 0.37%, the S&P 500 gained 0.08%, and the Nasdaq fell 0.33%.
On Wednesday of last week, the Fed announced it would leave its benchmark interest rates unchanged, but suggested that a rate hike is likely by the end of the year. Officials projected there would likely be three rate increases in 2018 and two in 2019. In addition, Fed officials projected GDP to come in at 2.2% this year, slightly higher than their expectations back in June. They also reduced their inflation expectations from 1.7% to 1.5% and now expect that inflation will not reach 2% until 2019. As expected, the Fed also announced plans to start reducing its $4.5 trillion balance sheet of Treasuries and mortgage-backed securities in October. It will roll off $10 billion initially and then increase the cap by $10 billion every quarter until the total reaches $50 billion per quarter.
The Fed’s decision caused a mid-afternoon decline in stocks as investors reacted to the hawkish announcement. However, they recovered late as the Fed decision, in reality, almost perfectly met reasonable expectations. The Fed’s hawkish monetary policy, used to slow economic growth and prevent excessive inflation, is positive for the market as it recognizes current economic strength and allows the Fed to continue unwinding from artificial economic stimulus.
After months of closed-door negotiations, the six key players from the White House, House, and Senate, known as the “Big Six,” unveiled its log-awaited plan to rewrite the tax code yesterday. The framework for the tax plan remains largely unchanged from earlier this year, and includes:
- Reduce the current seven brackets to three: 12%, 25%, and 35% (the current top bracket of 39.6% is decreased by almost 5%).
- Double the standard deduction ($24,000 for married couples).
- Increase the child tax credit, which is currently $1,000 per child under 17.
- Eliminate some itemized deductions and personal exemptions.
- Repeal the 3.8% Obamacare tax.
- Lower the business tax rate from 35% to 20%.
- Institute a low, one-time tax on corporate dollars that are repatriated (i.e. brought back to the USA).
- Repeal the estate tax.
- Repeal the Alternative Minimum Tax (AMT).
While this outline gives a general guideline, we will have to wait a little longer to see the legislation that will actually be voted on. Anticipation for the corporate tax reduction has driven the market for some time. If and when the tax plan passes, we expect the market to continue to move upward as earnings increase. Thus far the stock market appears to approve the tax plan as the Dow, S&P 500, and Nasdaq have all increased since the Wednesday announcement.
Jeremiah Patterson, CFP®
Copelin Financial Advisors
514 Brooks Street
Sugar Land, TX 77478
Phone: 281 240-2902
Fax: 281 240-2856
Securities offered through ProEquities, Inc., a Registered Broker-Dealer and Member FINRA & SIPC Advisory Services offered through Harvest Investment Services, LLC., a Registered Investment Advisor Copelin Financial Advisors, Inc and Harvest Investment Services, LLC are independent of ProEquities, Inc.
Several sources were consulted, including the Wall Street Journal and WE Sherman & Co., LLC