Stay up-to-date on economic conditions and outlook with our analysis and commentary.
We understand that uncertain times can be worrisome. As you are aware, we have seen significant changes to the financial markets, the economy, and generally, our everyday lives in a very short period of time.
As a valued member of our CAS family, we want you to know that we are here for you.
We are reaching out to let you know that we are here for you in the event you need to speak with us. Please feel free to contact us via phone or email at firstname.lastname@example.org if you would like to schedule a 15-minute call with us to discuss your portfolio.
We have suspended taking on new referrals, new client relationships, marketing, and all non-essential client work for the time being so that we can focus on client portfolios.
During this time, we are not only considering your financial security and asset protection, but we are also looking at opportunities. The bottom line is we will get through this; it is just a matter of time. Here are some considerations that are top of mind.
1) Primary Concerns:
- Cash Flow – Your cash flow needs are an important factor. We want to avoid selling securities at a lower value, if possible. If you have enough cash to support your cash flow needs for the next 6-12 months, let’s stay the course. If you do not, we need to connect to begin strategically raising cash.
- Market Risk and Volatility – Volatility in the markets tend to play on our emotions. You and I react when our account values drop as they have been over the last several weeks. This is human. The coronavirus is likely to get worse before it gets better. With that said, research and history show us that the prudent thing to do in times like these is to remain invested and focus on your long term objectives.
- For individuals that have been overweight in cash, this may be the time we have been waiting for. By observing current valuations, we feel there will be great companies and industries that are priced for opportunities to buy for long term growth, income, and appreciation. We suggest that excess cash be invested for long term objectives. A dollar-cost averaging strategy has been proven to work well during these times. Please contact us if you would like more information on this strategy.
- Tax Loss Harvesting – Due to the recent pullback we are now seeing an opportunity to realize losses on taxable accounts to offset future gains.
- For some individuals, we can take a loss by selling what may be considered a riskier asset and purchasing into an equity position that has less inherent risk…potentially reducing the overall risk level of your portfolio.
- These losses may be useful to offset gains from the sale of positions that are significantly overweighted in your portfolio. The gains from the sale of the highly appreciated stock can be offset by the realized losses and then the proceeds can be re-invested in a more diversified way. This strategy may serve to reduce single stock risk in your portfolio.
- If you are comfortable with your cash cushion, perhaps consider deferring or minimizing withdrawals from your portfolios.
We will be communicating on a regular basis via email, newsletters, and by telephone. If you have any questions or concerns, please do not hesitate to give us a call or email. We are here to serve you.
Stay safe and healthy!
As you are aware, we’ve seen significant changes to the stock market, the economy, and generally our everyday lives, in a very short period. Whether in Rochester, Naples, or other cities; restaurants, bars, beaches, and social venues have closed to limit the impact of the Coronavirus. Workplaces are reconfiguring staff to allow for remote access and reduced exposure.
At present we are moving toward minimum staffing mandates as the situation surrounding the virus escalates. It is our intention, and in keeping with being responsible citizens, to plan for a skeleton crew in both our offices daily. This will begin the week of March 23rd. We think it is important to take this step to both conform to the increasing concerns, and importantly, to manage your needs.
Our company is an essential business as defined by the government, and we will continue to take care of client needs. With the speed at which things are changing, we have put a contingency plan in place to minimize staffing within the offices. Going forward, if we are required to do so, we are prepared to work off-site. We are able to receive your phone calls, place trades, and address any distribution or servicing need that you may have. In effect, we will be able to do everything we do every day in our offices, at our assigned offsite workplace.
We believe that America will rebound from this. Given the recent response of eliminating opportunities for gathering, coupled with testing, we believe a recovery similar to what is being seen in China and South Korea is possible.
During this time we are spending 100% of our effort servicing the needs of our existing clients. As you know, servicing our clients has always been a priority, and at times like this, our number one concern is taking care of you. While we typically welcome referrals, we’d prefer that you defer referring new clients to us at this time. This allows us to stay in touch with you, and follow what’s going on with the markets. We expect to have the capacity to work with new relationships in another month or two. We will let you know when we resume welcoming new referrals, as this is the lifeline of our business. Please know that our number one concern at this time is you, and all our clients.
We believe it has always been to our advantage to plan in advance, and we wanted to take this opportunity to share our plan with you.
You are in our thoughts. For now, please be safe and we will be in touch.
Kim Ciccarelli Kantor, CFP® CAP® | President
As a valued member of our CAS family, we want you to know that we’ve been thinking about you. Your health and safety are one of our top priorities and at the heart of the decisions, we are making and will continue to make.
We believe it is critical that we all work together to reduce the transmission of COVID-19. At the same time, we know it is important for us to stay connected during this time of tumultuous markets and global uncertainty.
Our firm’s operations are critical and can’t – and shouldn’t – simply stop. We have looked at our options and at this time feel it is best to ramp up our efforts to protect you from exposure to this virus and any other illness, regardless of its source. Therefore, we’ve made the painful decision to meet with you, for the foreseeable future, by phone or video conference only. There is nothing as satisfying as a face-to-face meeting; however, these uncertain times require that we put our own desires aside and commit to containing risk wherever possible.
For your convenience, we have a dropbox outside of our Naples office for clients wishing to drop off checks or paperwork. It is located near the entrance that faces 96th street and is secured at all times. For both Rochester and Naples clients, we also have an area in our lobby for dropping off paperwork or checks. This area is sanitized for your protection after each use.
As part of our continuity plan, we intend to keep our office locations open and fully-staffed for your planning and service needs. Our intent is to keep our staff and planners healthy as well so that our operations may continue uninterrupted. We are just a phone call or email away for any questions or concerns you may have.
We thank you for your continued trust in us and wish you the very best of health as we move together through these times.
We wanted to let you know that we are closely following the financial markets across the globe and the continued volatility that is impacting investor confidence. Global markets have been bracing for uncertainty as the spread of COVID-19 leads to reduced economic activity. In addition, an oil price war between Russia and Saudi Arabia has exacerbated concerns of a global recession, prompting large selloffs across riskier asset classes.
At this moment, it’s impossible to forecast whether a recession will occur as a result of COVID-19 and oil oversupply concerns, and their impact on the global economy. Outbreaks are eventually contained, and recessions are part of market cycles. The most important thing to keep in mind is not to overreact to the headline news which can often create unnecessary panic. Markets have proven resilient over time and it’s important to maintain discipline and focus on your long-term goals.
We are here to support you and navigate these times of uncertainty together. Knowledge is power, and we’re committed to equipping you with the tools and information you need to weather this storm. We are continuing to watch market developments and are here to assist you with evaluating and understanding these economic changes.
As always, if you have any questions do not hesitate to call. We suggest scheduling time for a 15-minute conversation or a more comprehensive review if you have not yet connected recently with us or someone on our team.
There is a relatively old saying that has gone through various reiterations but is typically along the lines of “in life there are mountains, and there are valleys. You have to make it through one to get to the other.” It refers to the ups and downs that one can experience throughout their lifetime, but it can also be applied to other areas. By the end of the 2017 fiscal year, the market had surpassed numerous record highs that many believed would only continue into 2018. While some of those predictions did hold true, 2018 demonstrated that you may have to deal with both the mountains and valleys when investing.
Right out the gate of 2018, the S&P 500 began on a high note, reaching gains of +7.4% in just 18 trading sessions. Despite the initial surge, the S&P 500, Dow 30, and Nasdaq 100 all fell in March after major selloff in the technology sector pulled down stock measures across the board. Early concerns over then reports of imposed tariffs on Chinese trade may have also effected markets as investors weighed possible regulatory ramifications.
When the closing bells finally rang and signaled the end of the day for the 1st quarter, the Index had a decent rise of 1.4% for the day but was down 2.64% for the month. Some of the worst performing areas were: Financials, Materials, and Technology. Energy and Utilities performed quite well.
Many in the investing community voiced concerns over long term economic effects that could result from a possible oncoming trade dispute with China coupled with expected Federal interest rate hikes. Ratios of bull to bear investors remained nearly neck and neck, and many debated whether the longstanding bull market was showing early signs of coming to a close.
Despite these concerns and continued volatility, the 2nd and 3rd quarter ended in gains. The S&P reported total returns of 2.65% and 7.71% for the 1st quarter and 2nd quarter, and overall the index edged up 1.67% for the first 6 months of 2018. By the end of the 3rd quarter, the market had extremely good returns with a 7% quarterly return rate and the S&P 500 experiencing its best performance in nearly five years.
As mentioned earlier, with every mountain, there is typically a valley not too far away. This was the case for the final leg of 2018. Trade war fears, federal interest rate hikes, along with worries about contracting growth outside the U.S. may have played a role in the slowed growth activity and market downturn. In October, the S&P 500 lost $1.91 trillion. By the end of the year, the S&P 500 had a decline of 13.52% for the quarter, and 6.2% for 2018. Overall, the U.S. stocks posted the worst quarterly fall since the 2008 financial crisis.
One of the sectors that was hit the hardest was big technology, with many stocks underperforming and accounts of investors fleeing after earnings reports. By
Several factors may have played into this including bond yields and a fourth Federal interest rate increase. However, the job market has expanded substantially in the last year, with a growth of 3.7 % and a historically low unemployment rate.
The increase is on point with the Federal Reserve’s projections to insure that the inflation rate stay near 2% mark. Many voiced concerns that the hike coupled with an escalation in a Chinese trade war may actually cause an economic downslide. The U.S. has implemented tariffs on $250 billion worth in Chinese goods. There is a full list of products which have had implemented tariffs, but worries that these tariffs may require many tech giants to raise prices or face losses in their profit margins may have had a strong impact on investor’s optimism in the market.
Going forward into 2019, many are unsure of where the market is headed, and if the same issues and volatility will continue in the new fiscal year. Factors such as changing the political climate, many nations high debt levels, overseas trade, and interest rates may be on the top of many people’s minds when trying to gauge where the market is headed.
At the moment, the Federal Reserve has indicated that two more rate increases are to be expected. Some experts believe this may be good in the long run but may cause some turbulence at the start. Only time can truly tell.
The trade dispute with China still continues. Stimulus from tax cuts have been predicted by some to fade in the next year. Many hope that China’s need for a trade deal to combat an economic downturn may prompt a quicker resolution.
One issue that may have had a strong effect on December’s economic turmoil is many investors’ concerns over the ongoing political uncertainty in Washington. At the end of December, the federal government partially shut down after both sides of the aisle were unable to compromise over funding for a U.S. Border Wall. As this shutdown continues, many are uncertain of the long-term economic fallout.
Investment anxiety can arise from uncertainty, which is why it can be beneficial to meet with your advisor to discuss long term goals and risk tolerance so that together we can develop a financial roadmap that best suits you. A review of your asset allocation, time horizon, and risk tolerance is key.
While life may be filled with mountains and valleys, our team is here to guide you throughout the journey – today, tomorrow, and for generations to come.
Investment advisory services offered through Ciccarelli Advisory Services, Inc., a registered investment adviser independent of FSC Securities Corporation. Securities and additional investment advisory services offered through FSC Securities Corporation, member FINRA/SIPC and a registered investment adviser. 9601 Tamiami Trail North, Naples, FL. 239-262-6577.
Standard & Poor’s 500 Index Data:
Trade Tariffs Data
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Federal Interest Rate Data:
As I was returning home from a conference in Pennsylvania, I rode at the back of a bus on my way to the Philadelphia airport. On that 40-minute commute, I experienced one of the bumpiest roads of my life. With every pothole and every crack, I lurched in my seat and was thrown around like a rag doll. As I got off the bus, I was green in the face.
Bumps in the road can often be jarring and downright sickening – not only as it relates to my perilous journey on I-76, but also when we experience the ups and downs of a volatile market. As an investor, you are taken for a ride on an emotional roller coaster when the markets fluctuate – from hopeful and elated to alarmed and desolate.
The impulse to run away from the market during a correction period is totally natural and inherently human. Our fight-or-flight response – triggered by the amygdala region of the brain – causes our adrenaline to surge and sparks feelings of anxiety and distress. While this function is essential to our survival, the amygdala can also cause us undue stress when the source of our concern is largely beyond our control.
However, if we take a step back and put the immediate state of play into the broader, long-term context, we can overcome the “alarm bells” of our amygdala. Simply put, the market has always gone down and has always gone back up. Those who stay the course are often rewarded. In addition, volatile market conditions can present significant opportunities for savvy investors.
Why the Volatility?
In a deeply interconnected global economy, a wide variety of factors – both at home and abroad – are contributing to the current volatility. While a comprehensive list of factors is beyond the scope of this article, we will highlight the major current events that are driving the market fluctuations.
If you’ve been keeping up on your business news lately, you will likely be familiar with these topics. These stories have dominated the headlines.
Domestically, the adoption of tariffs has raised concerns for industries that depend on imported goods and for companies that sell their products overseas. In a similar vein, the recent revisions to NAFTA and discussions of other agreements have caused some uncertainty in the realm of international free trade.
Additionally, the Federal Reserve has continued to incrementally raise the federal funds rates (now set at 2.25%); while these rates are historically low compared to their pre-2008 levels, there has been a substantial increase since 2017 (when the rate was 0.5%). These three factors are driving much of the anxiety in the domestic sector.
In international news, the Chinese stock market has been careening downward since January. After reaching an all-time high of 3,559 on January 24, the Shanghai Stock Exchange Composite Index has fallen to 2,602 as of October 31 (a 26.8% decrease). The ripple effect of China’s economic woes can be felt worldwide.
Across the pond, the negotiations for Brexit still hang in the balance. By many indications, the divorce between the European Union and the UK could be a messy one.
In addition, Italy’s 2019 draft budget has been rejected by the EU. As seen in Greece, the massive debt incurred by Italy – coupled with the economic strain of the EU’s austerity measures – could be dire for Italy, and these factors have prompted murmurs of an Italian exit from the international alliance.
Lastly, leadership changes in Mexico (a new populist president, Enrique Peña Nieto) and in Brazil (a new far-right president, Jair Bolsonaro, who has advocated pro-market policies) could influence the investor outlook in the Latin American sector, as well as U.S. interests that are enmeshed in the region.
Without question, the global economy has never been more complicated and intertwined – and the future is sure to be filled with even more complexity. That being said, the level of volatility we are seeing today is not a new phenomenon.
Zoom Out to Bring the Full Picture into View
Despite the alarming nature of these recent financial news headlines, the reality is likely far less scary than we are inclined to believe. Let’s calm down our amygdala by putting the current situation into proper historical context!
On the graph below, you can see the annual performance data of the S&P 500 for each year since 1980. The gray bar represents the annual percentage of return; the red boxes represent intra-year declines – the difference between the highest and lowest points of the index during each particular year – as a measure of market volatility.
In 2017, the S&P 500 experienced a fairly steady market trend, where the strong upward trajectory was not offset by any significant corrections. In the first 10 months of 2018, we have seen a noticeable increase in volatility. However, the year-to-date market performance is still well within the historical norm.
With an intra-year decline of 10% in 2018, the circumstances facing the S&P 500 are far from dire and are quite comparable to the course taken by the markets in 2016. Also note that even in years where the intra-year declines were substantially larger (between 11-19%), the average calendar year return was 7.6%. For this reason, staying the course when the markets get choppy is often a wise decision.
The Greatest Opportunity
As investing legend Warren Buffett has famously said, “Be fearful when others are greedy and greedy when others are fearful.” Without a doubt, a correction period presents the potential to tap into significant financial planning opportunities:
- Buying opportunities for accumulators: If you are a career-focused professional who is actively saving money for retirement, corrections are essentially a seasonal sale on stocks. In many cases, it may behoove you to put your cash to work when the market takes a dip.
- Tax loss harvesting: You may want to consider selling some positions that have lost market value. By “harvesting” this loss, you can leverage the decrease in value to offset taxes on both capital gains and income. Tax loss harvesting can be an effective way to remove struggling stocks from your portfolio while also reducing your tax burden.
- Rebalancing: In some cases, it may be beneficial to revisit your asset allocation and identify areas for enhancement. The recent losses and volatility are not evenly distributed among asset classes; some sectors are performing well or holding steady, whereas others are lagging. Rebalancing allows you to reinvest the profits from an outperforming stock or industry into a different asset class that could have greater growth potential, while also maintaining a diversified portfolio to hedge against risk.
If the bumps in the road we have been experiencing in the market are causing your stomach to churn, you are not alone. You are human! We are hard-wired to react emotionally when the market slides. The often-sensationalized media coverage of current events and financial news also fuels the fear response and apprehension about staying in the market.
However, when we look at the big picture of market performance over the long haul, we find that – in many cases – the most prudent course of action is to (1) stay the course and (2) capitalize on any untapped opportunities that may arise as a result of the correction.
Fortunately, your CAS advisor is always available to help you look past the fear and anxiety, bring the big picture into focus, and explore the possibilities for maximizing your upside as we weather the turbulent tides of volatility.
If you’ve been keeping up on economic and market news, you are likely familiar with the Trump administration’s recent assessment of tariffs against major U.S. trade partners.
The new tariffs – taxes on imported goods – have stirred quite a frenzy among investors and economists across the globe and have dominated the financial news headlines throughout the past few months:
Dow drops 250 points on Trump’s tariffs.
Canada tariffs on U.S. goods from ketchup to lawn mowers begin.
Harley-Davidson, stung by tariffs, shifts some production overseas.
The main targets of the U.S. tariffs are (1) China, the world’s second-largest economy and a rapidly developing global power; and (2) three long-standing allies of the United States: Canada, Mexico and the European Union. In both cases, the Trump administration has levied ad valorem tariffs against specific imported products from these countries.
In the case of China, a 25% tariff has been assessed on steel and an additional $34 billion in Chinese goods. The tax, which was announced in April, is being levied on 1,300 products, ranging from medical supplies and machinery to dishwashers and snow plows.
In response, China has announced a plan to retaliate by taxing $34 billion in American agricultural goods, including beef, chicken, pork and soybeans; although these tariffs have not yet been implemented. Additionally, the Trump administration has suggested that any retaliatory measures taken by the Chinese will be met with tariffs on an additional $200 billion of imported goods.
The EU, Canada and Mexico were also hit with a 25% tariff on steel exports and a 10% tariff on aluminum exports. The EU has now imposed tariffs on $3 billion of U.S. goods (e.g. whiskey, peanut butter, Harley-Davidson motorcycles), prompting Trump to threaten a 20% tariff on all European-produced cars sold in America (to be levied on approximately $300 billion in automobiles).
Canada and Mexico have also responded in-kind to the steel and aluminum tariffs. Mexico has imposed a series of taxes on $3 billion in U.S. goods (e.g. pork, apples, potatoes, bourbon), and Canada has assessed tariffs on $12.6 billion of goods (e.g. ketchup, lawn mowers, whiskey).
In light of these recent developments and the looming possibility of further retaliatory actions, let’s examine how tariffs could impact your family and the global economy at large.
Tariffs vs. Reality
Tariffs are often imposed as a well-meaning attempt to protect domestic production of goods and services, as well as to reduce both a nation’s trade deficit with other nations and their overall budget deficit.
However, in a modern global economy, the touted benefits of tariffs rarely materialize. Let’s evaluate three claims that are often made in support of the recent tariffs assessed by the United States federal government.
Claim: Tariffs protect American jobs.
Reality – Mostly false. Tariffs might be effective in protecting domestic jobs in specific industries. For example, those who are employed in steel and aluminum production were ecstatic with the news about tariffs on imported metals. Domestic employment in those two industries should experience short-term preservation and even modest growth.
That being said, increased commodity prices will likely have a negative impact on related U.S. businesses that rely on imports of those goods – leading to net job loss.
The automotive and aerospace industries, for example, are dependent on imported steel to produce vehicles at a competitive price. Steel tariffs will increase their production costs, leading corporations to increase the prices of consumer goods and to take other measures that sustain profitability (scaling back expansion plans, cutting labor costs through downsizing or outsourcing, etc.).
Another prime example of tariff-induced job loss can be observed in the print media industry. The Trump administration levied tariffs against Canadian paper in January and February, leading to a 30% overall increase in the price of newsprint.
The Tampa Bay Times (Florida’s largest independent newspaper) anticipated that the tariffs will result in an additional $3 million in annual costs. Consequentially, the Times cut about 50 jobs to make ends meet.
Other print media companies have expressed similar concerns about the impact of the paper tariffs on their ability to operate in their current capacity. Smaller local newspapers could be forced to cease production altogether, while larger newsrooms will need to cut staff and/or reduce the size and frequency of their print editions.
Claim: The United States’ massive trade deficits with other countries are damaging to our country and need to be corrected.
Reality – Mostly false. Trade deficits can indeed have damaging consequences on national economies, but deficits are not inherently good or bad for an economic powerhouse like the United States.
In theory, running a trade deficit does carry significant risks. Large trade deficits can indicate that a country’s demand for imported goods significantly outpaces demand for their domestic products.
As a result of lackluster demand for domestic goods and services, both employment and currency value within that country would be negatively impacted. These conditions can set the stage for rampant inflation and rising interest rates, which can ultimately put a serious damper on economic growth.
However, the U.S. is largely immune to these negative consequences of trade deficits. Due to the fact that the U.S. dollar serves as the dominant world reserve currency – and given the sheer scope of our economic output – demand for the U.S. dollar remains relatively strong and sustained, regardless of trade deficits or other weak economic indicators.
It is also worth mentioning that trade deficits can lead to positive economic consequences. Countries with whom the U.S. carries a large trade deficit (China, for instance) will often recirculate their nation’s surpluses back into the United States in the form of foreign direct investment.
The best example is the influx of Chinese real estate investors, who have acquired substantial commercial and residential holdings in major U.S. cities since the dawn of permanent normalized trade relations in 2000.
Claim: Tariffs increase revenue for the federal government and reduce our bloated budget deficit.
Reality – Partially true. Tariffs do increase revenue to the federal government in the short term, as they collect duties on imported goods.
That being said, tariffs almost always translate into higher prices for consumers because businesses transfer their increased production costs onto you. As tariffs increase the cost of living for American families, people will have less disposable income on average.
By decreasing the purchasing power of wages, more and more Americans might need to utilize social welfare programs to make ends meet – especially SNAP (food stamps), Medicaid and subsidized housing. The increased demand for public assistance will require additional funding for these programs.
If the added revenue derived from tariffs is spent on social welfare programs, then the fiscal benefits of tariffs are neutralized.
It is also important to note that any revenue obtained from collecting duties won’t come close to compensating for the lost revenue from the most recent tax cut, which the Congressional Budget Office estimates will add at least $1 trillion to our 2018 deficit.
Three Additional Consequences
The retaliatory exchange of tariffs between two or more sovereign nations is known as a “trade war” and typically leads to negative consequences for all parties involved. In most instances, no one wins a trade war; it’s a matter of which country loses more.
Tariffs often have a negative short-term impact on U.S. stocks and erode investor confidence.
Whenever new tariffs are levied either by or against the U.S., the New York Stock Exchange and other global markets enter a short-lived freefall.
For example, the Dow fell 495 points on April 2 after China announced retaliatory tariffs against the U.S.; the markets surged back within two days. Similarly, the Dow dropped by 250 points on May 31 when Trump announced tariffs on the EU, Canada and Mexico; stock prices recuperated within 48 trading hours.
Although the dramatic headlines about daily market performance and volatility can be worrisome, the long-term impact of tariffs on investors is even more concerning. Tariffs can result in waning investor confidence about the profitability and growth potential of U.S. industries that are affected by the tariffs (both directly and indirectly).
The uncertainty of looming retaliatory tariffs also contributes to investors’ apprehension, which could further suppress economic growth.
American exporters will struggle to compete in foreign markets.
For American-based companies that sell their goods on the global marketplace, tariffs threaten their ability to sell goods at a competitive price. When a good or service is overpriced relative to the alternatives, demand for the product will drop substantially.
The ensuing loss of sales revenue reduces profitability and could even undermine a company’s ability to continue overseas operations in its current capacity.
Perhaps the most high-profile example of this phenomenon is Harley-Davidson. When the EU announced retaliatory tariffs against the U.S. in April, Harley-Davidson motorcycles were slapped with a 31% tax. The cost of every one of their motorcycles sold in the EU increased by $2,200 on average.
In response to the huge increase in production expenses, Harley-Davidson announced in June that they will be laying off workers at one of their Wisconsin plants and outsourcing motorcycle production for its Europe market.
Likewise, agricultural industry experts and farmers alike have expressed deep concerns about how impending retaliatory tariffs could affect food exports. The state of Iowa, which is the leading producer of pork in the U.S., could be especially hard hit.
Mexico imposed a 20% tariff on American pork in June, which caused pork prices to plummet and will cost Iowa’s producers an estimated $560 million in lost revenue during 2018. In addition, China has floated the idea of a tariff on U.S. soybeans (another staple crop of the Iowa state economy). Iowa’s soybean producers could lose up to $624 million.
The United States’ reputation as a dependable and essential international trade partner will likely deteriorate.
Widespread tariffs have the potential to destabilize the global free trade alliances that have underpinned the U.S. economy for decades. The countries that have been impacted by recent tariffs have expressed a diminished confidence in the U.S. as an integral trade partner.
The full ramifications of this international shift in attitude are yet to be seen. However, some new developments suggest that our current trade partners are more likely to take actions that advance their rational economic self-interest rather than affirming their loyalty to the U.S.
Canadian Prime Minister Trudeau has indicated that he will not engage in NAFTA renegotiation talks until the most recent slew of tariffs has been nullified. Also, amidst economic uncertainty and other outside factors on the Korean peninsula, the South Korean government is now pursuing a trade deal with Russia – a nation that has long sought to chip away at the iron-clad alliance between the U.S. and South Korea.
The current U.S. leadership also seems disillusioned with the established system of global trade, as evidenced by the Trump administration’s introduction of the United States Fair and Reciprocal Tariff Act last week. The bill would grant U.S. presidents far more latitude in levying tariffs on 163 World Trade Organization member countries, a move that would effectively terminate U.S. cooperation with the WTO.
If the economic tensions between the United States and our global trading partners continue to heat up, more foreign nations may begin to seek out alternative trade deals with the European Union, China and other emerging economic powers.
The question is: Will the U.S. will be invited to the table for future negotiations if we upend the chessboard of international free trade?
The Bottom Line: Protecting American jobs and preventing foreign nations from taking advantage of us is an appealing message that has resonated with millions of Americans.
Despite the strong rhetoric of the Trump administration, however, the haphazard implementation of tariffs is an ineffective and inappropriate course of action if our goal is to maintain and expand America’s standing as a global economic superpower.
In December, our team compiled an overview of the various provisions found within the Tax Cuts & Jobs Act of 2017.
The new tax legislation brought about significant changes to several areas of the federal tax code, some of which could impact you and your family.
Although the tax legislation is far-reaching and nuanced, one of the key themes of the new law is increasing the standard deduction while phasing out certain itemized deductions. Single filers can now claim a $12,000 standard deduction; $24,000 for joint filers.
As such, we would like to take the opportunity to hone in on three specific itemized deductions that have been reduced – mortgage deductions, state and local tax (SALT) deductions, and medical expense deductions.
These particular changes to the tax bill could influence the approach you take when filing your 2018 tax return, as well as the financial decisions you make throughout the course of the year.
Important: Several areas of the new law were implemented on a “sunset provision” basis, meaning that the changes will revert to previous levels at the end of 2026 unless Congress reauthorizes the provisions.
For many Americans, becoming a homeowner is seen as an integral part of the American dream. Owning a house is not only a source of pride and stability, but your home is also a key asset that constitutes a considerable proportion of your net worth.
Owning a home also carries substantial tax benefits in the form of deducting mortgage debt interest from your individual tax return.
What Changed? – Prior to the new tax law, homeowners could deduct interest on up to $1 million in mortgage debt on their primary residence, as well as deduct interest on up to $100,000 in a home equity line of credit (HELOC).
Under the new tax law (effective December 14, 2017), homeowners may deduct interest on up to $750,000 in mortgage debt on the primary residence. The HELOC deduction has been eliminated entirely.
The changes to mortgage and HELOC deduction caps were passed as a “sunset provision” and will be reverted to their previous level in 2026 if Congress does not reauthorizes the new thresholds.
Who Is Impacted? – Anyone who took out a mortgage after December 14, 2017, will be subject to the $750,000 mortgage interest deduction cap. If you purchased your home prior to this date, the $1.1 million in deductions are still available to you.
The Bottom Line – Since the vast majority of homes in the U.S. are valued at under $750,000, the change should not directly impact most homeowners.
However, the new tax law may reduce the incentive for potential homebuyers to take out a mortgage that exceeds the $750,000 threshold. Also, homeowners who were considering whether to sell a house that is valued at more than $750,000 may opt to hold off until the deductions are reverted to previous levels in 2026.
These two factors could increase competition over an already limited supply of homes valued under $750,000 – which could cause home equity to rise for these residences, while also boosting the appeal of renting over buying for potential first-time homebuyers.
Lastly, homeowners may be more hesitant to open a home equity line of credit for a second mortgage or when refinancing their house.
State and Local Tax Deductions
Across the U.S., there is a great disparity between both states and cities in terms of the taxes you owe. Whereas Florida and Texas have no state income taxes, people living in Manhattan are faced with hefty taxes from both New York State and New York City.
The state and local tax (SALT) deduction provides some relief to residents of high-tax, high-cost areas of the country on their federal tax returns.
What Changed? – The old tax code allowed you to deduct all property taxes paid to your state and local government from your federal tax return. Income or sales taxes paid at the state or local level were also eligible to be deducted from your federal taxes.
The new law mandates that the amount of state and local taxes you may deduct from your federal taxes will be capped at $10,000 per household. This limitation applies to both individual and joint filers.
As with the changes to mortgage deduction thresholds, the new SALT deduction cap will sunset in 2026 if Congress does not reauthorize.
Who Is Impacted? – Residents of high-tax states (e.g. New York, California, Connecticut) and residents of coastal cities where property values and cost of living are high (Boston, Seattle, Washington, D.C.) will bear the brunt of the federal tax liability that results from the SALT deduction cap. This is especially true for people whose combined mortgage and SALT itemized deductions exceed the new standard deduction.
People residing in areas where taxes and cost of living are relatively low will see little (if any) impact on their federal taxes as a result of this provision.
The Bottom Line – For many residents of New York and the other high-tax states/cities listed, $10,000 may not cover the full amount of your property taxes – let alone other state and local taxes you have paid.
Although state legislatures in New York and California are brainstorming new ways to circumvent the added federal tax burden on their constituents, it appears that – for now – residents of the high-tax coastal states will be left picking up the tab.
Medical Expense Deductions
Given the skyrocketing cost of health care, it is reassuring to know that a portion of your annual out-of-pocket medical expenses may be deducted from your federal taxes.
What Changed? – For your 2017 tax return, you could claim an itemized deduction for out-of-pocket medical expenses that exceeded 10% of your adjusted gross annual income.
The new legislation allows you to deduct out-of-pocket medical expenses that exceed 7.5% of your adjusted gross annual income for the year 2018 only. By lowering the threshold, you can deduct more medical expenses from your taxes. Without Congressional reauthorization, the floor will be raised back to 10% in 2019.
Who Is Impacted? – People with substantial medical bills (relative to their income) – especially those with chronic illnesses or disorders that require continual care – will be able to deduct a larger share of their medical expenses. In particular, those who are in poor health and do not yet qualify for Medicare would receive the greatest assistance in 2018.
If your medical costs are less than 7.5% of your income, there is no added benefit.
The Bottom Line – The new tax law provides a welcome gift – albeit fleeting – to Americans who are plagued with hefty medical bills. The medical expense deduction could help to temporarily alleviate the financial strain on these families – potentially offsetting any increases in insurance premiums that might occur in 2018.
Although these tips provide you with a more detailed understanding of three particular provisions in the new tax law, you should review your unique circumstances with your advisor before making any substantial life changes (selling a home, undergoing a major medical procedure, etc.) to determine the best opportunities for tax relief.
Our CAS team is constantly monitoring any proposed legislation that could impact your financial wellness, and we will continue to keep you abreast of any pertinent topics that might affect you and your family.
The GOP has delivered on its campaign promise to overhaul the federal tax code. Both the Senate and the House voted in favor of The Tax Cuts and Jobs Act of 2017, and the President signed the bill into law on Friday.
Our team has combed through all of the major provisions in the tax reform legislation and identified eight key changes that could impact you and your family.
#1 – Individual Tax Brackets and Standard Deductions
Despite the GOP’s desire to reduce the number of individual tax brackets, the final bill retains the 7-tiered individual progressive income tax brackets. The new tax brackets for individuals and families are 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent and 37 percent (see the chart below for a more detailed breakdown by income level).
As such, many Americans will see a slight reduction in their top marginal tax rate. That being said, these updated brackets were passed on a “sunset provision” basis – meaning that the updated tax rates will expire and revert to current levels at the end of 2025 unless Congress reauthorizes the lower rates.
Secondly, the standard deduction will essentially double for both individuals and families. Whereas the current standard deductions are $6,500 for individuals and $12,000 for families, the new standard deductions will be $13,000 for individuals and $24,000 for families.
For most working- and middle-class families, this piece of the tax bill represents the greatest source of tax cuts that each family will realize. In addition to an increased standard deduction, several itemized deductions will be reduced or phased out of the tax code (more details in the following sections).
The intention of increasing the standard deduction is to simplify the tax-filing process for individuals – encouraging more people to claim the standard deduction as opposed to itemizing their deductions.
Figure 1 – Marginal tax rates for individuals under the new tax legislation
#2 – State & Local Tax Deductions and Mortgage-Interest Deductions
One point of contention in the earlier stages of the tax legislation was state and local tax deductions. While the original House proposal called for the elimination of this deduction, pushback from House members in high-tax states persuaded Congress to compromise on this provision. As a result, taxpayers will be able to deduct up to $10,000 in state and local income, property and/or sales taxes from their federal tax burden.
In addition, you may deduct up to $750,000 of mortgage interest under the new tax proposal (a reduction from the current cap of $1 million). This deduction can be applied to your primary residence and one other qualified residence (which could include a vacation home, mobile home or a boat).
As with the new individual tax rates, the revisions to both of these deductions would sunset after 2025.
#3 – Medical Expenses Deduction
In 2017 and 2018, you will be able to deduct out-of-pocket medical expenses that exceed 7.5% of your gross adjusted income (but not on health care expenses that are less than 7.5%). For instance, if you earn $100,000 in a year and your out-of-pocket medical costs are $12,000, you may deduct $4,500 in medical expenses.
Effective January 2019, the threshold will return its current level, with any out-of-pocket medical expenses that exceed 10% of your gross adjusted income being tax-deductible.
#4 – Estate Tax
Due to resistance in the Senate, the GOP was unable to pass a “clean repeal” of the estate tax; and the 40% tax rate will remain unchanged. That being said, they have significantly raised the exemption threshold on taxable estates – meaning that fewer people will be subject to the estate tax.
Under the new policy, individual estates valued under $11.2 million ($22.4 million for couples) would be exempt. Once again, the estate tax provisions will expire at the end of 2025.
#5 – Alternative Minimum Tax
The alternative minimum tax – which is primarily levied on individuals and families who earn more than $200,000 annually – will remain intact. Although the assessment of this tax can vary significantly based on your personal circumstances, the exemptions and phase-outs will be slightly raised. As a result, fewer people will have to pay the tax and those who do will pay a smaller sum. These changes also sunset after 2025.
The 20% corporate alternative minimum tax has been permanently repealed.
#6 – Corporate Tax Rate
Perhaps the most drastic change to our tax code can be observed in the reduction of the corporate tax rate. Whereas the current rate is 35%, the new corporate tax rate will be 21%. Unlike many provisions in the bill, these tax cuts are permanent (i.e. the new rates do not sunset in 2025).
The substantial reduction aligns with the GOP’s promise to slash the corporate tax rate, with the goal of stimulating economic growth. However, contrary to the rhetoric on the campaign trail, none of the tax loopholes or deductions for special interests were eliminated – meaning that many larger, publicly traded corporations will pay an even lower effective tax rate.
#7 – Pass-Through Businesses
Small business owners have typically paid income taxes at their individual tax rate – particularly those who earn income via pass-through entities (limited-liability companies, S corporations, partnerships and sole proprietorships).
However, the tax legislation allows individuals to deduct 20% of their qualified business income, up to $157,500 for individuals ($315,000 for joint filers). For small business owners, this deduction will greatly reduce their tax liability. The provisions for pass-through businesses will also expire at the end of 2025.
#8 – Individual Healthcare Mandate
One of the most controversial provisions of the Affordable Care Act (colloquially known as Obamacare) is the individual mandate, where individuals must either purchase a qualifying health insurance plan or pay an annual penalty. Under the new tax code, the individual mandate penalty would be eliminated – reducing the incentive for healthy individuals to sign up for coverage.
Repealing the individual mandate is expected to lead to higher premiums for those who do not qualify for government subsidies or Medicare, and constitutes a renewed effort by the GOP to gradually do away with the Affordable Care Act.
For additional details on how the new tax legislation could affect you and your family, contact your advisor.
You can be forgiven if you’re skeptical that Congress will be able to completely overhaul our tax system after failing to overhaul our health care system, but our advisors are studying the newly-released nine-page proposal closely nonetheless. We only have the bare outlines of what the initial plan might look like before it goes through the Congressional sausage grinder:
We would see the current seven tax brackets for individuals reduced to three — a 12% rate for lower-income people (up from 10% currently), 25% in the middle and a top bracket of 35%. The proposal doesn’t include the income cutoffs for the three brackets, but if they end up as suggested in President Trump’s tax plan from the campaign, the 25% rate would start at $75,000 (for married couples), and joint filers would start paying 35% at $225,000 of income.
The dreaded alternative minimum tax, which was created to ensure that upper-income Americans would not be able to finesse away their tax obligations altogether, would be eliminated under the proposal. But there is a mysterious notation that Congress might impose an additional rate for the highest-income taxpayers, to ensure that wealthier Americans don’t contribute a lower share than they pay today.
The initial proposal would nearly double the standard deduction to $12,000 for individuals and $24,000 for married couples, and increase the child tax credit, now set at $1,000 per child under age 17. (No actual figure was given.)
The chief architects of the GOP tax reform proposal – economic advisor Gary Cohn and Treasury Secretary Steven Mnuchin – unveiled their plan with the President at Trump Tower.
At the same time, the new tax plan promises to eliminate many itemized deductions, without telling us which ones other than a promise to keep deductions for home mortgage interest and charitable contributions. The plan mentions tax benefits that would encourage work, higher education and retirement savings, but gives no details of what might change in these areas.
The most interesting part of the proposal is a full repeal of the estate tax and generation-skipping estate tax, which affects only a small percentage of the population but results in an enormous amount of planning and calculations for those who ARE affected.
The plan would also limit the maximum tax rate for pass-through business entities like partnerships and LLCs to 25%, which might allow high-income business owners to take their gains through the entity rather than as income and avoid the highest personal brackets.
Finally, the tax plan would lower America’s maximum corporate (C-Corp) tax rate from the current 35% to 20%. To encourage companies to repatriate profits held overseas, the proposal would introduce a 100% exemption for dividends from foreign subsidiaries in which the U.S. parent owns at least a 10% stake, and imposes a one-time “low” (not specified) tax rate on wealth already accumulated overseas.
What are the implications?
The most obvious, and most remarked-upon, is the drop that many high-income taxpayers would experience, from the current 39.6% top tax rate to 35%. That, plus the elimination of the estate tax, plus the lowering of the corporate tax (leading to higher dividends) has been described as a huge relief for upper-income American investors, which could fuel the notion that the entire exercise is a big giveaway to large donors. But the mysterious “surcharge” on wealthier taxpayers might take away what the rest of the plan giveth.
But many Americans with S corporations, LLCs or partnership entities would potentially receive a much greater windfall, if they could choose to pay taxes on their corporate earnings at 25% rather than nearly 40%. (Note: The Trump organization is a pass-through entity.)
A huge unknown is which deductions would be eliminated in return for the higher standard deduction. Would the plan eliminate the deduction for state and local taxes, which is especially valuable to people in high-tax states such as New York, New Jersey and California, and in general to higher-income taxpayers who pay state taxes at the highest rate?
Currently, about one-third of the 145 million households filing a tax return — or roughly 48 million filers — claim this deduction. Among households with income of $100,000 or more, the average deduction for state and local taxes is around $12,300. Some economists have speculated that people earning between $100,000 and around $300,000 might wind up paying more in taxes under the proposal than they do now. Taxpayers with incomes above $730,000 would hypothetically see their after-tax income increase an average of 8.5%.
Big picture, economists are in the early stages of debating how much the plan might add to America’s soaring $20 trillion national debt. One back-of-the-envelope estimate by a Washington budget watchdog estimated that the tax cuts might add $5.8 trillion to the debt load over the next 10 years.
According to the Committee for a Responsible Federal Budget analysis, Republican economists have identified about $3.6 trillion in offsetting revenues (mostly an assumption of increased economic growth), so by the most conservative calculation, the tax plan would cost the federal deficit somewhere in the $2.2 trillion range over the next decade.
Others, notably the Brookings Tax Policy Center (see graph) see the new proposals actually raising tax revenues for individuals (blue bars), while mostly reducing the flow to Uncle Sam from corporations.
These cost estimates have huge political implications for whether a tax bill will ever be passed. Under a prior agreement, the Senate can pass tax cuts with a simple majority of 51 votes — avoiding a filibuster that might sink the effort — only if the bill adds no more than $1.5 trillion to the national debt during the next decade.
That means compromise. To get the impact on the national debt below $1.5 trillion, Congressional Republicans might decide on a smaller cut to the corporate rate, to something closer to 25-28%, while giving typical families a smaller 1-percentage point tax cut. Under that scenario, multi-national corporations might be able to bring back $1 trillion or more in profit at unusually low tax rates, and most families might see a modest tax cut that will put a few hundred extra bucks in their pockets.
Alternatively, Congress could pass tax cuts of more than $1.5 trillion if the Republicans could flip enough Democratic Senators to get to 60 votes. The Democrats would almost certainly demand large tax cuts for lower and middle earners, potentially lower taxes on corporations and higher taxes on the wealthy. Would you bet on that sort of compromise?
Special thanks to Bob Veres for his commentary.