End of 2017 Market Letter

Faster than a speeding bullet! More powerful than a locomotive! Up in the air… look! It’s a bird… no, it’s a plane… no, it’s Super Tax Reform!

It only took 31 years, but we now have substantive tax change on our hands. While the scope of the bill is massive, the promised effect for America’s middle class will be muted. Here’s a short list of the winners:

– The ultra-wealthy, since the estate tax exemption doubles to basically 11MM per person

– Corporations whose top tax rate declines from 35% to 21%

– Individuals and small business who can take advantage of pass-through entities

– Lower to middle income families with multiple children

– Hedge fund managers since the concept of carried interest was not repealed

A short list of losers would include:

– High income tax domiciles since state and local deductibility has been slashed

– Expensive real estate markets because of mortgage interest deduction limitations over 750K and   capping of real estate tax deductions

– Charitable organizations – many folks will not be able to itemize, hence eliminating a tax-motivated reason to contribute

– Residents of primarily “blue” states since the Alternative Minimum Tax was not repealed

I remember the Tax reform Act of 1986 well. Among the prime beneficiaries of that era were accountants and lawyers, who reaped significant fees for finding loopholes in the system. This hastily constructed non-partisan bill provides the same opportunities for practitioners. Frankly, it will be our job to figure out how everyone’s taxes can be paid at the legal minimum. Many of us in the office will be spending our holiday vacations diving into the nitty gritty details of the legislation to uncover potential opportunities. For now, I’d suggest front-loading charitable contributions before year-end, and also pre-paying real estate taxes if you did not have Alternative Minimum Tax last year. Please feel free to e-mail or call if you have further questions. The bill will have no bearing on 2017 preparation or tax rates.

Arguably the greatest winner overall is Wall Street. 2017 was an outstanding year for equities and stock portfolio growth. The combination of low interest rates, solid corporate earnings, low volatility, fortress-like balance sheets, and strong consumer confidence made for a wonderfully benign investing environment. Corporate tax reform, according to CNBC, looks to add between 8.5-11.5% to 2018 earnings. This is akin to adding lighter fluid to an already robust fire. Optimism and bullishness continue to be Wall Street’s mantra.

Frankly, it’s difficult to disagree with traders’ assessments. The overall macroeconomic picture hasn’t changed much, and tax reform is a powerful aphrodisiac. I have little faith in the “trickle down” nature of the plan. It is scheduled to add anywhere from 1.5 to 2+ trillion dollars to the national debt, and I sincerely doubt whether the promised number of jobs or capital expenditures will materialize. They didn’t during the Reagan years, and probably won’t now. Therefore, if corporations can keep more profits due to paying less taxes, what will they do with the cash? Keep in mind also that multi-nationals will be repatriating dollars from overseas to add to the coffers. Companies would be able to do one or all of these things:

– Increase dividends

– Declare special dividends

– Buy back their own stock

– Acquire other businesses

All of these options are accretive for equities. Therefore, I have to divorce myself from some of the perceived inequities within the bill to concentrate on what’s best for my friends and clients. Helping to save taxes and manage assets will continue to be my goals for 2018 and the years beyond.

Unless the last week of trading suffers outsized losses, December will be another solid month for stocks. All of us must have been good little ones since the Santa rally was powerful. We’ll discuss what’s ahead in a moment, but for now, let’s celebrate the salubrious 2017 wealth effect.

Our traditional year-end custom is to grade ourselves on last year’s predictions, and look into the crystal ball for next year. Let’s first take a look at last year’s fearless Top 10:

  1. At least one of President Trump’s Cabinet selections will not be confirmed by Congress. WHILE NOT DIRECTLY TRUE, A COUPLE WERE OUSTED BEFORE THE CONFIRMATION PROCESS, AND TOM PRICE HAD A SCANDAL INDUCED DEPARTURE.
  2. Significant tax reform will be passed, both on the individual and corporate levels. TRUE… SEE ABOVE PARAGRAPHS. THIS IS THE ONLY PIECE OF LEGISLATION SIGNED BY THE PRESIDENT AND CONGRESS IN 2017.
  3. The Federal Reserve will hike interest rates fewer times than their stated three for 2017 due to US growth being stubbornly sluggish. WRONG. DECEMBER MADE IT A TRIO, ALTHOUGH GROWTH REMAINED LOWER THAN FORECASTED.
  4. Far right candidates will win elections in the Netherlands and France. 50-50 (NETHERLANDS).
  5. A major game of “chicken” will be waged with China over trade and tariff policy. Neither side will blink. TRUE, AND EYES ARE STILL WIDE OPEN.
  6. Oil and natural gas entities having a green light to “drill, baby, drill” will keep energy prices affordable. TRUE.
  7. There will be a significant scandal in the White House involving conflicts of interest within the Trump family. NOT REALLY, BUT THIS MOVIE IS ONLY IN PREVIEW STAGE.
  8. The Democratic Party will be relatively powerless in 2017, but will find new leadership late in the year in the person of Cory Booker of New Jersey. CORRECT ON THE FIRST ASSERTION IF RELATIVELY POWERLESS CAN BE EXPANDED TO TOOTHLESS. NO SHINING STARS IN ASCENDANCY YET.
  9. Stocks will again outperform other assets, but performance will not be as strong as in 2016. Financials and infrastructure plays will be most prominent. PARTIALLY CORRECT. VERY FEW PUNDITS PREDICTED HOW TERRIFIC 2017 WOULD BE FOR EQUITIES, BUT WE’LL TAKE IT FOR SURE. FINANCIALS AND INDUSTRIALS DID QUITE WELL, BUT TECH WAS THE LEADER.
  10. The Cleveland Indians will win the World Series. WOULD HAVE BEEN EASIER TO COMMENT ON THE BROWNS.

Without further ado, let’s jump into the fray for 2018:

  1. Jay Powell, as new Chairman of the Federal Reserve, will raise rates at least three more times in 2018 in an attempt to further correct monetary policy.
  2. The Senate will be Democratic controlled following the November mid-term elections. The House will remain under Republican leadership, but by a much closer margin.
  3. The MeToo movement will continue to gain traction. The harassment perpetrators will move from being identified in politics, sports, and show business to corporate America.
  4. Volatility in the market will increase substantively in 2018, leading to at least one corrective period.
  5. Cryptocurrencies like Bitcoin will continue to be frothy fads, but will make no major inroads within the traditional economy.
  6. The Mueller investigations into Russian election meddling will force Paul Manafort at minimum to flip to avoid imprisonment. The path will inexorably lead toward the President’s children.
  7. Tensions between North Korea and the United States will remain on simmer, but not boil over.
  8. Treasury yields will approach 3% for the 10 year, but not exceed that figure. Gold and precious metals will remain stagnant from a pricing perspective.
  9. Sears and JC Penney will shutter all in-store retail operations.
  10. Stocks will again perform nicely, but not at the 2017 levels. There will be more nervousness, but overall conditions are still intact for positive gains.

No, I won’t make a sports prediction as I jinxed the Indians last year…

Thanks as always for your trust and support. I look forward to talking with you soon… enjoy the rest of the holiday season…


Bill Schiffman

Registered Representative


The opinions expressed in this letter are those of William Schiffman and should not be construed as specific investment advice. All information is believed to be from reliable sources; however, no representation is made to its completeness or accuracy. All economic and performance information is historical and not indicative of future results.

Diversification cannot assure a profit or guarantee against a loss.