The Tax Cut You've Been Waiting For - Indexing Capital Gains To Inflation

We wanted to bring you this news as it unfolds. We have noted that the Trump Administration is considering indexing capital gains taxes to inflation. Under the proposal Mnuchin has the legal authority to change the indexing of capital gains taxes from nominal terms to inflation-adjusted terms, without an act of Congress. The proposal would eliminate taxing inflationary capital gains by indexing that gain to inflation and taxing only the after-inflation gain.

Estimates suggest that the tax change would be an 8-25% cut in the effective capital gains tax rate. This proposal increases the after-tax rate of return on stocks and will result in a significant unlocking of capital which would be a positive for US equities.

As far as timing is concerned, August and September have historically been weak months for stocks and Presidential approval ratings during midterm election years. Adjusting the capital gains tax during this time could be used as a work around.

The only taxpayers not receiving a significant tax cut from the 2017 tax changes are the wealthy in high tax states due to the limitations on state and local taxes (SALT). Indexing capital gains taxes to inflation is really a tax cut for the blue state taxpayers hurt by SALT (CA, NY, NJ, CT). High tax states would also likely to get a short-term reprieve from migration pains with federal taxes on capital gains reduced, effectively lowering the total tax obligation residents in high tax states now face.  The reduced tax burden may motivate some residents in high tax states to stay where they are.  Also, lower taxes on capital gains can unlock that capital (create asset sales) and create a taxable event in which the states can collect their tax. States benefit from this windfall.

A capital gains tax cut is one of the few tax changes that actually pays for itself. In 2003 the capital gains tax was cut by 25%. Following the tax cut, CBO expected to collect $260bn in capital gains tax revenue over five years. Revenues actually totaled $427bn in that time period, 67% higher than projected, as investors unlocked (sold) their capital. The 1997 capital gains tax cut produced similar results.

While there is a belief that Treasury has the legal authority to index capital gains to inflation, the statute is murky enough that a lawsuit would likely follow. We will keep you posted as this development unfolds. Please call or email us with any questions. Source: Strategas

 


 

Brian Amidei is Coachella Valley's only Barron's Magazine Top 1,000 Advisor in 2013 and 2014!

Brian Amidei, along with Partners Joseph Romano and Brett D'Orlando have also been named *2014, 2015, 2016, 2017 Five Star Wealth Managers!

Disclosures:

Awards and recognitions by unaffiliated rating services, companies, and/or publications should not be construed by a client or prospective client as a guarantee that he/she will experience a certain level of results if Fortem is engaged, or continues to be engaged, to provide investment advisory services; nor should they be construed as a current or past endorsement of Fortem or its representatives by any of its clients. Rankings published by magazines and others are generally based on information prepared and/or submitted by the recognized advisor. Awards may not be indicative of one client?s experience or of the Firm?s future performance.  Neither Fortem nor the recognized advisor has paid a fee for inclusion on a list, nor purchased any additional material from the award provider. The criteria for each award is listed below:

Barron's Disclosure:

The Barron's award is is based on the recognized adviser's assets under management, contribution to the firm's revenues and profits, and quality of practice.  Investment performance is not an explicit criteria.  Additional information about this award is available at http://online.barrons.com/report/top-financial-advisors. 

Five Star Professional Disclosure:

The Five Star Wealth Manager award is based on 10 eligibility and evaluation criteria: 1) Credentialed as an investment advisory representative (IAR) or a registered investment advisor; 2) Actively employed as a credentialed professional in the financial services industry for a minimum of five years; 3) Favorable regulatory and complaint history review; 4) Fulfilled their firm review based on internal firm standards; 5) Accepting new clients; 6) One-year client retention rate; 7) Five-year client retention rate; 8) Non-institutionalized discretionary and/or non-discretionary client assets administered; 9) Number of client households served; and 10) Educational and professional designations. The inclusion of a wealth manager on the Five Star Wealth Manager list should not be construed as an endorsement of the wealth manager by Five Star Professional or the magazine. The award methodology does not evaluate the quality of services provided.  Additional information about this award is available at: fivestarprofessional.com/2016FiveStarWealthManagerMethodology.pdf

Fortem Financial 2016. All rights reserved. 

Data Sources:  News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations.  Market Data: Based on reported data in WSJ Market Data Center (indexes); U.S. Treasury (Treasury Yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates).  All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. 

Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice.  The opinions expressed are solely those of the author, and do not represent those of Fortem Financial, LLC or any of its affiliates.  Past performance is no guarantee of future results.  All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.  Forward looking statements are based on current expectations and assumptions, the economy, and future conditions.  As such, forward-looking statements are subject to inherent uncertainty, risks, and changes in circumstance that are difficult to predict.  Actual results may differ materially from the anticipated outcomes.  Carefully consider investment objectives, risk factors and charges and expenses before investing.  Fortem Financial is a registered investment adviser with the SEC.  Advisory services are offered through Fortem Financial.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks.  The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy.  The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange.  The Russell 2000 is a market-cap weighed index composed of 2,000 U.S. small-cap common stocks.  The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide.  Market indices listed are unmanaged and are not available for direct investment.

If trade pressures continue to ease, equities should benefit

Our view over the past four weeks was that the Trump Administration needed a win on trade (outside of China) to build support for larger escalation with China. This process is now in place. After weeks of rising trade tensions, the U.S. and EU meeting last week resulted in some rare positive trade-related news. It is unclear whether this marks a broader shift away from protectionism or is an isolated event. But at this point, the bar for positive surprises is so low that even news that negotiations are continuing is considered a win for supporters of free trade. The recent pattern suggests that President Trump will shortly resume his harsh trade rhetoric, so we are approaching the issue cautiously. But we would welcome any move away from trade protectionism.

So far, actual economic damage from imposed tariffs and harsher trade rhetoric has been minimal. However, politicians could still enact additional restrictive measures that could cause more serious fallout. The uncertainty over the future of trade policy is causing problems for equity markets, as expectations are rising that companies could delay investments or business plans as they await additional clarity.

The good news for stock markets is that corporate profits have been stellar this year and economic growth remains solid. These factors have kept stock prices from falling in the face of trade uncertainty and kept government bond yields relatively low. Any improvement in the trade backdrop should cause both stock prices and bond yields to move higher. For now, however, we expect financial markets to continue churning and stocks to remain in the same trading range they have been in since early February: a high of 2,875 and a low of 2,532 for the S&P 500 Index.

The markets were mixed last week as trade uncertainties, a somewhat disappointing Q2 GDP estimate (+4.1%), and several notable earnings misses clouded investor sentiment.  For the week, the Dow Jones Industrial Average (+1.67%) led the major indices, the S&P 500? Index gained 0.61% while the Nasdaq composite fell 1.06% and the Russell 2000? Index lost 1.97%.  So far, quarterly results from 53% of S&P companies report an average earnings growth rate of 21.3%, the highest since the third quarter of 2010.  83% of companies have exceeded earnings expectations; 73% exceeded revenue targets.  Market results, especially for small cap stocks, suggest that investors are overlooking positive earnings reports and generally positive outlooks to reflect a “risk off” perspective.

Technology stocks reported mixed results: Alphabet posting strong results while Facebook and Intel missing earnings and revenue targets.  Facebook lost almost 20% after reporting slower growth and higher expenses.  The selloff, while perhaps overdone, nevertheless exemplifies investors’ high expectations for Technology stocks’ continuous earnings and revenue growth.  Several other bellwether companies, including United Technologies, United Parcel Service and Verizon, reported strong earnings and outlook

Transportation-related stocks underperformed due to concerns the sector is nearing peak contract rates which would lead to slower revenue growth.  Company commentaries for trucking, rail and marine sectors, though, reflected a more bullish sentiment based on economic growth and supply constraints.  Most companies reported minimal impact from tariffs; most believe the issue will not materially impact performance.

On the trade front, the European Commission and U.S. agreed to put proposed tariffs on hold in favor of trade negotiations.  China and the U.S. remain at an impasse on trade; this week, Qualcomm abandoned its takeover of NXP Semiconductors after China failed to approve the deal on antitrust concerns.  Somewhat more encouraging news on NAFTA negotiations suggests that the U.S. may moderate its demands; here, the White House strategy may reflect feedback from Republican legislators seeking to deescalate trade tensions.  The markets may respond negatively if a resolution is not forthcoming.

On balance, last week’s news including strong GDP growth, earnings, and preliminary steps towards easing trade conflicts might have reassured the markets.  However, uncertainties related to geopolitics and the mixed results from the Technology sector led investors to avoid risk; hence, the decline in small caps.  And yet, investors will likely determine that tariffs have not impacted the markets; and the strong economy is providing momentum entering the second half of the year.

Source: Pacific Global Investment Management Copany

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments. 


Last Week's Headlines: 7/30/2018

1. Existing-home sales decreased for the third straight month in June, as declines in the South and West exceeded sales gains in the Northeast and Midwest, according to the National Association of Realtors. The ongoing supply and demand imbalance helped push June's median sales price to a new all ...

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Google Cloud's partnership network begins paying dividends

When Google Cloud brought Diane Greene on board at the end of 2015, one of her goals was to expand the division's partership network, an approach she found worked quite well when she was ...

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Brian Amidei is Coachella Valley's only Barron's Magazine Top 1,000 Advisor in 2013 and 2014!

Brian Amidei, along with Partners Joseph Romano and Brett D'Orlando have also been named *2014, 2015, 2016, 2017 Five Star Wealth Managers!

Disclosures:

Awards and recognitions by unaffiliated rating services, companies, and/or publications should not be construed by a client or prospective client as a guarantee that he/she will experience a certain level of results if Fortem is engaged, or continues to be engaged, to provide investment advisory services; nor should they be construed as a current or past endorsement of Fortem or its representatives by any of its clients. Rankings published by magazines and others are generally based on information prepared and/or submitted by the recognized advisor. Awards may not be indicative of one client?s experience or of the Firm?s future performance.  Neither Fortem nor the recognized advisor has paid a fee for inclusion on a list, nor purchased any additional material from the award provider. The criteria for each award is listed below:

Barron's Disclosure:

The Barron's award is is based on the recognized adviser's assets under management, contribution to the firm's revenues and profits, and quality of practice.  Investment performance is not an explicit criteria.  Additional information about this award is available at http://online.barrons.com/report/top-financial-advisors. 

Five Star Professional Disclosure:

The Five Star Wealth Manager award is based on 10 eligibility and evaluation criteria: 1) Credentialed as an investment advisory representative (IAR) or a registered investment advisor; 2) Actively employed as a credentialed professional in the financial services industry for a minimum of five years; 3) Favorable regulatory and complaint history review; 4) Fulfilled their firm review based on internal firm standards; 5) Accepting new clients; 6) One-year client retention rate; 7) Five-year client retention rate; 8) Non-institutionalized discretionary and/or non-discretionary client assets administered; 9) Number of client households served; and 10) Educational and professional designations. The inclusion of a wealth manager on the Five Star Wealth Manager list should not be construed as an endorsement of the wealth manager by Five Star Professional or the magazine. The award methodology does not evaluate the quality of services provided.  Additional information about this award is available at: fivestarprofessional.com/2016FiveStarWealthManagerMethodology.pdf

Fortem Financial 2016. All rights reserved. 

Data Sources:  News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations.  Market Data: Based on reported data in WSJ Market Data Center (indexes); U.S. Treasury (Treasury Yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates).  All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. 

Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice.  The opinions expressed are solely those of the author, and do not represent those of Fortem Financial, LLC or any of its affiliates.  Past performance is no guarantee of future results.  All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.  Forward looking statements are based on current expectations and assumptions, the economy, and future conditions.  As such, forward-looking statements are subject to inherent uncertainty, risks, and changes in circumstance that are difficult to predict.  Actual results may differ materially from the anticipated outcomes.  Carefully consider investment objectives, risk factors and charges and expenses before investing.  Fortem Financial is a registered investment adviser with the SEC.  Advisory services are offered through Fortem Financial.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks.  The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy.  The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange.  The Russell 2000 is a market-cap weighed index composed of 2,000 U.S. small-cap common stocks.  The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide.  Market indices listed are unmanaged and are not available for direct investment.

Earnings have been strong but the markets are not reflecting current economic realities

We continue to believe that there is a disconnect between the strong US economy / robust corporate earnings and the wall-of-worry (trade, yield curve, debt levels, mid-term elections, etc.). Politics are trumping economics this midterm election year, but our base case remains intact: investors are underestimating the stimulative effects of fiscal stimulus and regulatory easing while overestimating the potential negative impacts of a trade war, a rotation (not a fade) in global growth is underway, and a capex surge is brewing. The supply-side of the economy is now in focus and investments that will increase productivity will result in higher wages.

Capex spending is up year-over-year and is finally being rewarded by the market over share repurchases. Companies spending on capex are outpacing the S&P by 200 basis point year-to-date. It is still early, but an emphasis on capital spending could greatly extend the business cycle as investments boost productivity, earnings and wages while keeping unit labor costs low and the Fed accommodative.

Last week, the Russell 2000® Index (+0.58%) led the major indices; the Dow Jones Industrial Average and the S&P 500® Index rose modestly (+0.15% and 0.02%, respectively) while the Nasdaq Composite posted a slight (-0.07%) decline. Earnings reports for the week were generally good; those which missed expectations cited company-specific events rather than overarching economic factors. For example, Netflix lost approximately 10% after falling well short of its projections for new subscribers. In contrast IBM and Microsoft beat revenue and earnings expectations; both reported surging growth in their analytics and cloud storage strategies.  Financials companies including Bank of America and BlackRock continued to report strong results although the investors are closely monitoring the sector out of apprehension that the Federal Reserve might slow interest rate increases. Other bellwether stocks, including Honeywell, Johnson & Johnson, CSX Corporation and United Continental, beat earnings estimates. Company executives have reported strong demand while expressing some concern over the potential impact of trade tariffs. They are likely to take a more cautious attitude until they can assess the effect of emerging trade policies on their businesses.

Trade continued to dominate the headlines.  On Friday, President Trump announced his willingness to place tariffs on all $505 billion in Chinese goods imported to the U.S.; he also stated that he believes China and Europe are engaging in currency manipulation to lower their currencies which would effectively lower the prices of their exports. The various policy initiatives appear based on current market conditions without reflecting the impact of behavioral changes in response to policy changes. So far, the markets continue to reflect the assumption that the tariff disputes will reach a negotiated resolution. Elsewhere, oil prices remained volatile due to uncertainties about the added production by Russia and Saudi Arabia to offset production declines from Iran and Venezuela.  Last week’s higher oil inventories, as reported by the EIA, may be more of an anomaly than a signal of a more worrisome increase in U.S. production levels.

The strength of the global economy has continued to support the markets’ advance despite the political uncertainties related to trade sanctions and energy production.  Also, many companies are reporting higher earnings due to the benefit of tax reform; they are crediting the lower corporate tax rate in supporting various growth initiatives. Many companies report second quarter earnings this week; investors will closely monitor earnings reports and political developments during what is otherwise a seasonally slower period in the markets.

Source: Strategas, Pacific Global Investment Management Company

Chart reflects price changes, not total return.  Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.


Last Week's Headlines: 7/23/2018

1. Industrial production rose 0.6 precent in June after declining 0.5 percent in May. For the second quarter as a whole, industrial production advanced at an annual rate of 6.0 percent, its third consecutive quarterly increase. Manufacturing output moved up 0.8 percent in June. The production of ...

Read Story

Europe's Smack to Google May Only Be the Beginning

The european Commission's record-breaking fines for Google foreshadow a larger regulatory invasion of the U.S. technology industry. 

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Brian Amidei is Coachella Valley's only Barron's Magazine Top 1,000 Advisor in 2013 and 2014!

Brian Amidei, along with Partners Joseph Romano and Brett D'Orlando have also been named *2014, 2015, 2016, 2017 Five Star Wealth Managers!

Disclosures:

Awards and recognitions by unaffiliated rating services, companies, and/or publications should not be construed by a client or prospective client as a guarantee that he/she will experience a certain level of results if Fortem is engaged, or continues to be engaged, to provide investment advisory services; nor should they be construed as a current or past endorsement of Fortem or its representatives by any of its clients. Rankings published by magazines and others are generally based on information prepared and/or submitted by the recognized advisor. Awards may not be indicative of one client?s experience or of the Firm?s future performance.  Neither Fortem nor the recognized advisor has paid a fee for inclusion on a list, nor purchased any additional material from the award provider. The criteria for each award is listed below:

Barron's Disclosure:

The Barron's award is is based on the recognized adviser's assets under management, contribution to the firm's revenues and profits, and quality of practice.  Investment performance is not an explicit criteria.  Additional information about this award is available at http://online.barrons.com/report/top-financial-advisors. 

Five Star Professional Disclosure:

The Five Star Wealth Manager award is based on 10 eligibility and evaluation criteria: 1) Credentialed as an investment advisory representative (IAR) or a registered investment advisor; 2) Actively employed as a credentialed professional in the financial services industry for a minimum of five years; 3) Favorable regulatory and complaint history review; 4) Fulfilled their firm review based on internal firm standards; 5) Accepting new clients; 6) One-year client retention rate; 7) Five-year client retention rate; 8) Non-institutionalized discretionary and/or non-discretionary client assets administered; 9) Number of client households served; and 10) Educational and professional designations. The inclusion of a wealth manager on the Five Star Wealth Manager list should not be construed as an endorsement of the wealth manager by Five Star Professional or the magazine. The award methodology does not evaluate the quality of services provided.  Additional information about this award is available at: fivestarprofessional.com/2016FiveStarWealthManagerMethodology.pdf

Fortem Financial 2016. All rights reserved. 

Data Sources:  News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations.  Market Data: Based on reported data in WSJ Market Data Center (indexes); U.S. Treasury (Treasury Yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates).  All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. 

Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice.  The opinions expressed are solely those of the author, and do not represent those of Fortem Financial, LLC or any of its affiliates.  Past performance is no guarantee of future results.  All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.  Forward looking statements are based on current expectations and assumptions, the economy, and future conditions.  As such, forward-looking statements are subject to inherent uncertainty, risks, and changes in circumstance that are difficult to predict.  Actual results may differ materially from the anticipated outcomes.  Carefully consider investment objectives, risk factors and charges and expenses before investing.  Fortem Financial is a registered investment adviser with the SEC.  Advisory services are offered through Fortem Financial.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks.  The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy.  The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange.  The Russell 2000 is a market-cap weighed index composed of 2,000 U.S. small-cap common stocks.  The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide.  Market indices listed are unmanaged and are not available for direct investment.

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