You are viewing a preview location.

November 8 , 2017

The Markets

 

“Taxes are what we pay for a civilized society.”

 

U.S. Supreme Court Justice Oliver Wendell Holmes’s statement is engraved on the front of the Internal Revenue Service building in Washington, D.C. Some people agree with the sentiment. Others believe it to be a logical fallacy.

 

It’s likely the tax plan proposed by House Republicans last week had all of them talking, regardless of position on the opinion spectrum. Some of the changes suggested in the proposal include:

 

  • Reducing current marginal income tax brackets from seven to four (12, 25, 35, and 39.6 percent). The New York Times reported, “While the lowest income rate would increase, typical families in the existing 10 percent bracket would most likely be better off because of a larger child tax credit and an increase in the standard deduction.”
  • Repealing the Alternative Minimum Tax.
  • Increasing the standard deduction to $12,000 for individuals and $24,000 for married couples, while eliminating personal exemptions (the $4,050 exemptions you claim for yourself, your spouse, and your dependents).
  • Repealing state and local tax deductions.
  • Reducing (and eventually eliminating) estate taxes.
  • Setting the corporate tax rate at 20 percent. Financial Times wrote, “This will not increase wages or growth by much, and nowhere near the wild claims made by its proponents. But a lower rate combined with a broader tax base is not a terrible idea…To pay for the cuts, the tax law writers have gone after corporate deductions…”
  • Eliminating medical expense deductions. The Hill explained, “Under current law, the IRS allows individuals to deduct qualified medical expenses that exceed 10 percent of a person’s adjusted gross income for the year. The bill would repeal that itemized deduction, effective in 2018.”

 

In addition to headline news about tax reform, investors contemplated the appointment of Jerome Powell as the next Chair of the Federal Reserve and embraced strong earnings. The Standard & Poor’s 500 Index, Dow Jones Industrial Average, and NASDAQ closed at record highs last week.

 

GPS STRATEGIES were unchanged.  We continue to see value in our Aerospace and Defense investments made in many models in May due to the commitment of Washington to make this a focal point of trade.  From Saudi Arabia, Israel, Japan and many other countries our defense exports to our allies are set to rise according to Bloomberg.  Furthermore, our timber investment made in the wake of the tragic destruction from the hurricanes and wild fires is doing well as millions of homes will need to be rebuilt.  This week we put in some stop-limit orders stop-limit order to protect some of the investments that have done so well this year.  Our algorithm continues to be bullish on stocks.  This analysis based on market technicals attempts to indicate whether the market is in an up, neutral or down trend.  We continue to favor international developed and emerging markets, US growth stocks, active bond managers, defense stocks, timber and healthcare. 

 

THE FEDERAL RESERVE:  "Collectively, the Fed, European Central Bank and Bank of Japan own one-third of the global bond market. "

- Mary Ellen Stanek, CFA
Managing Director and Director of Asset Management, Robert W. Baird & Co.,
Chief Investment Officer, Baird Advisors

 

"Don't Fight the Tape or the Fed!"  It is one of investing's "golden" rules and is perhaps never more true than it is today.  The Fed, ECB and BoJ own one-third of the global bond market.  One-third!  Pause, put finger to chin and wrap your mind around that one.  Print and use that money to buy bonds -- tens of trillions of dollars, yen and Euros worth of bonds.  Liquidity created out of thin air.  If I buy bonds from you, where are you going to reinvest your proceeds?

 

The massive amount of global quantitative easing and central bank buying has driven yields to 5,000-year lows.  Well, technically we are off those lows but still low, unattractive and negative in many places.  Central banks have inflated the global fixed income markets and equity markets.  Don't fight the big guy has gained new meaning.  Good news for us but now what?

 

Game plan: Keep our eyes on the central bankers, keep our eyes on the market's trend evidence and keep our eyes on the recession indicator signals.  Every Fed tightening period has ultimately landed us in recession.  Bad stuff happens to equity markets and high yield corporate bonds in recession.  This week, let's take a look at several of my favorite recession watch indicators.  Objective: avoid pain.

 

Three Steps and a Stumble - Don't Fight the Tape or the Fed

 

You may have heard the phrase, "three steps and a stumble."  It means that when the Fed raises rates three times in a row, a market stumble is likely to follow. 

 

Following is a visual look at that rule:

  • The S's in the chart mark the third consecutive rate hike
  • Note how the hikes almost always precede a new recession
  • Note the current signal is a sell or "S" and

Note the DJIA has declined a median of 17.9% from sell signals to bear market bottoms

 

 

 

.

are you bullish about Pet Tech? Early in the last century, authors like Anna Sewell (Black Beauty) and Jack London (White Fang) wrote stories that encouraged readers to understand and empathize with animals. Today, entrepreneurs are developing devices to help people better understand pets. Here are a few innovations in the pet-tech space that may (or may not) become household necessities or in-demand holiday gifts:

 

  • Remote control pet interaction. You may be sitting in your office, miles from home, but that doesn’t mean you can’t pull out your smartphone and fling a treat to Fido or shine a laser for Boots to chase. That’s right, interactive pet cameras let you see, feed, talk to, and play with your pet when you’re far away.

 

  • Pet insight software. A tech writer at Slate wrote, “For the most part, [my cat’s] feelings, daily activities, and health are a black box to me.” Apparently, it’s a common issue. Entrepreneurs have invested $10 million to develop “deep learning software that can analyze the huge quantities of pet video…to learn more about animal behavior and how it's linked to animal health issues and moods.”

 

  • Fitness trackers for pets. Pet owners who suspect their animals are too sedentary may want to invest in smart collars for their pets. Some collars track temperature, heart rate, heart rate variability, activity, calories burned, and more. Once a normal baseline has been established, pet owners may be able to spot anomalies that signal health issues.

 

  • Robotic pets with artificial intelligence. Perhaps, you just don’t have the time to feed, walk, and play with a pet. Maybe, you travel too much or dislike the household wear and tear associated with pets. If you want a pet that behaves perfectly and requires less care, you may want to consider a robotic alternative that’s “packed with an array of sensors, cameras, microphones, and internet connectivity, as well as far more advanced AI backed by cloud computing to develop the dog’s personality,” according to The Guardian.

 

It’s a high-tech world, after all.

 

Weekly Focus – Think About It

 

“Lots of people talk to animals.... Not very many listen, though.... That's the problem.”

--Benjamin Hoff, Author of The Tao of Pooh

 

Best regards,

 

The Jim Goodland Team at GPS

 

P.S.  Please feel free to forward this commentary to family, friends, or colleagues. If you would like us to add them to the list, please reply to this email with their email address and we will ask for their permission to be added.

 

 

* Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.  However, the value of fund shares is not guaranteed and will fluctuate.

* Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest rate and credit risk as well as additional risks based on the quality of issuer coupon rate, price, yield, maturity, and redemption features.

* The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. You cannot invest directly in this index.

* All indexes referenced are unmanaged. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.

* The Dow Jones Global ex-U.S. Index covers approximately 95% of the market capitalization of the 45 developed and emerging countries included in the Index.

* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.

* Gold represents the afternoon gold price as reported by the London Bullion Market Association. The gold price is set twice daily by the London Gold Fixing Company at 10:30 and 15:00 and is expressed in U.S. dollars per fine troy ounce.

* The Bloomberg Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.

* The DJ Equity All REIT Total Return Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.

* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.

* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

* Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

* Past performance does not guarantee future results. Investing involves risk, including loss of principal.

* You cannot invest directly in an index.

* Stock investing involves risk including loss of principal.

* Consult your financial professional before making any investment decision.

 

Sources:

http://www.bankrate.com/finance/taxes/tax-quotes-by-famous-people-in-power-1.aspx#slide=3

https://www.nytimes.com/interactive/2017/09/27/us/politics/six-charts-to-explain-the-republican-tax-plan.html

https://www.kiplinger.com/article/taxes/T055-C032-S014-3-game-changers-for-investors-in-house-tax-plan.html

https://www.ft.com/content/ee5a97ce-c07e-11e7-b8a3-38a6e068f464 (or go to https://s3-us-west-2.amazonaws.com/peakcontent/+Peak+Commentary/11-06-17_FinancialTimes-The_Good_the_Bad_and_the_Ugly_of_US_Tax_Reform-Footnote_4.pdf)

http://thehill.com/policy/finance/358437-gop-tax-bill-would-eliminate-medical-expense-deductions

https://www.cnbc.com/2017/11/02/trump-picks-jerome-powell-to-succeed-yellen-as-fed-chair.html

https://www.cnbc.com/2017/11/03/us-stocks-apple-earnings-jobs-report.html

https://edsitement.neh.gov/lesson-plan/jack-londons-call-wild-nature-faker

https://www.cnbc.com/2017/10/25/petcube-raises-10m-from-yc-almaz-capital-to-understand-dogs-cats.html

http://www.slate.com/articles/technology/technology/2017/11/go_ahead_put_a_fitness_tracker_on_your_pet.html

https://www.theguardian.com/technology/2017/nov/01/sony-aibo-ai-robotic-dog-back-from-dead

https://www.dogquotations.com/quotes-about-animals.html

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Spire Wealth Management, LLC), or any non-investment related content, made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from Spire Wealth Management, LLC. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Spire Wealth Management, LLC is neither a law firm nor a certified public accounting firm and no portion of the website content should be construed as legal or accounting advice. A copy of the Spire Wealth Management, LLC’s current written disclosure statement discussing our advisory services and fees is available upon request.