Elliot H. Kallen

Financial Planner, Wealth Manager, Registered Principal
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Major News Affecting Your Money

Headlines lately have been filled with news affecting your wealth. Here’s what’s most important.

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A sweeping revision of the U.S. Tax Code is being negotiated in Congress. The proposal would cut taxes by $1.5 trillion over 10 years, adding to America’s $20 trillion debt. The bill would redistribute the federal tax burden of individuals, making winners of some and losers of others.

Residents of high tax places, like New York, New Jersey, and California, are expected to pay about $1 trillion more in taxes under the bill’s limit on the deduction for state, local, and property taxes. This key provision of the bill, along with a few other controversial changes, are meeting opposition in Congress, and the final legislation could be scaled back significantly in political horse trading. We’ll update you by Thanksgiving with steps before the year ends to reduce your 2017 tax bill.

In other news affecting your money, President Trump nominated Jerome Powell as the next chairman of the U.S. Federal Reserve Board of Governors. Mr. Powell, 64, is expected to replace Janet Yellen, who is only the third Fed chair to serve a single four year term. Ms. Yellen was the first woman ever to hold the chairmanship and the first Democrat in the post since 1987.

Mr. Powell, who has been a member of the Board of Governors of the Fed since May 2012, was nominated by President Barack Obama and was the first member of the Fed from the opposition party nominated by a President since 1988. Mr. Powell has supported Janet Yellen’s stance on monetary policy and is expected to maintain the course she charted to promote growth.

The current expansion is one of the longest in modern U.S. history, and unemployment dropped to 4.1% in October, the lowest level since December 2000, even as the economy created 261,000 new jobs. The employment situation is about as good as it gets, and a very good surprise also just

Growth in real wages of 1.2% for the 12 months through October was nearly double the rate of the roaring 1990s expansion! It’s four times the rate of growth experienced during the last expansion, from 2000 through 2006. That’s all really good, but what’s best is the growth in real wages is not costing employers as much as expected because of an important economic surprise.

Productivity of American workers in the third quarter shot up to 3%, compared to the meager eight tenths of one percent productivity rate averaged in the previous five years. The gain in productivity offset the rise in wages, so the cost of an employee rose by just one half of 1%. Rising labor costs are the main driver of inflation, but they’re mitigated by productivity gains. That frees the Federal Reserve to maintain its easy monetary policy and let the economy run
a little hot without fears of igniting inflation.

All the good news was welcomed on Wall Street and propelled the Standard and Poor’s 500 stock index to new record high levels. A 10 or 15% drop could occur any time on a change in sentiment or bad unexpected news, and the chance of a bear market decline of 20% or more increases as the eight and a half year bull market grows older.

But inflation is benign, the job situation is excellent, and a productivity increase last quarter kept employment costs low despite a rise in real wages to workers. The average price of a stock in the S&P 500 trades at 19.9 times its trailing 12 month earnings and 17.4 times the consensus forecast for earnings in 2018, so stocks are not priced at a high multiple versus profits. The bull market could run much longer and go higher, which is good news for the growth
engine in a diversified portfolio.

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U.S. GDP Growth Surprise

In this week’s news affecting your wealth, the U.S economy grew 3% in the third quarter, much faster than had been expected. The consensus forecast of 59 economists, surveyed by The Wall Street Journal in early October, had been for 2.7% growth. The 3% figure is an estimate and the final number could be revised in the weeks ahead.  For growth to hit 3% in the third quarter despite two severe hurricanes, the threat of a nuclear war with North Korea, and political strife in Washington, D.C. is an impressive display of the current economic momentum.

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Meanwhile, the House of Representatives took a major step forward on enacting a massive $1.5 trillion tax cut, which will stimulate the already strong growth expected in 2018. The House narrowly approved a $746 billion federal budget for the government’s 2018 fiscal year, increasing the deficit by $80 billion. Approval of the budget resolution clears the path to the massive tax cut, but the details of the tax cut remained far from clear.

The proposal calls for paying for the tax cuts largely by eliminating the deduction on state and local taxes, including property taxes. The budget was narrowly passed by a 212 to 216 vote in the House on Thursday, with 20 Republicans from high tax states voting against the resolution, alongside Democrats.

More Republican lawmakers in states with high income and property taxes may defect and vote against the tax cuts unless the final legislation softens the financial blow to their constituents. High income urban and suburban communities would be hardest hit under the proposal, and  it would increase deficit spending and weaken the balance sheet of the U.S. Government. Should the tax proposal be adopted, your current tax liability for 2017 could decline. This could require lastminute tax planning before the end of the year.

Lower taxes would put more money in consumers’ hands and boost spending in the economy, and the Standard & Poor’s 500 stock index, which has been breaking records for months, ended last week at a new all time high. A correction of 10% or 15%, due to a change in sentiment or some bad unexpected world
event, is always possible. And, as the eight and a half year bull market grows older, the likelihood of a bear market a drop of 20% or more increases. However, inflation is tame, job growth has been strong, and real growth in wages and disposable personal income are at record levels.

Despite the tripling in the value of the S&P 500 since bottoming in March of 2009 and the stream of good economic news, irrational exuberance is not an issue.The average price of a stock in the S&P 500 trades at 19.9 times its trailing 12 month earnings and 17.4 times the consensus bottom up forecast for 2018 earnings, according to Wall Street analysts’ consensus estimates. Investors have not bid stock prices beyond their historical valuation range. Despite some very troubling headlines, the economy keeps surprising on the upside, and the bull market could head much higher and run much longer.

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Why Does the S&P Keep Going Up?

Despite the threat of a nuclear war, events in Washington, and a proliferation of more truly frightening headlines than ever before, the stock market has continued to go up. Why? While stocks breaking record highs repeatedly for months may seem at odds with all the bad news, rarely has the outlook for the economy been so bright. It is the best and worst of times.

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The International Monetary Fund, in its latest World Economic Outlook, revised its July estimate for world growth higher, to 3.7%. That’s way up from 2016, when the world economy grew by 3.2%. In July, the IMF estimated global GDP for 2017 would jump to 3.5%, and then to 3.6% in 2018. The latest revision bumped up the expected growth of the world economy to 3.6% in 2017 and 3.7% in 2018. A good world economy is good for everyone, including the U.S.

The Wall Street Journal asks more than 60 economists for their growth forecasts every month. In early October, the consensus forecast of those surveyed was for the US to average a 2.5% growth rate for the five quarters through September 30, 2018.The expected growth rate of 2.5% is much higher than the average GDP growth rate of just 2.1% during the first seven years of the economic expansion, which started in March 2009.

If the consensus forecast is right, then the U.S. is about to grow much faster than it has so far in this expansion. Economic growth drives earnings and earnings drive stock prices, so this is very good news for stocks. The average annual earnings growth rate over the decades on the Standard & Poor’s 500
stock index is 7.3%, but earnings are expected to grow by 12% in 2017 and 11% in 2018. That would be a surge in profit growth. Again, since earnings drive stocks, this is music to the ears of stock investors.

Adding to the good economic news, the Senate passed a budget resolution, taking a step toward enacting a massive one and a half trillion dollar tax cut.
Your current tax bill for 2017 could decline, and lower taxes would boost consumer spending, savings, and business activity.

Statistically, as this bull market grows older, the likelihood of a bear market a drop of 20% or more increases. As is always true, a correction of 10% or 15% is possible at any time, just on a change in sentiment or some bad unexpected world event. But the economy shows no signs of coming undone. Fundamental economic conditions that have accompanied bear markets in the past are not present now. To the contrary, inflation is tame, job growth has been strong, real growth in wages and disposable personal income are at record levels, and precursors of recessions in the past are nowhere to be found now.

Despite the value of the S&P 500 tripling since it bottomed in March 2009 and the flood of good economic fundamentals, irrational exuberance is not an issue.
Investors have not bid stock prices beyond their historical valuation range.

The average price of a stock in the S&P 500 trades at 19.9 times its trailing 12 month earnings and at 17.4 times the consensus bottomup forecast for 2018 earnings, according to consensus estimates. The price of the S&P 500, which has hit record highs repeatedly for months, broke another record last week, and the Dow Jones Industrial Average hit the 23,000 mark for the first time ever.

In the epochal opening sentence of A Tale of Two Cities, Charles Dickens described the years of The French Revolution as the best and worst of times, but the world may always seem to be in such turbulence and yet it keeps turning. Despite the frightening headlines and all that’s going wrong, the economic outlook is bright and the bull market could head much higher and run much longer.

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Inflation Mystery

Seventy-one-year-old Federal Reserve Board Chair Janet Yellen, a Professor of Economics at Harvard and Berkeley for four decades before her appointment to lead the Fed in 2014, admitted at a press conference recently that the persistently low rate of inflation was a mystery. Perhaps then it should be no surprise that inflation’s mysterious behavior is behind the unexpectedly good financial news of 2017.
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Business Mergers and Acquisitions Acquiring and Selling a Company With Tax Efficiency and Opportunity

Prosperity is proud to present an educational event for Business Owners, CFOs and CPAs: Strategies for Acquiring and Selling a Business. Thursday November 9th: 5:30-7:30 pm at Prosperity's First Floor Conference Room. Guest Speaker - Ron Claussen Attorney at Law specializing in Business Sales Transactions

  • Enjoy free appetizers and drinks
  • Relaxed, no-pressure atmosphere
  • Feel free to bring family, friends and colleagues

Register here

Ron Claussen’s practice focuses on corporate law, with an emphasis on merging growth companies, venture capital financing and mergers and acquisitions. Ron continues his entrepreneurial approach to the practice of law, providing creative solutions for his clients’ business opportunities.

Prior to going into private practice in 1986, Ron was general counsel to Nanco Enterprises, and had oversight of Nanco’s subsidiaries, including Carrows Restaurants, Jeremiah’s Steakhouses, Elephant Bar and Restaurants, Rayne Corporation and Santa Barbara Aviation, Inc. In addition to his general counsel responsibilities for these companies, Ron became actively involved in the long range orientation of each entity. From 1978 through 1981, Ron was also president of the Rayne Corporation, a west coast franchisor of water treatment products. In only three years, he doubled the client base of this 50-year-old company through acquisitions and strategic alignments.

Ron is a member of the State Bar of California and the Blue Key National Honor Fraternity and was a charter member in the Gibson Inn, Phi Delta Phi. Ron served as the Pacific Coast Director of the Montana Wildlife Federation from 2008-2013, during which time he created and fostered MWF’s Montana Matters fundraising campaign (www.montanamatters.com); he currently serves as an At-Large Director of the National Wildlife Federation and as a member of its development committee. He received his B.A. from University of California at Davis in 1968 with departmental honors and earned his J.D. from the University of California at Davis in 1971.

For more information, please call Yvette Mays at 925.314.8501 or Register here.




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Market DataBank: 3Q 2017

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