Elliot H. Kallen

Financial Planner, Wealth Manager, Registered Principal
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Stock Market Is Unfazed By Russia Indictment, Displaying What Makes America Great

On Friday, February 16, at about 1 p.m., a 37-page indictment alleging a criminal conspiracy by Russian agents to meddle in the 2016 U.S. presidential election was posted on the website of the U.S. Justice Department.
What’s lost in the headlines is that faith in the nation, as measured by the stock market, remained unshaken; stock prices barely budged, displaying what makes America great.
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If You Had The Power Of Perfect Knowledge

If you had the power of perfect knowledge — the power to predict which one of twelve types of investments representing a wide range of assets was going to be number one every year for each of the 15 years from 2002 through 2016 — you would have averaged a 29.9% annual return.
Of course, no one has the power to predict which investments will be number one every year.
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Maybe The Best Economic Conditions In Modern U S History

In December, inflation dropped again while retail sales continued to roar. Growth with almost no inflation is an optimal condition, rare in modern U.S. history. Meanwhile, earnings growth is accelerating - and earnings drive stock prices.

Drilling into the retail sales data, non-store retailers — online sellers —  grew explosively in 2017, soaring 12.2%.

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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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Market DataBank: 4Q 2017

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