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