Archive for economy

Tax reform is here. What does it mean for high-net-worth individuals?

As we enter tax season, the real-world effects of the recently enacted Tax Cuts and Jobs Act of 2017 are becoming clearer for many taxpayers. Although there remains a great deal of detail to be understood, from what we know today, there are plenty of changes for high-net-worth individuals to be excited about.

Estate taxes

A significant change in the new legislation is an increase in the estate and gift tax exemption to roughly $11.2 million ($22.4 million for married couples). This doubles the former exemption of $5.6 million for individuals and $11.2 million for couples. Only a small percentage of households paid the tax at the old levels, and even fewer will pay it now.

Tax reform

The real effects of the recently enacted Tax Cuts and Jobs Act of 2017 are becoming clearer for many taxpayers.

For high-net-worth households who might have been affected before but are now safely under the line, this change could make a difference in the way they approach their financial future.

“The new tax laws may change their planning,” said Timothy Barrett, senior vice president and wealth advisor based in Argent’s Louisville office. “They may have created trusts to capture and preserve a $5- to $6-million estate tax exemption, or double that for a couple. With the exemption amounts now doubled, couples with estates currently smaller than $10 million may be able to simplify their planning tremendously or switch their focus to income tax planning. But be aware that most of the personal tax changes revert back to 2017 law after 2025, which complicates permanent solutions.”

“Depending on how much you have and what age you are, 2018 ought to be a year to review and decide what is right for you and your individual financial situation,” said Howard Safer, CEO of Argent’s Nashville office.

Tax bracket changes

Marginal tax rates under the new tax bill will be lower for many taxpayers starting in 2018 and running through 2025. The top rate has been reduced from 39.5 percent to 37 percent, and will now apply to individuals with over $500,000 in income and couples with over $600,000.

Previously, the top tax rate had applied to individuals making $426,700 or more and couples making $480,050 or more.

A couple filing as “married/joint” with combined income between $237,000 and $351,000, for instance, will see their marginal tax rate fall from 33 percent to 24 percent. Assuming there are no changes in other deductions, this could result in a tax savings of around $10,000.

“Lowered brackets are one piece of much more complex tax change. It all depends on your mix of state and local taxes, mortgage interest and other itemized deductions and whether it makes sense to use the new higher standard deduction. Some people will end up keeping more of their income, and the rate changes are meaningful for all tax brackets. But there are too many moving parts at this point to make a definite call on how much someone will save,” said John McCollum, senior vice president – investments in Argent’s Atlanta office.

“Even though many details are yet to be worked out, the change does benefit high earners who aren’t independently wealthy, because you don’t jump to that top rate so fast now, ” Barrett says.

Pass-through income

A new deduction for pass-through businesses could benefit many high income earners who have an ownership stake in a business. Sole proprietors, LLCs, partnerships and S corporations may be able to deduct 20 percent of qualified business income, albeit with some limitations. This may create an opportunity for certain taxpayers to form limited liability companies that would be eligible for the deduction.

“People will be trying to take advantage of pass-through entities,” Barrett says. “Any high-earner who can work on a non-employee basis will want to explore using a limited liability company.”

Fewer itemized deductions

Some taxpayers may see a benefit from the near-doubling of the standard deduction, which has been raised to $12,000 for individuals and $24,000 for couples in 2018, up from $6,350 and $12,700, respectively, in 2017.

However, new rules regarding itemized deductions — affecting state and local taxes, medical expenses and mortgage and home equity loan interest, among other areas — will play out differently for every taxpayer depending on their individual financial situation. Some may opt for the standard deduction when they may not have before.

“One approach that may be useful for many taxpayers is bunching, in which deductions such as charitable donations are pooled every other year to maximize tax savings through itemization, with taxpayers taking the standard deduction on alternating years,” Safer says.

Boost to the economy

The tax bill’s benefits to corporations are also likely to benefit individual high-net-worth investors. In addition to receiving a permanent cut in the corporate tax rate, from 35 percent to 21 percent, companies will benefit from a sharp drop in the tax rate for repatriation of foreign earnings. This change will allow companies with large amounts of overseas income to bring it back to the U.S., paying 15.5 percent instead of the old rate of 35 percent.

“Many companies had accumulated large amounts of cash earned overseas, and the vast majority was just sitting there. By reducing their tax burden, it eliminates barriers, real and perceived. Companies are going to increase dividends and pay more to employees — you can find hundreds of those stories. More importantly, that cash is going to get invested,” McCollum says.

There is a great deal of detail about these changes that won’t be fully understood until the IRS releases its regulations on how to put these new tax changes into effect.

“The last major tax reform was in 1986, and it took years to fully understand and make that come together,” Safer says. “These laws will evolve in their interpretation.”

“The effects on individuals and pass-through businesses will be more complicated, but the benefit will be real for sure. It just remains to be seen how these various pieces will end up working together to change behavior,” McCollum says. “The bottom line of the tax change is that it’s putting more money in the hands of businesses and consumers to spend and invest instead of sending to the government, and I think that’s why the market has reacted so strongly.”

Monthly Market Brief-January 2018

Each month, our Heritage Investment team publishes a market brief to provide an overview of the major factors influencing the US economy, including a summary of key sectors and the current positives & challenges.

Click Market Brief January 2018 for updates.

Here are some key highlights:

POSITIVES:

  • Non-farm payrolls rose 148000, still favorable though lower than expected. Unemployment stable at 4.1%.
  • Fifth month of solid growth in manufacturing payroll, 25000 in December and 31000 in November. Proving to be the driving force for the economy. Best run for manufacturing payrolls in 3.5 years. Construction payrolls are also on a five month winning streak, led by increasing sales of new homes. Housing and construction sector accelerated into year-end as proven by their strong payroll gains.
  • Oil prices steadily moving close to $60 which is the highest since 2014. Higher prices will likely inflate imports (worsening the trade deficit), but is also expected to boost retail sales and manufacturing (specifically energy equipment). Talks about the administration lifting restriction on offshore drilling could increase supply and put downward pressure on the oil price.

CHALLENGES:

  • Trade deficit deepening: Deficit increased to $50.5 billion in November compared to $48.9 billion in October. Partly attributed by the increase in imports on consumer goods and oil imports.

 

 

Monthly Market Brief-December 2017

Each month, our Heritage Investment team publishes a market brief to provide an overview of the major factors influencing the US economy, including a summary of key sectors and the current positives & challenges.

Click Market Brief December 2017 for updates.

Here are some key highlights:

POSITIVES:

  • Sales of new homes increased 6.2% in October to 685000 – a new high! This is not signaling to a housing bubble since the sales surge is not coupled with a price surge. Median price of a new home is up only 3.3% on the year.
  • Rising consumer confidence is at a new expansion high (129.5 in November). Largely due to optimism in the job market and expected stock market gains.
  • The stock market highs may partly be due to expectation of corporate tax cuts and their on going effects. GDP growth has been 3% last two quarters while consumer spending as of October has been at 4.2%, posing no threat of over heating.

CHALLENGES:

  • International trade deficit is expected to widen in October to $47.1 billion, up from September’s $43.5 billion, due to falling exports and a jump in imports of consumer products.
  • Growth in corporate profits have continued to lag the growth of the stock market. Pre tax profits packed in 2012 and really have expended only 10% over the past 5 years.

 

Monthly Market Brief-August

Each month, our Heritage Investment team publishes a market brief to provide an overview of the major factors influencing the US economy, including a summary of key sectors and the current positives & challenges.

Click Market Brief August 2017 for updates.

Here are some key highlights:

POSITIVES:

  • Non-farm payrolls added 209,000 jobs in July, bringing this year’s monthly average additions to 170,000 which is well above the minimum 100,000 needed to absorb new entrants
  • Second quarter GDP came in at an annualized growth of 2.6% for one of the best postings in 2 years
  • Business investment posted a strong increase of 5.2% in 2Q17, driven by a sharp increase in equipment investment of 8.2%
  • Factory payrolls have come alive with unfilled orders jumping to a two-year high, increased shipments rising to a five-year high, and new orders standing at a three-year high

CHALLENGES:

  • With unemployment at 4.3%, average hourly earnings should theoretically be trending higher rather than remaining at a flat 2.5%
  • Given the relatively flat wage trend, consumer spending has been trending lower over the last three months with an average growth of 0.16%, near a cycle low

Monthly Market Brief- June 2017

Each month, our Heritage Investment team publishes a market brief to provide an overview of the major factors influencing the US economy, including a summary of key sectors and the current positives & challenges.

Click Market Brief June 2017 for June 2017 updates.

Here are some key highlights:

POSITIVES:

  • European equities continue to outpace the U.S. market with solid fundamentals and increased investor confidence in response to Emmanuel Macron’s French presidential win
  • The ISM non-manufacturing Index came in at 56.9, driven by strong backlogs and strength in employment
  • 1stquarter GDP was revised up from 0.7% to 1.2%

CHALLENGES:

  • As the pool of candidates dwindled to a 9 year low, non-farm payrolls posted its weakest reading in nearly 5 years, adding just 138,000 jobs in May
  • Wage growth remains surprisingly weak even as the unemployment rate sits at a 16-year low of 4.3%
  • The effects of low wages has likely played a part in weakening vehicle sales & a decline in existing home sales; further weakness in consumer spending is expected
  • Political uncertainty remains a near-term risk given the multiple challenges facing the Trump administration

That Was Easy

by Ken Alderman, March 2017

One thing we can say for sure is that the political drama in Washington is definitely not boring. This month the long awaited “Repeal and Replace” of the Affordable Care Act (ACA) made its first appearance in the form of proposed legislation. The legislation stalled amid no Democratic support and a lack of support from the most conservative element of the Republican party. Many experts argue that the ACA is failing and something must be done and virtually everyone agrees the goal should be affordable quality health care for all.ken-alderman-website

While not an expert on the subject, it is clear premiums are up significantly in several states and insurers are leaving markets. It’s one thing to have coverage, it’s another to get quality care (just ask a veteran) and it’s still another to be able to afford the premiums, deductibles and co-pays to take advantage of the insurance coverage.

Unfortunately, our political process encourages politicians of all stripes to make promises without fully funding the costs of those promises. Since our nation lacks a balanced budget requirement, politicians can promise a new benefit, not raise taxes to pay for it and defer implementation–and the resulting economic pain–until after their next election.

Typically our politicians are very wide of the mark when it comes to fully funding a government program or understanding the effects of legislation affecting major portions of our economy. That’s how we have arrived at a national debt of nearly $20 trillion dollars with little hope that it can ever be seriously reduced. If politicians had to fully fund their promised programs and benefits, the programs and benefits would never get passed and re-election would become more problematic. But, once passed into law, how does any politician of any party take away a benefit from a voter? The answer is, they can’t and they won’t. As voters, we share the blame for allowing poor management of our country’s balance sheet.

click here to read more.

Monthly Market Brief- November

Each month, our Heritage Investment team publishes a market brief to provide an overview of the major factors influencing the US economy, including a summary of key sectors and the current positives & challenges.

Click Market Brief November 2016 for the November 2016 update.

Here are some key highlights:

POSITIVES

o Consumers continue to remain healthy and rounded out the 3rd quarter in September with personal income increasing by 0.3% and consumer spending increasing by 0.5%
o The October ISM Manufacturing Index reading of 51.9 signifies the U.S. economy and manufacturing sector remain in growth territory despite declining new orders and a continued contraction in backlog orders
o Average hourly earnings increased 0.4% in October to bring the year-over-year rate to a recovery peak of 2.8%
o October vehicle sales came in at a very strong annualized 18.3 million to further highlight the strength of the consumer
o October non-farm payrolls added a respectable 161,000 jobs, bringing the year-to-date average to 181,000

CHALLENGES

o While 3rd quarter annualized GDP growth came in at a solid 2.9%, 1.2 points came from exports which were largely driven by a surge in soybean exports
o Construction related spending declined 0.4% in September for a year-over decline of 0.2%

 

INVESTMENT OUTLOOK- October 2016

Making Sense of Conflicting Signals: Where is the Economy Taking Us?

by Jim McElroy, jmcelroy@argentfinancial.com
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We are living in unusual times. The U.S. economy is now in its eighth year following the “great recession”. Under normal circumstances, we would expect that a recovery lasting eight years might be a little long in the tooth: the average since 1950 has been just over five years. But this has been no ordinary recovery: it’s been the weakest since the end of WWII. Not once in the twenty-nine quarters of this post-recession expansion has GDP grown at an annualized rate in excess of 5% and only twice has it grown in excess of 4%. The average number of greater than 5% quarters for the preceding ten post-war expansions has been seven. During those ten earlier expansions, the average annual GDP growth rate was 4.85% per quarter; the current average through June has been 2.08%. Is slower better and does incremental growth last longer? Or, does the tepid nature of the current expansion serve as a warning that the economy is vulnerable to an unexpected shock? The question we’re asking — the question we’re always asking — is where are we in the economic cycle: are we closer to the beginning, middle or end of an expansion? The answer to that question is obviously critical to the timeliness of investment decisions.

Investment markets are supposed to be semi-reliable predictors of the economy. The stock market, reputed to be the best market harbinger of economic growth or decline, has been in a bull market for over eight years and is near all time highs. On the other hand, fixed income markets, sporting absurdly low yields — below 2% for ten-year U.S. Treasuries and negative for many international debts — suggest anemic prospects for the economy. So, which market are we to believe? And, to further cloud the picture, this is a presidential election year. That and the fact that the two major candidates have distinguished themselves by their unpopularity create a situation fraught with uncertainty.

The continuing strength of equity performance is noteworthy in that earnings for major U.S. corporations (i.e. the S&P 500) have been declining for the last five quarters and are expected by analysts to have declined even further for third quarter, which ended September 30th. Though much of the index’s earnings decline over the past five quarters came from the energy sector and, according to FactSet, earnings would have been mostly positive without its negative impact, this does not, on its own, justify record high prices or an almost 20 multiple on trailing earnings. Either the stock market is extremely forgiving of lackluster earnings — not its reputation — or factors other than earnings are driving stock prices. We need look no further than the fixed income markets and the level of interest rates for at least one explanation of equity strength.

There are at least two ways through which interest rates influence stock prices: through their impact on overall economic activity and through competition. High interest rates obviously discourage borrowing and encourage savings, results that reduce economic activity and limit equity earnings. In addition, high interest rates raise the bar for stock returns, causing investors to require either higher earnings and/or dividends (difficult in a period of reduced economic activity) or lower stock prices. Low interest rates, or in the current case, ludicrously low interest rates, normally produce the mirror image of the above: aggressive borrowing and depletion of savings by investors and consumers and a lowered bar for equity returns. As it happens, the current environment of near zero interest rates has had only a limited impact on economic activity: the consumer is spending more and low mortgage rates are encouraging him to invest in more home ownership, but corporations to date have been unwilling to borrow funds or employ cash savings to invest in new plant and equipment. Consequently, the effect of low interest rates on economic activity has been limited and has had very little impact on stock prices. However, the impact of low interest rates on the competition for returns on risky investments, such as stocks, has been enormous. When cash management funds are yielding less than .25% and ten year Treasuries are yielding below 1.6%, a dividend yield of 2.06% (S&P 500) or higher, with the potential for growth, looks very attractive indeed. It looks so attractive, on a risk return basis, that corporations have been employing excess cash reserves to buy their own stock rather than investing in plant and equipment. Little wonder that all time highs in the stock market are coinciding with all time lows for interest rates. All this begs the question of what happens to the stock market when central banks like the Federal Reserve begin to raise interest rates.

The Federal Reserve raised short term interest rates .25% last December and said that it expected to raise rates four times in 2016. Because of a variety of weak economic news during the first three quarters of 2016, the Fed balked and did nothing. It now is signaling that it will likely raise rates by .25% this December. We believe the Fed will raise rates in December, but will continue their message of caution and patience in bringing interest rates to levels consistent with sustainable growth. As long as the Fed succeeds in conveying this message of patience, there should be no December collapse in asset prices.

It is becoming clear, even to many central bankers, that a low to negative interest rate will not in and of itself create economic growth or inflation. Those effects, like almost everything else in economic and market activity, are driven by the collective psychology of humans behaving as humans or, as John Maynard Keynes called it, “animal spirits”. Among investors it’s called fear and greed. Without the presence of optimism among economic participants, reducing interest rates to extremely low levels in order to produce growth is only so much pushing on a string. And, as many have seen over the last few years, it can also be counterproductive: desperately low rates can produce a degree of pessimism that may discourage investment and the assumption of risk. On the other hand, lifting interest rates from very low levels may not discourage investing and risk taking when in the context of growing consumer and investor optimism. And, at least domestically, consumers and investors appear to be demonstrating an incipient degree of optimism: U.S. consumer confidence has been climbing since May — the latest reading places it at its highest level in nine years (since just before the last recession); and the stock market is hovering within 2% of its all time high, which was set during the current/third quarter.

We’ve already mentioned that the absence of competition from bonds has provided a support to the equity markets. With rates set to increase, this support could slowly disappear, a future well appreciated by stock investors. Since the stock market has the reputation of discounting practically everything, we may assume that the market at current levels is not overly concerned with a .25% increase in overnight rates. However, in order for the stock market to grow from current levels, investors will have to believe that earnings growth will make a long awaited appearance sometime in 2017. In order for that to happen, there needs to be a lift in GDP well above the “muddling through” pace to which we’ve grown accustomed.

It seems to us unlikely that a 2% GDP growth rate will last indefinitely: it will either accelerate or the economy will slip back into a recession. In addition to the increases in consumer confidence mentioned above, there are signs that the U.S. economy is improving: the unemployment rate has declined to 4.8% and payroll employment is holding steady; perhaps more importantly, the labor participation rate, after having declined for most of the last nine years, appears to have bottomed (at 62.8%) and begun to rise; the housing market is steadily improving and new home prices are closing in on levels not seen since before the last recession; and the Federal Reserve, after having modestly lifted short rates from zero last December, now finally sees enough strength in the economy to consider another increase. As long as the Fed raises rates gradually — and they say that they will — then we see no reason why the domestic economy won’t benefit from higher rates. Perversely, there may be nothing like higher capital costs to quicken the animal spirits of corporations and investors. If this is correct, then this long recovery may last even longer and we might actually see significant growth and returns on invested capital.

For more information about the commentary found in this newsletter, please contact a member of the investment committee.