Tax Math Perplexes Investors, Punishes Stocks

After the drubbing Republicans got in Tuesday’s elections, Wall Street is worried that tax reform might never get through a divided Congress. Investors were counting on stimulus under President Trump. We’re now nine months into his administration and it still hasn’t happened.

These realities weighed on stocks Thursday, pulling down all three major indices.

The S&P 500 has risen 21% since Trump’s election a year ago. Wall Street’s animal spirits have been racing at the thought of Trump’s pro-business agenda.

In particular, the technology sector was looking forward to a generous tax repatriation policy. But Silicon Valley is starting to give up on that hope; falling tech stocks dampened the broader markets Thursday. The struggling retail sector also pulled indices lower.

The Senate on Thursday released details of its tax bill. The proposed measure differs from the House version in key ways. The Senate bill eliminates the ability to deduct state and local taxes. This deduction is highly popular with affluent suburban voters that both parties need. The Senate also would curtail, rather than repeal, the estate tax.

Both the House and Senate versions share a common problem: they add to the deficit. By Senate rules, a deficit-busting bill requires 60 votes to pass. It’s questionable whether GOP tax proposals as they currently stand could even get a simple majority in the Senate, let alone a super majority.

This math problem is bedeviling investors.

Over the past 12 months, stocks have been propelled higher by still-low interest rates, “synchronized” global growth, strong corporate earnings, a strengthening employment picture, and promises of big tax cuts.

Now in its ninth year, the bull market is the second-longest in recent financial history. But the markets hover in overbought territory.

As we saw on Thursday, political disappointment can send investors running for the exits. The selloff could worsen in coming days, as traders pounce on the disconnects between political promises and actual governance.

Also on Thursday, bellwether retailers issued weak quarterly results. Signs are mounting that the holiday shopping season could prove a dud.

About 70% of U.S. gross domestic product is consumer spending, three-fourths of which occurs during the holiday season. If “Black Friday” this month disappoints, the markets could drop further.

Macy’s (NYSE: M) issued a disappointing third-quarter report card. And yet, Macy’s stock soared 10.98% on Thursday. That’s because investors believe the retailer remains on the right track by emphasizing profit margins. They’re confident that the iconic store will continue to restructure to lower costs.

Kohl’s (NYSE: KSS) also reported mixed third-quarter results. But investors aren’t giving the retailer the same benefit of a doubt. Kohl’s pursues sales growth. And unlike Macy’s, it lacks an aggressive e-commerce plan. KSS shares rose only 0.93% on Thursday.

The upshot: Stay focused on the fundamentals. Keep your powder dry. Watch earnings reports and economic indicators. And lower your expectations that the feuding clowns in Washington, DC will get anything worthwhile accomplished. Your money is never safe while the national legislature is in session.

Thursday Market Wrap

  • DJIA -0.43% or 101.29 points, to close at 23,462.07
  • S&P 500 -0.38% or 9.76 points, to close at 2,584.62
  • Nasdaq -0.58% or 39.06 points, to close at 6,750.05

Thursday’s Big Gainers

  • Coty (NYSE: COTY) +13.82%

Beauty products firm beats on fiscal 1Q results.

  • Perrigo (NYSE: PRGO) +8.36%

Health care supplier crushes 3Q expectations.

  • DISH Network (NSDQ: DISH) +3.22%

Satellite TV operator upgraded on possible mergers.

Thursday’s Big Losers

  • TransDigm Group (NYSE: TDG) -6.83%

Aircraft component maker underwhelms in fiscal 4Q.

  • CenturyLink (NYSE: CTL) -4.82%

Telecom misses on 3Q; dividend at risk.

  • Stericycle (NSDQ: SRCL) -4.53%

Waste management firm stumbles in 3Q.

Letters to the Editor

“I’m thinking of claiming Social Security benefits at age 62. Does it make more sense to wait?”— Richard H.

If you can afford it, you should delay claiming Social Security benefits. It’s a common mistake to start too early.

The early retirement age to begin collecting Social Security benefits is 62. You’re entitled to a higher monthly benefit if you wait until you reach full retirement age.

Under current law, full retirement age is 66, but that’s scheduled this year to begin a slow rise to 67. To summarize a complex formula, full retirement age will be fixed at age 67 for those reaching age 62 after 2022.

Every year you put off claiming Social Security translates into an annual hike in benefits of 7% to 8%. Try to withdraw from your 401(k), Individual Retirement Account (IRA), or other savings first before tapping Social Security. It’ll take discipline, but you can better leverage your Social Security payments if you wait.

When you start taking your monthly Social Security checks, consider if traditional IRA distributions will affect your tax bill. Those distributions count as taxable income and help determine whether your Social Security benefits should be taxed.

And of course, with tax reform on the front burner in Congress, your nest egg is at risk. Keep an eye on lawmakers, who are dying to get their hands on your money. Various proposals are floating around that would eliminate tax breaks and deductions popular with retirement investors. I’ll keep readers apprised of these changes, as they develop.

Got a question? Drop me a line: — John Persinos

This Day in History

November 9, 1938: Nazis launch a campaign of violence against Jews in Germany. The rampage was called Kristallnacht (Night of Broken Glass) because it resulted in countless smashed windows.

Kristallnacht killed more than 100 Jews. Thousands of Jewish businesses, homes, synagogues, schools, and graveyards were vandalized.

About 30,000 Jews were arrested. Many were sent to concentration camps. The Holocaust was yet to come. One of the lessons is that greater catastrophes often start with clear warnings.

Number of the Day: 38%

According to the Reuters Institute, only 38% of Americans believe that the media does a good job separating fact from fiction. The press has a credibility problem in this country. That’s why Investing Daily emphasizes accuracy. You’ll never find “fake news” in our publications.

Quote of the Day

What am I afraid of? The IRS. That’s it. I don’t want those people knockin’ on my door, man.” — comedian and actor Tracy Morgan