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Nearly every Worker will get a Raise in February via Tax Cuts

by Fortem Financial January 8, 2018

As the New Year begins, investors are beginning to assess the impact of tax reform on corporate earnings and growth estimates.The IRS will issue guidance in mid-January which will allow for worker paychecks to be adjusted for lower taxes (and higher take-home pay) by February. This is akin to giving nearly every worker in America a raise at the same time. The last time paychecks adjusted for lower taxes in 2003 growth and yields surged. Additionally, nearly 80 companies have publicly announced increasing bonuses, wages, and other employee benefits since the tax cut passed into law.

To date, analysts have held off on updating earnings models pending information as to how corporate executives will apply the new tax policies.  Companies may utilize the benefits of the tax reform to return money to shareholders in the form of dividends and buybacks; hire new workers; purchase new equipment; expand operations; or acquire complementary businesses.  Each of these case-by-case decisions will likely have a positive long-term impact on corporate finances.  And, most individuals will pay less income tax as a result of tax reform.  Some households may opt to save or invest, while others will buy products and services.  These will also factor into projections for corporate earnings and growth.  Fourth quarter earnings conference calls will provide the first official look into expectations regarding tax reform; JPMorgan Chase, Wells Fargo, and Delta Air Linesbegin the reporting season next week.  Management comments and outlooks may help shape the market?s early-year trend.

2018 started off on a positive note, with the Dow Jones Industrial Average gaining more than 575 points (+2.3%) in the first week of trading.  All market sectors, except Utilities, rose while Consumer Staples, which includes household products, food, and beverage companies, was essentially flat.  These areas typically attract investors seeking stability and relatively high dividends; their underperformance suggests a shift away from conservative investment strategies.  At the same time, last week?s 4.0% gain in NASDAQ 100 confirms the continued popularity of large cap growth stocks.  Small cap value stocks, though, remain overlooked; the Russell 2000? Value Index returned +1.2%.  We expect the trend to reverse this year.  Retailers provided holiday updates: JC Penney reported a 3.4% increase in sales on strong demand for home and beauty products; Macy?s also increased sales (+1.1%), including double-digit growth in its online platforms; sales at Costco increased +9.1% in December as the warehouse chain continues to gain market share while fending off online competition; and, L Brands reported a 6% sales decline atVictoria?s Secret.  Overall, holiday spending estimates (+4.9%) suggest the largest increase in six years.

* Pacific Global Management

Chart reflects price changes, not total return.  Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

 

Last Week's Headlines

  1. The employment sector finished 2017 in good shape. There were 148,000 new jobs added in December and the unemployment rate, at 4.1%, was unchanged for the third consecutive month. Job gains occurred in health care, construction, and manufacturing. In 2017, payroll employment growth totaled 2.1 million, compared with a gain of 2.2 million in 2016. Over the year, the unemployment rate and the number of unemployed persons were down by 0.6 percentage point and 926,000, respectively. The labor force participation rate, at 62.7%, was unchanged over the month and over the year. The employment-population ratio was unchanged at 60.1% in December but was up by 0.3 percentage point over the year. The average workweek was unchanged at 34.5 hours in December. Average hourly earnings for December rose by $0.09 to $26.63. Over the year, average hourly earnings have risen by $0.65, or 2.5%.
  2. The international trade deficit for goods and services was $50.5 billion in November, up $1.6 billion from October. November exports were $200.2 billion, $4.4 billion more than October exports. November imports were $250.7 billion, $6.0 billion more than October imports. Year-to-date, the goods and services deficit increased $53.4 billion, or 11.6%, from the same period in 2016.
  3. Purchasing managers noted an improving manufacturing sector in December, according to the survey conducted by IHS Markit. The U.S. Manufacturing Purchasing Managers' Index™ registered 55.1 in December, up from 53.9 in November — the highest such reading since March 2015. Greater demand spurred acceleration in new orders, stronger production growth, and cost inflation.
  4. According to the Manufacturing ISM® Report On Business®, supply managers/respondents also reported that economic activity in the manufacturing sector expanded in December. The December PMI® registered 59.7%, up from November's 58.2% reading. New orders, production, supplier deliveries, inventories, and prices increased in December. Only employment decreased last month.
  5. Growth slowed in the services sector in December, according to the Non-Manufacturing ISM® Report On Business®. The Non-Manufacturing Index registered 1.5 percentage points lower than the November reading. Business activity and new orders also decreased last month. On the plus side, business managers reported an uptick in employment and prices. Included in the report are service industries such as retail trade; utilities; arts, entertainment and recreation; health care; accommodation and food services; finance and insurance; and real estate.
  6. In the week ended December 30, initial claims for unemployment insurance was 250,000, an increase of 3,000 from the previous week's level, which was revised up by 2,000. The advance insured unemployment rate remained 1.4%. The advance number of those receiving unemployment insurance benefits during the week ended December 23 was 1,914,000, a decrease of 37,000 from the previous week's level, which was revised up 8,000.

 

Eye on the Week Ahead

Trading is expected to pick up this week following the prior two holiday-shortened weeks. Inflation indicators for December are available this week, led by the Consumer Price Index. Inflation had been stagnant for much of 2017, although consumer demand for goods and services during the holiday season may nudge prices upward — at least for December.

 

 

Brian Amidei, along with Partners Joseph Romano and Brett D'Orlando have also been named *2014, 2015, 2016, 2017, 2018 Five Star Wealth Managers!

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Awards and recognitions by unaffiliated rating services, companies, and/or publications should not be construed by a client or prospective client as a guarantee that he/she will experience a certain level of results if Fortem is engaged, or continues to be engaged, to provide investment advisory services; nor should they be construed as a current or past endorsement of Fortem or its representatives by any of its clients. Rankings published by magazines and others are generally based on information prepared and/or submitted by the recognized advisor. Awards may not be indicative of one client’s experience or of the Firm’s future performance. Neither Fortem nor the recognized advisor has paid a fee for inclusion on a list, nor purchased any additional material from the award provider. The criteria for each award is listed below:

Five Star Professional Disclosure:
The Five Star Wealth Manager award is based on 10 eligibility and evaluation criteria: 1) Credentialed as an investment advisory representative (IAR) or a registered investment advisor; 2) Actively employed as a credentialed professional in the financial services industry for a minimum of five years; 3) Favorable regulatory and complaint history review; 4) Fulfilled their firm review based on internal firm standards; 5) Accepting new clients; 6) One-year client retention rate; 7) Five-year client retention rate; 8) Non-institutionalized discretionary and/or non-discretionary client assets administered; 9) Number of client households served; and 10) Educational and professional designations. The inclusion of a wealth manager on the Five Star Wealth Manager list should not be construed as an endorsement of the wealth manager by Five Star Professional or the magazine. The award methodology does not evaluate the quality of services provided. Additional information about this award is available at: fivestarprofessional.com/2016FiveStarWealthManagerMethodology.pdf
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Data Sources: News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. Market Data: Based on reported data in WSJ Market Data Center (indexes); U.S. Treasury (Treasury Yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness.

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The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighed index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.

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