Right after my last newsletter in October, the equity markets dropped quite a bit making my timing look a bit awkward, but the reality is, corrections are part of this game and for the higher returns of stocks and bonds over cash long-term, volatility is sometimes the price of admission.
I am trying to bring most clients in to my office over the next couple of months for account reviews. If you would like to accelerate the process, I encourage you to contact Rosemary or Jenny here in my office and they will make an appointment for you with me. I welcome the opportunity to have a face to face or at least a phone conversation to update you over recent events.
Thank goodness the midterm elections are over. It appears that we have a Democratic House of Representatives and a Republican Senate. Does this mean we have gridlock? Maybe, and historically, a Republican President with a split Congress has been one of the best combinations for the S&P 500 with 15.7% gains on average over the next year in this scenario. Investors tend to like checks and balances that can take extremes out of play and remain the status quo.
What are some of the headwinds we face? LPL Research believes it is unlikely that House Democrats will be able to get Republicans and President Trump to go along with tax increases. That said, potential Democratic initiatives including infrastructure have to be paid somehow amid a rising U.S. deficit, and rolling back tax cuts on the wealthiest Americans is one possible way to do it, including some risk. Though not a risk, so-called tax reform 2.0, which would have made the December 2017 tax cuts permanent (they are currently slated to sunset in 2026), is now off the table. The chance that the president moves to index capital gains taxes to inflation, already unlikely, looks even more remote.
To achieve some of the party’s priorities in 2019, Democrats could use the debt ceiling as leverage, much like the Republicans did in 2010-11 to get spending cuts. Congress must raise the debt ceiling in 2019, with 60 votes required in the Senate. The odds of a 2011-esque standoff may be very low, but this risk should not be ignored.
Surprisingly, global trade has yet to weaken, in spite of tariffs and trade spats. China’s exports and imports have remained steady, even after the latest round of U.S. tariffs on $200 billion in goods kicked in on September 24. Currently, strong global demand is outstripping any interruption from trade. To LPL, this demonstrates the interconnected nature of the global economy, with solid U.S. growth making an increasingly heavy contribution to overall global growth. All of us at Legacy wish you a warm Thanksgiving and please do not hesitate to contact us for information or to arrange a get together with me. – Mark
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. No strategy assures success or protects against loss. Economic forecasts may not develop as predicted. Some of this research material has been prepared by LPL Financial. All indices are unmanaged and may not be invested into directly. Referenced material: LPL Research Weekly Market Commentary & LPL Research Weekly Economic Commentary, both dated November 12, 2018. Approved Tracking #: 1-793210.