Broker Check

August 6, 2018

| August 06, 2018
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Last week, the White House proposed capital gains be adjusted or ‘indexed’ for inflation before they are taxed. Princeton Professor Alan Blinder explained the idea in The Wall Street Journal:


“Why index gains? Suppose you own a stock for many years, during which time overall prices have doubled because of inflation. Over the holding period, the value of your stock also has doubled. When you sell, the proceeds have precisely the same purchasing power as the original purchase. There’s no gain, no loss. But under current tax law, you owe taxes on the phantom ‘gain.’ Worse, if your stock went up by less than the cumulative inflation, you’ll still get taxed despite your loss. This is unfair and dysfunctional.”


Capital gains tax reform comes with a big price tag: $100 billion over 10 years. A capital gain is any increase in the value of an asset, such as an investment, a home, land, etc., between its purchase and its sale. The amount of a gain is determined by subtracting the purchase price from the sale price.


This is not the first time indexing has been proposed and the first instance that we are aware of occurred in 1978. The suggestion is appealing to many investors, it’s not without controversy and the merits have been debated for years. This is why we believe tax law changes belong with Congress and not the administration.


In addition, adjusting capital gains for inflation without doing the same for interest expense and depreciation may allow some taxpayers to be able to generate significant losses on paper. Current tax law includes provisions that limit this kind of tax strategy, but indexing capital gains would reopen the door, reported the Tax Policy Center.


Another consideration is the impact of the change on the deficit and the national debt. The Congressional Budget Office estimates suggest 2017 tax reform will increase “…the total projected deficit over the 2018-2028 period by about $1.9 trillion.” Adjusting capital gains for inflation could increase the shortfall by about $100 billion over a decade, reported Naomi Jagoda for The Hill.


July’s stock market performance was very positive. The S&P 500 rose 3.6 percent, and global stocks climbed 2.9 percent. Value stocks performed very well, too, after lagging growth in recent years. The Russell 1000 Value Index rose 4 percent, while the Russell 1000 Growth Index rose 2.9 percent. The aggregate bond index produced flat returns in July.


The U.S. jobs market remains robust. The July jobs report released last week showed 157,000 jobs created, missed the 190,000 consensus estimate. The report pushed unemployment down to 3.9 percent showed strong job growth. The rate considered most important is annual wage growth, which ticked up a little higher to 2.7 percent. Wage growth had been inching higher reflecting the overall strength of the economy. Some reports suggested layoffs at Toys R Us, which is shutting down, caused the overall number to miss targets. Previous months’ reports were increased and more than offset the lower-than-expected increase in July.

Apple hit a milestone that no other company in history has ever reached before: $1 trillion in market value. This occurred after its strong second quarter earnings report pushed the stock up 2.92 percent. This feat illustrates the change in corporate landscape from industrials toward technology. Incidentally, the first company to hit $1 billion in market-cap was U.S. Steel.


Key points for the week


  • The July jobs report continued to show a robust U.S. jobs market.
  • Value stocks outperformed growth in July following months of underperformance.
  • Apple became the first company to reach a $1 trillion market value.


What are we reading?

Below are some articles we paid particularly close attention to this week. We encourage our readers to follow the links.


Apple Becomes 1st U.S Based Trillion Dollar Company

Founded in 1976 and coming close to extinction, the company has changed the technology industry and the world as we know it. It is hard to believe how much impact one company has had.


Fidelity Reaches Zero First

Mutual fund expenses for basic vanilla index funds have been declining for the past 15-20 years. Fidelity has now become the first large fund provider to offer two new mutual funds with zero expenses. Pundits believe Fidelity will stick make money though through lending securities in the portfolio and margin loans.


America has a billion-dollar drunk shopping problem

Companies like Amazon have made online purchasing so simple that consumers can click and buy anytime and anywhere. However, this has led to a drinking-and-buying problem. The United States, on average, spends $448 per person on drunk purchases. This totals more than $1 billion per year! Unfortunately, this problem can’t be blamed on millennials. Generation X spent the most per person at $738, while millennials spent $206.


the millennial way.


From social media to housing options to banking, every generation has had its own preferences. Today, millennials (individuals between the ages of 18 and 34) are having a profound influence on lifestyle and culture. Here are three trends to watch:


  1. Millennials are moving to smaller cities. “Mid- or second-tier cities, loosely defined as those under a million people that aren’t regional powerhouses like Austin or Seattle, are increasingly seen as not just places to find a lower cost of living, easier commute, and closer connections with family, but also a more approachable, neighborhood-oriented version of the urban lifestyle that sent many to the larger cities in the first place,” reported Patrick Sisson for com.


  1. Millennials like point-of-sale loans. Point-of-sale loans are catching on. The Economist reported, “Consumers who might previously have financed big-ticket purchases such as furniture, electronics, or home-improvement projects with a credit card are now opting to borrow at the checkout, often with an initial 0 percent interest rate. These short-term credit products were once the domain of big banks…[and] store-branded credit cards. Now tech startups are entering the market with innovative techniques for underwriting and approving potential borrowers, often in seconds.”


  1. Millennials tend to prefer healthier lifestyles. “For millennials, wellness is a daily, active pursuit. They’re exercising more, eating smarter, and smoking less than previous generations. They’re using apps to track training data and online information to find the healthiest foods. And, this is one space where they’re willing to spend money on compelling brands,” reported Goldman Sachs.



Weekly Focus


“The changes in our life must come from the impossibility to live otherwise than according to the demands of our conscience, not from our mental resolution to try a new form of life.”


                                                                                                                       ~ Leo Tolstoy, Russian writer


"When we do what we have always done, we get what we have always gotten."

                                                                                                                       ~ Dr. Gerald Sentell, Author


"The mediocre teacher tells.  The good teacher explains.  The superior teacher demonstrates.  The great teacher inspires."


                                                                                                                   ~ William Arthur Ward, Author, Editor and Pastor


Links & Disclaimers

RJFS and SPC do not offer or provide legal or tax advice. Tax services and analysis are provided by the related firm, S&M through a separate engagement letter with clients. Portions of this newsletter were prepared by Carson Group Coaching. Carson Group Coaching is not affiliated with RJFS, SPC or S&M.  The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material.  The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.  Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.  This information is not intended as a solicitation of an offer to buy, hold or sell any security referred to herein.  There is no assurance any of the trends mentioned will continue in the future.  Any opinions are those of the author and not necessarily those of RJFS.  Any expression of opinion is as of this date and is subject to change without notice.

Opinions expressed are not intended as investment advice or to predict future performance.  Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.  Past performance does not guarantee future results.  Investing involves risk, including loss of principal.  Consult your financial professional before making any investment decision.  Stock investing involves risk including loss of principal.  The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.  The Dow Jones Industrial Average (DJIA), commonly known as “The Dow” is an index representing 30 stock companies maintained and reviewed by the editors of the Wall Street Journal.  Please note direct investment in any index is not possible.


The Russell 1000 Value Index measures the performance of those Russell 1000 companies with higher price-to-book ratios and lower forecasted growth values. The Russell 1000 Growth Index measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values. The Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market.


Links are being provided for information purposes only.  RJFS, SPC and S&M are not affiliated with and do not endorse, authorize or sponsor any of the listed websites or their respective sponsors, and they are not responsible for the content of any website, or the collection or use of information regarding any website's users and/or members.




RJ Approval # 2205229


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