JANUARY 22, 2018
In 2013, the U.S. government closed for 16 days. About 850,000 federal workers were furloughed and 6.6 million workdays lost. The shutdown affected private companies that worked with the government, too, and the U.S. economy took a hit. This year the shutdown lasted 3 days and the economic impact should be minimal.
The government shutdown didn't appear to concern investors too much. Barron's reported the Dow Jones Industrial, Standard & Poor's 500, and NASDAQ indices all finished the week higher.
The lack of response from investors isn't all that surprising. Geopolitical events - from the Brexit vote to the U.S. bombing Syria to the North Korean nuclear escalation - have had the little lasting effect on markets. The president of a financial research firm told The New York Times, "geopolitical events may be widely feared, and there will often be a knee-jerk market reaction when they're unexpected, but seldom do they have a lasting impact. Underlying economic trends and monetary policy are far more important."
2017 produced an extremely calm year with very steady returns. There were only eight days when the market moved by more than 1 percent during the calendar year. None of the eight days with a 1 percent move occurred in the fourth quarter. The last one happened on August 17, 2017. While markets continue to deliver more of the same in 2018, we expect volatility to increase during the year and the number of 1 percent moves to rise substantially.
Source: Carson Group, Morningstar Direct
Key points for the week
- Global stocks remain in rally mode.
- Economic recovery is mostly benefitting low-skilled workers.
- Chinese GDP comes in above expectations, while risks remain.
New Tax Withholding Tables Issued.
The IRS Thursday issued new income tax withholding tables that reflect new tax rates and other changes for individuals implemented by the Tax Cuts and Jobs Act of 2017. Employers should use the updated withholding rules for 2018, putting them into effect as soon as possible but no later than Feb. 15.
The IRS noted that many employees should begin to see their take-home pay increase in February depending on how quickly their employers implement the new tables and whether they are paid weekly, biweekly, or monthly. The new withholding tables are designed to work with Forms W-4, Employee's Withholding Allowance Certificate, that employees already have on file, so employees do not have to fill out new ones at this time.
The IRS plans on issuing a new Form W-4 in the near future. It is also working on revising the withholding tax calculator available on its website, which it expects will be finished by the end of February. According to the IRS, the new tables reflect the increase in the standard deduction, the repeal of personal exemptions, and new tax rates and brackets. The new tables are designed to produce the correct amount of tax withholding and are also intended to avoid over- and under-withholding of tax.
The IRS also posted a "frequently asked questions" page on its website to explain the new withholding tables to taxpayers. The IRS says it will make additional changes to its withholding tables in 2019 and work with employers and the payroll industry on designing these changes.
What are we reading?
Below are some areas articles we paid particularly close attention to this week. We encourage our readers to follow the links.
Low-wage workers are beginning to generate more rapid wage gains than those at higher levels. As the slow and steady economic growth continues to push unemployment lower, the scarcity of entry-level workers is driving wages of low-skill positions higher. Walmart's recent decision to raise its starting wage from $9 to $11 an hour is one example of the trend towards higher wages.
The Chinese economy grew 6.9 percent in 2017 and 6.8 percent in the fourth quarter. Both numbers were above expectations, and 2017's growth was slightly higher than 2016's. But, economists expect the robust growth to slow in 2018. Debt levels continue to climb and government-sponsored infrastructure projects remain too large a percentage of overall growth.
Purchasing Power Parity.
Purchasing power parity, or PPP, is a simple idea with a tongue twister of a name. When two countries have PPP, a basket of goods costs the same amount in both countries after the exchange rate has been factored in.
The Economist developed an entertaining measure of PPP. It's called 'The Big Mac Index.' The index doesn't measure a basket of goods. It simply considers the cost of a hamburger in 120 countries around the world. The index was updated for January 2018 and showed burger costs varied when translated into U.S. dollars. For example:
In Switzerland, a burger costs $6.26
In the United States, a burger costs $5.28
In the Euro area, a burger costs $4.84
In Britain, a burger costs $4.41
In China, a burger costs $3.17
In Russia, a burger cost $2.29
The Economist reported:
"If the local cost of a [hamburger] converted into dollars is above $5.28, the price in America, a currency is dear; if it is below the benchmark, it is cheap. The average cost of a [hamburger] in the Euro area is €3.95 or $4.84 at the current exchange rate. That implies the euro is undervalued by 8.4 percent against the dollar."
Overall, PPP is better aligned across the globe. One reason is the improving health of world economies. China remains the most undervalued currency among wealthier nations. In emerging markets, like Russia, currencies remain undervalued relative to the United States.
PPP provides economists with an apples-to-apples measure for comparing the well being of countries and consumers.
The story of the week
In Canada, Kentucky Fried Chicken is promoting a special that allows customers to buy buckets of chicken with bitcoin. The bitcoin bucket costs .0010272 bitcoin or $20 Canadian dollars. KFC Canada's website posted a bitcoin page, which provides live updates on how much bitcoin is required to purchase a bitcoin bucket. KFC's announcement that it "sold out" of the buckets came as no surprise as transaction fees exceeded $50 and processing times took nearly two hours.
Weekly Focus - Think About It
"With ordinary talent and extraordinary perseverance, all things are attainable."
~ Thomas Fowell Buxton
"For anything worth having one must pay the price; and the price is always working, patience, love, self-sacrifice - no paper currency, no promises to pay, but the gold of real service.
~ John Burroughs, American naturalist, and essayist
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 are 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 Dow Jones Industrial Average (DJIA), commonly known as “The Dow” is an index used to measure the daily stock price movements of 30 large, publicly owned U.S. companies. 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 NASDAQ composite is an unmanaged index of securities traded on the NASDAQ system. Please note, direct investment in any index is not possible.
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