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Washington Update

How elections, policy and other developments in Washington could affect the markets and your financial life

 

 

 

March 1, 2019

What’s Deductible? IRS Clears Up Confusion Around the Tax Law

IF YOU HAVE QUESTIONS about how the 2017 “Tax Cuts and Jobs Act” could affect your returns for 2018 and beyond, you’re not alone. For months, the Internal Revenue Service has been working to clear up “a lot of holes and unanswered questions,” says noted tax expert and CNBC contributor Andrew H. Friedman, principal and founder of The Washington Update. Some of the IRS’s clarifications may help taxpayers maintain deductions they had feared were lost under the new law, Friedman notes in his latest report, “Tax Reform Aftermath: New Guidance for Investors.”

Some of the IRS’s clarifications may help taxpayers maintain deductions they had feared were lost under the new law.

For example, at first glance the law seemed to have eliminated the ability of homeowners who itemize their returns to deduct any interest on home equity loans and lines of credit (HELOCs). According to the IRS, you can still claim a deduction if the loan is specifically for home improvement. “If you build a new wing or renovate your kitchen, and you tap into your line of credit, the interest is deductible,” Friedman notes. Likewise, many business owners had feared that the law’s elimination of deductions for entertainment expenses would include meals. The IRS delivered the good news that meals are still deductible (at the traditional 50%) so long as the expense doesn’t include entertainment.

Even with the new clarity from the IRS, many aspects of the law may be confusing, Friedman cautions. Be sure to consult your tax specialist before making any decisions.

Investing involves risk including possible loss of principal.
The opinions are as of 03/01/2019 and those of the author and subject to change.
Neither Merrill Lynch nor any of its affiliates or financial advisors provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.

 

 

February 15, 2019

Second Shutdown Averted As President Signs Funding Bill 

THE FEDERAL GOVERNMENT WILL REMAIN OPEN for business, thanks to a budget deal averting a shutdown that had been set to begin at midnight on Friday, February 15. President Trump signed the funding bill, which earmarked $1.375 billion for fencing along the southern border, on Friday afternoon, after declaring a national emergency to obtain additional funding for a border wall.

The bill includes $333 billion in federal spending, keeping the government open at least through September and preventing a new round of pain for federal workers and the economy.

The next fiscal challenge facing Congress and the President: passing a budget for fiscal year 2020, which begins on October 1, and addressing the nation’s debt limit.

The next fiscal challenge facing Congress and the President: passing a budget for fiscal year 2020, which begins on October 1, and addressing the nation’s debt limit. If the debt limit is not raised or suspended by March 1, the Treasury Department could face challenges paying the government’s obligations later this year.1

Watch for updates on the intersection between politics, the economy and the markets here.

1 https://www.brookings.edu/blog/fixgov/2018/12/27/congress-in-2019-five-things-to-watch-for-in-the-budget-battles-to-come/
Investing involves risk including possible loss of principal.
The opinions are as of 2/15/2019 and those of the author and subject to change.
The views expressed are those of the Chief Investment Office (CIO) only and are subject to change. This information should not be construed as investment advice. It is presented for information purposes only and is not intended to be either a specific offer by any Merrill Lynch or U.S. Trust entity to sell or provide, or a specific invitation for a consumer to apply for, any particular retail financial product or service that may be available.

 

 

January 29, 2019

Government Reopens . . . But for How Long?

THE FEDERAL GOVERNMENT REOPENED JANUARY 25, ending the longest shutdown in U.S. history after 35 days. That’s good news for everyone from delayed air travelers to taxpayers hoping for timely refund checks to some 800,000 federal workers awaiting paychecks. It’s also good news for the economy: The shutdown cost a potential $3 billion in permanent economic loss during the last quarter of 2018, according to the Congressional Budget Office (CBO). The CBO also projects that real GDP could be $8 billion lower in the first quarter of 2019 as a result of the shutdown.1

The Congressional Budget Office projects that real GDP could be $8 billion lower in the first quarter of 2019 as a result of the shutdown.1

What’s next? A 17-member bipartisan panel of House and Senate members have convened to hash out a compromise. If that panel isn’t able to negotiate a veto-proof spending bill that includes funding for border security, the government may shut down again at midnight on February 15. Check back for updates on developments as they unfold, as well as any further potential effects on the economy, the markets, and your portfolio.

1 https://www.cbo.gov/publication/54937
Investing involves risk including possible loss of principal.
The opinions are as of 1/16/2019 and those of the author and subject to change.
The views expressed are those of the Chief Investment Office (CIO) only and are subject to change. This information should not be construed as investment advice. It is presented for information purposes only and is not intended to be either a specific offer by any Merrill Lynch or U.S. Trust entity to sell or provide, or a specific invitation for a consumer to apply for, any particular retail financial product or service that may be available.

 

 

January 16, 2019

Could the Government Shutdown Hurt the Economy?

WITH POLITICIANS LOCKED IN A STALEMATE over a proposed border wall, the longest government shutdown in U.S. history “is likely to continue, in our view, until it has a noticeable impact on economic growth,” says Chris Hyzy, Chief Investment Officer for Merrill Lynch and U.S. Trust. For every two weeks without a resolution, economic growth could drop by about 0.1 percent, he adds. “If the situation continues to the end of March, first-quarter growth could drop by more than one-half of 1%.”

"If the situation continues to the end of March, first-quarter growth could drop by more than one-half of 1%." —Chris Hyzy, Chief Investment Officer for Merrill Lynch and U.S. Trust

A recent Investment Insights report from the CIO, “Government Shutdown,” showed that, historically, shutdowns have had minimal impact on the economy and markets. Yet the current shutdown, which started December 22, represents uncharted territory. “The longer the freeze lasts, the more it could hurt those businesses with exposure to government contracts and services,” Hyzy says.

The ripple effect could eventually spread to consumer spending, especially in areas such as travel, leisure, entertainment and municipal services. Beyond the human costs to 800,000 federal workers and their families going without paychecks, the shutdown could also disrupt the flow of key government economic data, such as retail sales figures and fourth-quarter GDP, Hyzy notes. He encourages investors to reach out to their advisors if they have any concerns about how the ongoing shutdown could affect their portfolios.

Investing involves risk including possible loss of principal.
The opinions are as of 1/16/2019 and those of the author and subject to change.
The views expressed are those of the Chief Investment Office (CIO) only and are subject to change. This information should not be construed as investment advice. It is presented for information purposes only and is not intended to be either a specific offer by any Merrill Lynch or U.S. Trust entity to sell or provide, or a specific invitation for a consumer to apply for, any particular retail financial product or service that may be available.

 

 

December 20, 2018

Another Rate Hike: Is It Good for the Economy?

AS EXPECTED, THE FEDERAL RESERVE RAISED RATES a quarter point on Wednesday, citing the continuing strength of the U.S. economy. “Job gains have been strong, on average, in recent months, and the unemployment rate has remained low. Household spending has continued to grow strongly,” it noted in its statement announcing the increase. This fourth hike of the year places the central bank’s benchmark interest rate in a range between 2.25 and 2.5 percent.

What higher rates could mean for the economy and the markets:

The major indexes fell on news of the rate hike, despite indications from Fed committee members that only two hikes might be needed in 2019—down from three or four previously forecast. Given current investor concerns about slowing growth, “the Fed needs to pause and allow the current hikes to filter through the broader economy before they resume future rate increases,” says Chris Hyzy, Chief Investment Officer for Merrill Lynch and U.S. Trust. “We continue to expect investor risk appetite to stay low until several issues are resolved,” he adds. Among them: a more dovish Fed in 2019, resolution of U.S.-China trade tensions, and proof of resilience in corporate earnings.

"The Fed needs to pause and allow the current hikes to filter through the broader economy before they resume future rate increases." —Chris Hyzy, Chief Investment Officer for Merrill Lynch and U.S. Trust

“Earnings each quarter will need to maintain a trend that is positive around 5 percent growth and not fall close to zero growth,” Hyzy notes. “Given the low base of 2506 on the S&P 500, relative to our fair value price of 2900, we could see the potential for 12 -15 percent returns for 2019, from current levels. Volatility is not expected to subside, however, until there is full clarity on rates, trade, and earnings.”

What higher rates could mean for your investments:

“We remain constructive in equities for the longer-term investor,” says Hyzy. “In our view, it would be useful for investors to have a disciplined plan ready to add to equities in three separate re-balancing episodes in the first half of 2019.” As for fixed income, “we view shorter-term fixed income and cash yields as attractive relative to dividend yields and longer term debt.”

For more insights, on what future hikes could mean for the economy and the markets, check out the latest Investment Insights from the CIO, “A Liquidity Recession, Not an Economic One”. And for a look ahead to 2019, read “Outlook 2019: Answers to 7 Key Questions.”

Investing involves risk, including the possible loss of principal.
Past performance is no guarantee of future results.

The opinions are those of the author and subject to change.
Equity securities are subject to stock market fluctuations that occur in response to economic and business developments.
Investing in fixed income securities may involve certain risks, including the credit quality of individual issuers, possible prepayments, market or economic developments and yields and share price fluctuations due to changes in interest rates. When interest rates go up, bond prices typically drop, and vice versa.
Asset allocation, diversification and rebalancing do not ensure a profit or protect against loss in declining markets.
Neither Merrill Lynch nor any of its affiliates or financial advisors provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.

 

 

December 18, 2018

What Could a Government Shutdown Mean for Investors?

THE PROSPECT OF A GOVERNMENT SHUTDOWN on Friday adds one more concern for investors during this period of volatility in the markets. “Equity markets are already on edge” over everything from the Federal Reserve’s interest rate plans to U.S.-China trade tensions, notes the Chief Investment Office (CIO) in its Investment Insights: Another Government Shutdown? What It Could Mean for the Economy and Markets? “A potential government shutdown would likely weigh on prices in the short term.”

Yet while government shutdowns can add to short-term volatility and result in furloughs of federal employees, they tend to be short-lived, with little long-term effect on the economy or markets. Historically, the S&P 500 has dropped only 0.5% during shutdowns. During the 16-day shutdown of 2013, the S&P 500 initially dropped but then rallied and closed 3.1% higher when it ended.

Historically, the S&P 500 has dropped only 0.5% during shutdowns. During the 16-day shutdown of 2013, the S&P 500 initially dropped but then rallied and closed 3.1% higher.

What services would be affected?

For the government’s fiscal year ending September 30, 2019, five appropriations bills have already been passed that account for about 75% of government operations, notes the “Investment Insights.” In any case, “mandatory programs like Medicare and Social Security are always maintained, as are other essential functions, such as air traffic control, law enforcement, and security activities.”

For a closer look at the potential for a government shutdown on Friday, read the Chief Investment Office report, “Another Government Shutdown? What It Could Mean for the Economy and the Markets.”

Investing involves risk, including the possible loss of principal.
Past performance is no guarantee of future results.

Neither Merrill Lynch nor any of its affiliates or financial advisors provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.
Equity securities are subject to stock market fluctuations that occur in response to economic and business developments.

 

 

November 8, 2018

Could Divided Government Be Good for the Markets?

WITH DEMOCRATS WINNING THE HOUSE and Republicans holding on to the Senate, what should investors expect from a divided government? “Despite heated rhetoric, gridlock shouldn’t hurt the markets or the current strong economy,” says Chris Hyzy, Chief Investment Officer for Merrill Lynch and U.S. Trust.

In the wake of Tuesday’s election, a new Chief Investment Office report, “Divided Government: Taking Stock of the Midterm Election,” finds reasons for optimism—and even some bipartisan agreement.

The outlook for stocks

“Following midterm elections, presidents often prioritize growth-oriented policies, with an eye toward re-election,” Hyzy says. Since 1928, the S&P 500 has produced an average annual return of 12% with a Republican president and divided Congress—suggesting that stocks can still perform well under political gridlock.1 It’s also important to keep in mind that the U.S. economy is in the midst of one of the longest economic expansions in history. When it comes to stocks, “while Washington matters, the private sector matters even more,” Hyzy says.

Policy changes

“We expect few significant policy changes from Washington between now and the 2020 presidential election,” Hyzy notes. With a divided government, additional tax cuts are unlikely, fiscal spending is expected to be constrained, and the regulatory framework should see few changes. Yet in certain areas, such as badly needed infrastructure improvements, there is room for bipartisan agreement.

When it comes to stocks, “while Washington matters, the private sector matters even more.” —Chris Hyzy, Chief Investment Officer for Merrill Lynch and U.S. Trust

Geopolitical issues

“We’ll likely see a tougher congressional tone towards Russia, Saudi Arabia and North Korea,” Hyzy believes. “But that shouldn’t affect markets.” Relations with China remain tense, and there may be bipartisan support for trade and investment restrictions.

Interest rates and the dollar

“Despite modest decreases in the dollar and 10-year Treasury yields, we saw nothing dramatic immediately following the election,” Hyzy notes. Expectations that the Federal Reserve will raise the Fed Funds rate in December, with three additional increases in 2019, are unchanged.

Potential winners and losers, by sector

Even a modest infrastructure bill could help the Industrials and Materials sectors. And progress on trade issues ahead of the 2020 election could help Consumer, Materials and Industrials companies. Losers could include some Communication Services firms, amid demands for privacy regulations and oversight. The outlook for Healthcare, an area where the parties are sharply divided, remains neutral, Hyzy says.

Read the CIO team’s “Divided Government: Taking Stock of the Midterm Election,” for a closer look at what to expect following the 2018 midterm election.

1S&P, FactSet, BofA Merrill Lynch Global Research US Equity & US Quant Strategy
Investing involves risk, including the possible loss of principal.
Past performance is no guarantee of future results.

Neither Merrill Lynch nor any of its affiliates or financial advisors provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.
Equity securities are subject to stock market fluctuations that occur in response to economic and business developments.

 

 

November 7, 2018

The Midterm Elections Are Over—Now What Happens in the Markets?

THE POLITICAL ADS ARE A THING OF THE PAST (for the moment), ballots have been cast, and the results are (mostly) in. Are the markets—which have been so turbulent of late—ready to settle down? Let’s look at the historical data. “Typically, midterm election years are quite volatile,” notes Niladri Mukherjee, head of portfolio strategy for the Chief Investment Office in Bank of America’s Global Wealth and Investment Management division. And that has certainly proven true in 2018. He adds, “The S&P 500 index has experienced corrections averaging about 15% during a midterm election year,“ according to 2018 data from Strategas Research Partners.

That might not sound very encouraging, but he points to better news: The bounce back in the 12 months following the election generally has averaged about 28%, Strategas also found.

Why the ups and downs? Because, Mukherjee observes, “more populist and less market-friendly policies are often pursued leading up to midterm elections.” In 2018, these hot button issues included trade tensions with China and the potential for more regulation in some corners of the tech sector. Once ballots have been cast, the rhetoric usually cools down a bit. And what follows, as a rule, is a period of stability—which could be excellent news for 2019. Again, according to historical trends, “the third year of a presidential cycle is usually the strongest in terms of market performance,” he says, citing an October 2018 “Investment Strategy Overview” from the Chief Investment Office.

So, does that mean this post-midterm interval is an ideal moment to step up your exposure to the markets? Well, not exactly—or at least, believes Mukherjee, it shouldn’t form the basis for an investment strategy. “Rather, focus on the fundamentals, such as economic growth, corporate profits and valuation levels.” A financial advisor is there to help with the decisions that can help you pursue your goals.

For more insights on market lessons learned in the 2 years since the last presidential election, read the latest Capital Market Outlook from the Chief Investment Office.

Investing involves risk, including the possible loss of principal.
Past performance is no guarantee of future results.

Asset allocation, diversification and rebalancing do not ensure a profit or protect against loss in declining markets.
Investments in a certain industry or sector may pose additional risk due to lack of diversification and sector concentration.
Equity securities are subject to stock market fluctuations that occur in response to economic and business developments.
Investing in fixed-income securities may involve certain risks, including the credit quality of individual issuers, possible prepayments, market or economic developments and yields and share price fluctuations due to changes in interest rates. When interest rates go up, bond prices typically drop, and vice versa.
Neither Merrill Lynch nor any of its affiliates or financial advisors provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.

 

 

May 21, 2018

One Good Reason to Review Your Estate Plans Now

THE 2017 TAX LAW DOUBLED the federal estate tax exemption to $22.36 million for couples and $11.18 million for individuals, shielding all but the wealthiest Americans from federal estate taxes. But that larger exemption (which also applies to gift and generation-skipping transfer taxes) expires in 2025, after which the exemptions will drop by about half unless Congress extends them.

Given the temporary nature of this exemption, now might be a very good time to review existing planning documents, such as wills and trusts, to make sure there are no unintended consequences. That’s the recommendation of a new “Wealth Strategy Report: Estate Planning After the 2017 Tax Act,” from the Chief Investment Office.

The new report examines a wide range of scenarios, taking into account how issues such as capital gains and state taxes could affect your estate planning decisions.

Use the report as a guide to discussions you may want to have with your tax, legal and financial advisors. Consider what combination of gifts, credit shelter trusts, and other approaches could help you pass along your wealth to loved ones as tax efficiently as possible—and whether a gift now or a bequest later might make more sense.

The new report examines a wide range of scenarios, taking into account how issues such as capital gains and state taxes could affect your estate planning decisions. These hypothetical scenarios could help drive a conversation with your team about what’s best for your unique situation.

To learn more about how the new tax law could affect your personal estate planning, download “Estate Planning After the 2017 Tax Act” here.

Neither Merrill Lynch nor any of its affiliates or financial advisors provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.

 

 

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1 Andrew H. Friedman, principal and founder of The Washington Update, is an outside tax authority, and is not affiliated with Merrill Lynch or any of its affiliates.

Neither Merrill Lynch nor any of its affiliates or financial advisors provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.

Always consult your independent attorney, tax advisor, investment manager, and insurance agent for final recommendations and before changing or implementing any financial, tax, or estate planning strategy.

This material does not take into account your particular investment objectives, financial situations, or needs and is not intended as a recommendation, offer, or solicitation for the purchase or sale of any security, financial instrument, or strategy. Before acting on any information in this material, you should consider whether it is suitable for your particular circumstances, and if necessary, seek professional advice. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of issue.

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