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Tax Reform, Interest Rates, Global Growth

Posted January 5, 2018

Interest Rates: December proved to be an interesting month in the world of finance. Earlier in the month, the Federal Reserve raised interest rates. The quarter point raise marked the third interest rate hike this year, bucking a trend of less frequent rate increases. As an example, the Federal Reserve raised rates only once in 2016. The MSCI All Country World Index, which represents stock markets around the world, shrugged off this event. The lack of impact may indicate the rate hike was already “priced in”, meaning it was so widely anticipated, that it didn’t change investor sentiment. As likely, investors took the interest rate increases of 2017 as votes of confidence about the state of inflation and jobs.

Tax Reform: Overshadowing the December interest rate increase, however, was the tax reform bill known as The Tax Cuts and Jobs Act, signed into law on December 22. This is the first significant reform of the U.S. tax code since 1986 so interest abounds. The bill is lengthy, clocking in at over 1000 pages, but we would be remiss not to name a few of the crucial provisions. With respect to individuals, 2018 will bring an increase to the standard deduction, elimination of personal exemptions, limits on certain itemized deductions, and a reduction to the top tax bracket from 39.6% to 37%. On the corporate side of the equation, the most impactful change is the reduction of the corporate tax rate from a maximum of 35% down to 21%. This will put the U.S. closer to the global average. What does all this mean for you as an individual? On average, individual tax payers should see a tax break. That said, residents of high tax states (this includes California) who have been itemizing their deductions could see higher tax payments in the future as the federal deduction for state, local, and property taxes is capped at $10,000. On the corporate side, U.S. companies’ profits in general should increase, perhaps justifying the high valuations prevalent in the stock market today.

Global Growth: What is in store for 2018 besides more talk of interest rates and unraveling the tax bill? We are hopeful that the synchronized global growth seen in 2017 that spurred an international equity rally can continue. The 45 largest economies tracked by the Organization for Economic Cooperation and Development (OECD) all grew simultaneously in 2017, and are predicted to do so again in 2018. This would mark the first back-back growth of the world’s largest economies in over a decade.

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