Hiding in plain sight is probably the best way to describe it. The new Republican tax plan has a major tax hike for stock investors that has largely gone unnoticed to this point. The tax plan contains a new provision that would do away with the status quo of letting investors choose which shares to sell off first as part of unloading a holding, and instead force investors to sell the oldest shares first. Many fund managers say the change could cost investors millions. The CEO of Eaton Vance summed up the changes this way, saying that if they become law, “markets will work less well. Our fund managers will have their hands tied, and our shareholders will owe more in taxes”.
FINSUM: This is a major change that has not been covered at all by the financial media. It will not only raise tax payouts, but it also constrains financial freedom. Bad policy.
The market is keeping a very close eye on one particular asset class and with good reason. Junk bonds are coming under a nervous eye from investors as they could portend a big move in rates or a fall in stocks. Junk bond ETFs have just fallen to a seven-month low following a slide this week. High yield ETFs have been experiencing losses and outflows and yesterday fell alongside stocks. Junk bond issuers have been seeing lackluster earnings, which has weighed on the sector. Speaking on the junk market, one prominent junk bond trader said “There has been a real lack of willingness of investors to hold on to securities after an earnings miss . . . and it is more pronounced in the last week than it has been in quite some time”.
FINSUM:Junk bonds seem like they might be moving ahead of stocks, so could signal a fall to come. That is exactly why investors are watching the high yield market so closely.
The market fell in a big way yesterday, at least for 2017. The Dow fell over 100 points and the S&P 500 was off 0.8%. The catalyst? It was worries over what appears to be a faltering tax package. The big problem is that the Senate’s tax plans contrast sharply with the House’s, showing just how far Congress and the Republican party need to go to get a package passed. According to the WSJ, the two plans differ in ways including “the timing of a corporate tax-rate cut, the number of individual tax brackets, the details of international tax rules, and the particulars of estate-tax changes”.
FINSUM: We always thought it would take a lot of time and work to get a new tax package through. However, we do not believe that if Congress fails to do so it will have big impacts on the market. We think investors are incredulous of the prospect for a big tax package and that it has not been priced into this market.
Low volatility has become so commonplace that it is easy to lose sight of just how stable things are. The S&P 500 dropped 0.8% yesterday and it felt like a monumental move. In fact, it was a “two sigma” drop for 2017, the industry term for an event which should happen less than 5% of the time. However, in 2016 it would have needed to fall 1.6% to meet that specification, and in 2015, 2%.
FINSUM: Volatility has dropped remarkably, even over the last two years when everyone was already talking about low volatility. The big question is whether the low volatility actually means anything or whether it is just another false indicator that needn’t worry anyone.
Markets might be having a great year, but yields are still low and income investors still may not be meeting their cash flow goals. With that in mind, here are five stocks that might prove good income bets. Cummins, United Technologies, Honeywell, Ingersoll-Rand and Illinois Tool Works all possess strong dividends that should move higher. All the names yield over 2%, and all seem likely to raise their dividends in the future. Furthermore, all the selections have dividend payout ratios below 50%, making them sustainable.
FINSUM: Our long-term view is that bonds and income stocks are going to stay solid relative to anything else happening in the markets as there is a huge demographic tide of Baby Boomers moving into the age where they will need more and more income.
The recent flurry of sexual harassment scandals and accusations that have been pouring out all over the country has become a central consideration for investors. Some stocks have been hit hard by such allegations and investors now need to consider the risk before they invest. Weinstein & Co., for instance, is seeking a cash infusion because of how hard it has been hit by the scandal surrounding Harvey Weinstein. However, it is currently hard to predict such events and take them into account when investing, so some ESG-focused investors, like a team at Eaton Vance, are pushing corporate boards to take a much more aggressive line on these issues internally.
FINSUM: These types of scandals are big stock washouts waiting to happen, especially when they occur in smaller to medium-sized companies that are very founder-centric.