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2017 Wraps Up

By Richard Tomes December 22, 2017 Misc.

2017 Wraps Up

As this year winds to a close, all of us at TWPM want to wish you all Happy Holidays and a very wonderful New Year.  We have enjoyed being of service to all our clients this past year and are looking forward to working for our clients in the New Year.  As the year ends and we look forward to the future, there are a few things of interest to put a bow on 2017 and to prepare for 2018.

It has been quite a year for the stock market.  As of December 19, 2017, the S&P 500 Index is up22.13%.  Depending on specific allocations, cash flow needs, etc., most of us have seen nice returns in our portfolios.  Some other indices of note through the same date:  The Russell 3000 is up 21.32%; the Bloomberg Barclays US Aggregate Bond Index is up 3.10%; the Bloomberg Barclays Muni Bond Index is up 4.99%; the Citi 3 Month US T-Bill Index (often used as a proxy for cash) is up 0.80%, while the average for the last three years ended 11/30/17 is only 0.35%; the Bloomberg Commodity Index is up 0.54% and still down an average of 8.41% over the last three years ended 11/30/17.

We have been receiving a lot of calls about stock market valuation.  Many people are getting nervous after such a strong advance in the stock market that it must now go down.  While not prognosticating the future, the stock market does not necessarily have to go down as it is not necessarily overvalued.  Whether or not the stock market is overvalued depends to a large degree on which “expert” is speaking.  My own estimation is that the market is likely fully valued at this time, with certain sectors and some individual stocks overvalued while others are undervalued, but on the whole, it seems fully valued.

If the market is fully valued, then why should it go higher from here?  The answer is earnings.  Stocks are generally priced by professionals in terms of their “Price-to-Earnings” ratio, or, “PE.”  If a stock is trading in the market at $16 per share and is earning $1 per share, the PE is 16.  That is just about the historic average for the S&P 500 Index.  The S&P 500 is currently at about 25.12 PE on trailing earnings and 19.82 on expected future earnings.  With the expected effects of the tax reform bill considered, this should get the S&P 500 Index just about fairly valued.

What makes a stock market go down?  Usually it is a slow down in the economy.  Based on leading economic indicators and the tax reform expectations it would seem the economy is set for good growth next year, not a slow down.  If that does indeed turn out to be the case, the market does not have a reason to go down and stay down.  Unexpected shocks can cause panicky pullbacks and sell offs and most normal years see markets go down 10% or more at some point during the year, even in up years.  Unless a shock were to cause the economy to reverse it is likely the stock market continues at these levels or go higher, should some good surprises happen economically.  From a fundamental point of view, it is not necessary that the markets go down just because a preceding year saw good returns.  For example, the S&P 500 Price Index (without dividends) was up 34% in 1995, 20% in 1996, 31% in 1997, 27% in 1998 (though it was down 19% at one point that year) and up 20% in 1999.  Those were good economic years and the stock market reflected the good economy, then, in 2000, the economy began to change directions and the stock market declined for the next three years.  History does not always repeat itself and past performance is not necessarily indicative of the future, of course; however, those years show that just because the market has a good year it does not have to have a down year following, though it may.

The main thing for investors is to have a strategy and to understand why that is the strategy they have.  It should then be accepted that there will be ups and downs in the markets, but knowing why one has a particular strategy and believing it to be sound and in keeping with the client’s needs should make those ups and downs a lot easier to handle.

We have also been getting a lot of questions regarding the Tax Cuts and Jobs Act.  As this is being written, the plan has just been passed by both Houses today (12/20/17).  It is expected to be signed into law.  One of the reasons for the delay in writing this year-end commentary this year was trying to wait until this could be addressed.

Neither I, nor TWPM gives any tax advice.  The reader is referred to their CPA for an exact analysis of how the law impacts that specific situation.  With that said, here are some selected observations on the personal, non-business level (this information comes from a variety of sources, but the reader is referred to for a more complete discussion):

It is estimated that, adjusted for GDP increases, after-tax incomes may increase by 1.1%.  The brackets for a married couple filing jointly are expected to be as follows:

2017 Bracket

2017 Income Range

2018 Bracket

2018 Income Range






$19,051 - $77,400


$19,051 - $77,400


$77,401 - $156,150


$77,401 - $165,000


$156,151 - $237,950


$165,001 - $315,000


$237,951 - $424,950


$315,001 - $400,000


$424,951 - $480,050


$400,001 - $600,000


$480,051 and over


$600,001 and over


There is an increase in the Standard Deduction to $24,000 for a married couple filing jointly.  So, if a taxpayer has Schedule A deductions (itemized deductions) that are less than $24,000 the need to itemize may disappear.  If a couple had only $14,000 of Schedule A deductions their Standard Deduction may be $10,000 higher and simplify the process of filing and the record keeping duties.

The personal exemption of $4,050 is eliminated.  For some families, this might offset some of the benefit of the increased Standard Deduction.  Nevertheless, the brackets are expended and in all but two brackets the brackets were lowered.

The child tax credit was raised from $1,000 to $2,000, with $1,400 of that being a refundable credit.  For those with children, this may be helpful.

The penalty for not buying ACA compliant health insurance is repealed.  In the face of soaring premiums and high deductibles, this may allow some to buy major medical policies, or other policy types that might more align with their needs that are not ACA compliant without tax penalty.

The State and local and property tax deductions are limited to $10,000.  For those living in States with high income and property taxes, this might have a negative effect.  However, for many, those high income and property taxes may lead to having to pay the Alternative Minimum Tax.  The exemption from the application of this tax has been raised from $86,200 to $109,400 for those filing married and jointly.  The trade off between the cap of $10,000 and the potential to avoid potentially the Alternative Minimum Tax will have to be measured on an individual basis.

The Federal Estate Tax exemption amount is doubled to $11.2 million per person.  It allows a couple to pass on $22.4 million in assets without the imposition of the Federal Estate Tax.  This will help especially those with large family farms and ranches who might be land rich and cash poor.

Business taxes were affected even more substantially than the personal side.  The corporate tax rate was lowered to 21% effective 2018.  Some pass-through businesses will see further deductions.  Immediate expensing of certain capital investments is expanded.  A repatriation tax of 15.5% on cash and 8% on non-cash is established.  The US will now have a territorial tax system, like most other industrialized countries.  The Alternative Minimum Tax for businesses is eliminated.

The impact on the economy is estimated to be an increase in long-run GDP of 1.7%.  If that is accurate, it should have positive effect on the stock markets.

Several companies have announced positive actions to be taken as a result of this legislation.  While this is being written, AT&T just announced that in response to the tax bill it plans to invest $1 billion in capital expenditures and give 200,000 employees a $1,000 extra bonus.  Southwest Airlines has announced it plans to invest in upgrading its planes and systems.  Anecdotally, it seems that the prospect of this new law is causing companies to react in ways that should be stimulative to the overall economy, which was one of the intents of the law.

Another big topic of conversation as we go into the end of the year is Bitcoin and cryptocurrencies.  Many people want a quick and easy explanation.  Here is one of the best and easy to understand introductions I have found: .

Should one be investing in Bitcoin or other cryptocurrencies?  Given the volatility in exchange rates these currencies are certainly not for mainstream investors.  For those who really think they understand cryptocurrencies and the risks involved, who have a high level of risk tolerance, they may wish to invest in these.  Perhaps a more accurate word than “invest” would be “speculate.”

There is an underlying technology for cryptocurrencies called, “Blockchain.”  While this technology may be applied to cryptocurrencies, it also may be applied to many other things.  Central banks and governments around the world are watching and are also considering government-backed cryptocurrencies that could lead to the outlaw of non-government-backed cryptocurrencies eventually.

There is a misconception among many that cryptocurrencies are safe from robbery.  This is not accurate.  Here are two stories: ;  

At best, cryptocurrencies for now are best considered a very risky investment and classed as an alternative investment (like cattle, hog and corn futures).  As such, direct investment by the average investor is something that is most likely a very bad idea, even if the currencies continue their rise in value.  The hype and excitement surrounding these currencies reminds me of the hysteria that surrounded dotcom stocks in 1999 and tulips in 1636 ( ).  Blockchain and cryptocurrencies may have a normalized place in the future and blockchain may have many wonderful applications.  But at this time, cryptocurrencies are anything but normalized.

We at TWPM wish all our clients a very happy holiday season and a wonderful New Year!


Richard Tomes, CFP®