It is the guiding principle behind the Trump administration, but to "Make America Great Again" the U.S. may have to break some eggs. Are you ready for that?

 

"MAGA" is much more than a marketing gimmick. Almost every day, we uncover additional evidence of how the President and his supporters in Congress are dismantling regulations, taxes, and on the foreign front, trade deals.

 

For example, while the president professes to have "a great relationship" with China and admires its president, Xi Jinping, at the same time, he is working behind the scenes to apply more pressure to our sometime-friend, sometime-nemesis.

 

This week we will have surely upset China when the House passed two bills that will make it easier for high-ranking Taiwanese officials to exchange visits with counterparts in the U.S. The second bill would promote Taiwan's participation in the World Health Organization.

 

Mainland China has long held a policy of "One China" (since 1949). The Communist government considers Taiwan a rebel province, which will one day be reunified with the mainland, even if that means applying military force. The U.S. actions this week threaten that stance and could invite some kind of retaliation from the mainland. Certainly China does not separate trade relations from geo-political concerns. To them, it is all one and the same. Therefore their response could be in the economic sphere or in the political realm (less pressure on North Korea).

 

On the trade front, many global trade economists believe that 2018 will be the year when Trump takes the gloves off when it comes to China. In December, Trump unveiled his national security plan and identified Russia and China as rivals that are attempting to erode American security and prosperity. He specifically accused Beijing of unfair trade practices.

 

There are plenty of areas ranging from steel to intellectual property where America has expressed their trade grievances. Politicians like to use the trade imbalance with China as justification (now about $309 billion in their favor) for additional tariffs on Chinese goods, but that line of discussion is too simple and  ignores the vast and tangled economic relationships we have with that country.

 

Our withdrawal from the TPP Southeast Asian trade agreement has also left us with less clout when negotiating with China. In many ways, we are now on our own, as opposed to being the lead player in a multi-country, Asian trading bloc, when dealing with the Chinese. In fact, China is trying to replace the U.S. in that particular trade group, which could strengthen their position and cause us even more difficulties.

 

As of today, we have yet to feel any real fallout from our MAGA moves, but they are coming. Just this week, the markets tumbled worldwide when an unnamed Chinese official intimated that China might slow down, or stop purchasing altogether, our U.S. Treasury bonds. The concern was understandable, since China is the largest foreign purchaser of our debt. Other officials quickly denied the statement, but it reveals how dependent global financial markets are on maintaining the status quo in world trade.

 

And it is not only China that we need to contend with. This week, according to some Canadian trade officials, the North American Free Trade Agreement (NAFTA) is reported to be on the rocks. If that is true, the implications would be huge. No one can predict what would happen as a result of the dissolution of NAFTA, but suffice it to say that it would not be good for the stock markets of Mexico, Canada or the U.S. The three currencies involved have already seen some wild gyrations. When long-standing trade deals change, dislocations should be expected. There will be winners and losers, some obvious but others may take years to discover.

 

An enormous number of companies on both sides of our borders would be impacted. Hundreds of thousands of jobs would also be affected in ways that analysts are only just beginning to study. The same downside (and upside) exists in our relationship with China and every other country where our MAGA policies will impact trade agreements.

 

Financial markets hate uncertainty. Financial markets at historical highs dislike uncertainty even more. Aside from backing out of the TPP and bowing out of the world's climate change initiative, nothing substantial has come out of the president's first year in regard to trade. That doesn't mean it won't. As 2018 gets going, be aware that there are trade risks out there that we are only beginning to comprehend. Let's hope the president gets it right.

 

Bill Schmick is registered as an investment adviser representative and portfolio manager with Berkshire Money Management (BMM), managing over $200 million for investors in the Berkshires.  Bill's forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

The Dow Jones Industrial Average gained a thousand points in a month. In just the first three days of 2018, all three U.S. averages hit consecutive record highs. Overseas indexes did even better.

 

Japan, for example, was up more than 3 percent on its first trading day of the year. Emerging markets continue to make new highs, while European bourses continue to climb. Those who expected the markets to tank in the New Year have thus far been wrong. How long can this last?

 

Short sellers, convinced that stocks just have to come down, bet on a market decline and have had their head handed to them on a daily basis. Undeterred, they point to the "overbought" indicators that have been flashing red for weeks now. Investor sentiment numbers continue to climb to nose-bleed levels as well, which is usually a contrary indicator. Still, the markets climb higher.

 

There is an old saying among traders that "the markets can remain irrational, longer than you can remain solvent." It is something that all investors should not forget. We are experiencing a melt-up and if one is on the bull train, remain on it. If, on the other hand, you still have that yearly cash bonus, practice a little patience. There will come a time when you can put that new money to work, just not quite yet.

 

We are in a period of goldilocks-type conditions that one rarely sees in the stock market. We have low, even historically low, interest rates given the growth rate of the global economy. Negative interest rates in a large part of the world are coupled with accelerating growth. At the same time, the U.S. economy, which has been growing moderately, may now get a new burst of energy thanks to the newly-passed tax reform. If our Twitterer-in- Chief is correct, the $1.5 trillion in tax cuts for one and all will create a robust environment for additional consumer spending as well as capital investment.

 

The U.S. could therefore act as a speeding locomotive pulling the rest of the world's economies along at an ever-increasing rate. It is similar to what happened back in the early 2000s when China's economy exploded. Almost every nation on earth benefited from that economic miracle. Some think this could happen again, only this time to the U.S., under the Trump presidency.

 

Maybe a simpler answer for today's market gains lies in the fact that we are entering a new stage of the market's emotional cycle. We call it the optimistic stage, where prices rise as new capital is put to work by current market players, as well as by new market participants, who have been on the sidelines.

 

It is difficult to predict the length of this phase (if it has truly begun) because it is dependent upon the success of that invested capital, as well as the time required to generate a positive rate of return for this risk capital.

 

One highly-respected, gray-haired sage of stock markets I respect is Jeremy Grantham, founder and chief Investment officer of Boston-based Grantham Mayo Van Otterloo. In his company's latest investment letter, Grantham believes we are currently showing signs of entering the blow-off or melt-up phase of this bull market.

 

"I recognize on one hand that this is one of the highest-priced markets in U.S. history, he writes. "On the other hand, as a historian of the great equity bubbles, I also recognize that we are currently showing signs of entering the blow-off or melt-up phase of this very long bull market."

 

He adds that the end of this phase could take anywhere from another six months to two years to complete before all is said and done. Before we do, we should expect the final emotional stage of the market to unfold. That is when euphoria takes over and stock prices reach their zenith. Parabolic price gains become the norm and a false feeling of well-being occupies the investor psyche. But don't worry, I see no signs of this occurring as of yet. So enjoy your gains and expect more in the future.

 

Plenty of investors will be faced with an unpleasant surprise. Any day now, one or more of the mutual funds that you own will be sending out their capital gain distributions for the year.

 

The tax hit could be quite large this year.

 

Many investors are not aware that mutual fund companies are required to distribute at least 95 percent of their capital gains to investors each year. Given the double-digit gains in the stock market last year, those gains could be an unwelcome liability when tax time rolls around.

 

At this late date, there is little one can do about it, other than pay the piper, but this year you can take steps to minimize 2018's potential tax liability. Since the tax reform act did not change capital gains taxes, you can expect that short-term capital gains (less than 12 months) will be taxed at the same rate as your income tax bracket. Long-term capital gains, however, will continue to be taxed at 15 percent.

 

The job of most mutual fund managers is to buy low and sell high. That's what creates track records, which, in turn, attracts investors to their funds. But mutual funds are just like individuals when it comes to capital gains. Anytime a mutual fund sells a security, no matter what the asset, that gain is taxable. And since mutual funds are considered pass-through entities, they are required to pass along to you any of these taxable gains.

 

In the grand scheme of things, capital gains distributions could be considered a luxury problem since we want the mutual fund we are invested in to turn a profit for us. So producing capital gains (as opposed to capital losses) is a good thing. But some caveats do apply.

 

Distributions reduce the fund's net asset value, regardless of whether they are long-term, or short-term capital gains, qualified dividends, or a return of capital. The problem might be in the timing of your purchase. If, for example, you purchased such a fund after all the gains were made, but before the distribution, you will be sent the capital gain (plus the taxes you will owe) while the mutual fund you purchased would decline by the amount of the distribution. You would be left with an after-tax loss on that mutual fund investment.

 

So the morale of this tale is if you are going to stay invested in mutual funds in a non-retirement account you better start tracking the upcoming capital gains distributions on the funds you own or are considering purchasing. In general, most mutual funds pay one or two capital gain distributions each year, normally sometime during the summer, and the last one toward the end of the year (late November or December). Try to avoid buying mutual funds at those times.

 

The mutual fund industry is aware of how these sudden taxable events impact shareholders. Most managers try to avoid dumping huge gains on investors, especially short-term gains, which are taxed at a higher rate. However, at certain times, they are forced to do just that.

 

During market declines, for example, when they are faced with unusually large redemption requests, then fund managers may be forced to liquidate positions that they would have preferred to hold, but can't.

 

Today a shareholder of mutual funds can easily find out when and what upcoming distributions will be made by simply accessing each mutual fund's website. There, you will find a wealth of information concerning distributions. Many fund websites will give you distribution guidance several months before the event. That makes it easier for you to make informed investment decisions.

 

Bill Schmick is registered as an investment adviser representative and portfolio manager with Berkshire Money Management (BMM), managing over $200 million for investors in the Berkshires.  Bill's forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

At the best of times taxes are confusing, so much so that most people hire an accountant to prepare them. This coming year should be a real doozy for the accountancy industry.

 

Given the massive changes to the tax code that will go into effect next year, taxpayers are rightly concerned (and confused) on exactly what the rules will be and how they will impact their families. 

 

"Most (although not all) taxpayers would owe less under the new rules, according to analyses by various independent think tanks, including the Tax Foundation and the Tax Policy Center," according to Charles Schwab and Co. 

 

In high tax states, lines are already forming at the local assessor's offices. New York Gov. Cuomo just signed an emergency executive order that urges counties in the state to send 2018 property tax bills now before the end of the year. That way, residents can pay next year's taxes before the end of the year thereby still taking a tax deduction against their federal tax bill.

 

Money management firms across the country are also being besieged by clients who want to pay next year's fees in advance in an effort to take advantage of that tax deduction before those too expire in 2018 under the new legislation. Phone lines to most accountancy firms ring busy and even office voice mails are full.

 

Let's start with your tax brackets. There are still seven tax brackets but the new legislation generally lowers rates across income levels. For a couple filing jointly, the new brackets will be 10 percent for taxable income up to $19,050, 12 percent on $19,050 up to $77,400; 22 percent on income up to $165,000; 24 percent up to $315,000; 32 percent to $400,000; 35 percent to $600,000; and 37 percent on income above $600,000.

 

In addition, since most Americans do not itemize their tax deductions, the standard deduction available to those taxpayers has doubled from $12,000 for individuals and $24,000 for couples. However, what the government giveth, the government can also taketh away. The personal exemptions for individuals were also removed, which comes out to $4,050 per person.

 

However, overall, if you're a low- or middle-income household, an increased standard deduction combined with an increased child tax credit should lower your tax bill.

 

The new tax law has placed a cap on itemized state and local tax deductions that have been up to this point fully tax deductible against your federal taxes. The cap on combined state and local taxes amounts will be no more than $10,000. People with heavy tax burdens in high-tax states such as New York, New Jersey, California and Massachusetts will be hurt the most.

 

And in order to close as many loopholes as possible, the Republican lawmakers barred these taxpayers from prepaying in 2017 any state or local taxes that will be due next year.

 

Those who have been choosing to itemize deductions may now have to reconsider which is better: a reduced level of itemized deductions versus the standard deduction. Some families may now fare better taking the simpler standard deduction.

 

The Internal Revenue Service has also warned high-property state taxpayers not to prepay property taxes before the end of the year unless your local government has already assessed your property for 2018. For example, my town has already billed me for next year's taxes, while across the border in New York State, the local authorities bill in the year taxes are due.

 

Mortgage interest amounts will also be limited to the first $750,000 of a loan for a newly purchased first or second home. Although it is early days, many analysts believe this tax change will have a devastating effect on areas that rely on second homes and their owners for their livelihood. People who might have considered buying a second home will find the new rules will be a disincentive to purchase. It could also make it harder for home owners in those markets to sell their homes. The net effect would be a dampening of economic activity in those areas.

 

This would impact many lower income families who depend on second home owners for their livelihood. Those who provide landscaping, lawn care, house maintenance and repairs, snow plowing and a myriad of additional services supplied by mostly blue collar workers would feel it the most.

 

There are countless other areas from healthcare to pass-through income that has been affected by the new rules. In future columns, I will examine many of these changes. But for now, rest assured that as 2018 unfolds, there will be countless variations to this legislation that will continue to impact the economy and all of us in unexpected ways.

 

Bill Schmick is registered as an investment adviser representative and portfolio manager with Berkshire Money Management (BMM), managing over $200 million for investors in the Berkshires.  Bill's forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

You can't say enough about a stock market that continues to climb, day after day, month after month. Best of all, it looks like it will continue to do so through the end of the year. What happens in 2018? Well, that may be a different story.

 

There is no evidence, however, that things will have to change in the New Year. Thanks to the big fat tax refund check that Corporate America will receive next year, investors will be expecting several quarters of better earnings. At the very least, that should support stock prices for a few months, if not more.

 

Let's not get into whether the tax cuts are good or bad for the economy. If you have been reading my columns, you know my opinion on that. Instead, let's just focus on the stock market and how things might change within the markets. For example, technology shares, especially the FANG names, have been leading the market all year. So have semiconductor stocks, a major ingredient in so many technology products, as well as large cap growth stocks.

 

Recently, small cap stocks have started to outperform. This is largely due to the tax reform legislation. The thinking behind these gains is that small businesses who are mostly focused on domestic markets will gain the most from the tax cuts. As such, the sector has seen some outsized gains in the last few months.

 

The question I am asking is will the leadership change in the new year?

 

 I have noticed that since the beginning of December some lagging sectors are beginning to join the party. Energy stocks are getting some buying interest, as are basic material companies. Even precious metals are participating in the market's move higher. Why then should that be the case?

 

One explanation could be that "a rising tide lifts all boats," meaning even the laggards get to participate, whether they deserve to or not. Another explanation may have to do with President Trump's recent comments that 2018 might be the time to refocus America's attention on infrastructure spending. All sorts of basic material companies, producing everything from steel to cement, would benefit.

 

While energy might not be directly impacted by infrastructure spending, it helps support prices, as does the recent production cuts engineered by OPEC. Those factors, combined with continuing global economic growth, have convinced the majority of oil analysis that the worst is behind us in oil price declines. Many are looking for oil to rise into the sixty dollar-plus range next year. At that price, most energy companies will do okay earnings-wise and the stocks are cheap.

 

Then there is also a growing camp of worry-warts, who fear that the $1.5 trillion in tax cuts, combined with additional infrastructure spending, layered on top of an already-growing global economy may spell rising inflation in the near future. Commodities usually do quite well in an inflationary environment and since these sectors are already selling at a steep discount to the rest of the market, why not take a bet on these groups.

 

But all of these topics are for next year's columns. It is enough to know that we have all done quite well in the markets this year. The fact that I have urged you to stay invested throughout all of it makes me feel grateful and happy. I am going to carry that feeling with me throughout this holiday season. Happy Chanukah and Merry Christmas to all of you and give your loved ones a hug for me.

 

Bill Schmick is registered as an investment adviser representative and portfolio manager with Berkshire Money Management (BMM), managing over $200 million for investors in the Berkshires.  Bill's forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.