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Washington Update

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


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.

 

 

March 23, 2018

As principal and founder of The Washington Update, Mr. Friedman is not affiliated with Merrill Lynch. Opinions provided are his, do not necessarily reflect those of Merrill Lynch and may be subject to change. Neither Merrill Lynch nor its advisors provide legal, tax or accounting advice. Please consult your tax advisor about the insights provided here.

New Mortgage? Medical Costs? Kids' School Choices? How the Tax Law Could Affect Your Financial Decisions

MAYBE YOU’RE CONSIDERING A HOME PURCHASE and are wondering how the new tax provision capping mortgage interest deductions could affect your choices. Or you’d like to know how changes in the way small businesses are taxed apply to your consulting income, or whether you’ll be able to afford to give as much to charities this year. These are just the sorts of questions that noted tax expert Andrew Friedman1, principal and founder of The Washington Update, has been exploring since details on the massive Tax Cuts and Jobs Act of 2017 began to emerge late last year.

Now is a good time to get up to speed on the many ways the new law could influence financial decisions you make throughout the year.

With most of the provisions already in effect as of January 1, now is a good time to get up to speed on the many ways the new law could influence key financial decisions you make throughout the year. You can start by reading the article, “Tax Reform & Your Life: What’s Changed?” In it, Friedman shares his insights on how the law can affect seven common priorities, from covering health care costs to saving for education and planning for retirement.

Then, for a comprehensive look at the new law, download “Tax Reform Accomplished: How Does the Legislation Affect Investors and Businesses?” a whitepaper written by Friedman and Jeffrey B. Bush. Together, the two pieces could help you prepare for essential conversations with your tax specialist and private wealth advisor as you consider your financial plans for the coming year.

Check out “Tax Reform & Your Life: What’s Changed?” Then download Andrew Friedman and Jeffrey Bush’s whitepaper, “Tax Reform Accomplished: How Does the Legislation Affect Investors and Businesses?

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 or financial instrument. 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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Banking, mortgage and home equity products offered by Bank of America, N.A., and affiliated banks, Members FDIC and wholly owned subsidiaries of Bank of America Corporation. Equal Housing Lender. Credit and collateral are subject to approval. Terms and conditions apply.

Before you invest in a Section 529 plan, request the plan’s official statement from your Merrill Lynch Financial Advisor and read it carefully. The official statement contains more complete information, including investment objectives, charges, expenses and risks of investing in the plan, which you should carefully consider before investing. You should also consider whether your home state or your designated beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds and protection against creditors that are available only for investments in such state’s 529 plan. Section 529 plans are not guaranteed by any state or federal agency.

This material should be regarded as general information on Healthcare considerations and is not intended to provide specific healthcare advice. If you have questions regarding your particular situation, please contact your legal or tax advisor.

 

 


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