Tax Reform Excites Market

According to President Trump, the U.S. economy is set “to rock”, as the largest tax reform bill since 1986 is expected to be signed into law in the coming days. Trump expects the Job Market to “explode”, which is an interesting thought considering that the U.S. Unemployment Rate is already at a 16 year low of 4.1%.  Further, there have been few times in U.S. history when the labor market was even tighter than it now is.  Although this bill be a wonderful Christmas gift for many Americans, the reality is that this could easily heat up our economy to an unhealthy level quite quickly.  Of course, that would lead to the Fed having to drive interest rates even higher to try and slow or offset some of the growth most economists expect us to see.  In the end, stock values will likely push higher, which will allow even more baby boomers to retire.  This will add further stress on the labor market in an environment where employers are already having a difficult time finding workers.  That leaves the under-utilized group of early 20-something’s who have not yet chosen to fully engage in the labor market as well as Middle Aged Americans who are currently surviving on government entitlements to step back into the labor market. Without more Americans willing to work, the Tax Reform bill could dramatically hurt the longer-term economy.

Although both the House and Senate bills previously scaled back the tax break when homeowners sell a primary residence for a profit, the final tax bill maintains the current rules.  This means that a homeowner who has occupied a primary residence for at least 2 of the past 5 Years will be able to receive a tax-free gain of up to $250,000 for a single and $500,000 if married. Had this rule changed, many speculate that the number of homeowners willing to sell would have greatly reduced, as some would rather hang onto their homes at least long enough to be able to receive the gains tax free.

Stocks have started the day much higher, and again are setting strong all-time highs. This continues to weigh against mortgage bonds which have held up surprisingly well under the pressure of stocks.

We will maintain our locking bias.