I hope you had a wonderful weekend! This week we celebrate “National Pecan Pie Day” on July 12. Out of all the non-fruit pies, pecan is my favorite. I invite you to grab a piece on Wednesday to enjoy!
LRPC’s Monday Morning Minute for this week, “Washington Midyear Update: 4 Key Issues For Investors To Watch” (presented below) comes to you courtesy of Charles Schwab & Co. As an independent, objective Registered Investment Advisory firm, Lawton Retirement Plan Consultants, LLC has access to research from many sources. Be assured that I will share enlightening, useful information with you each week.
Although there has been a lot of noise out of Washington, I am not sure that much was accomplished during the first part of the year. Check out below what the experts from Schwab think.
Have a wonderful week!
Washington Midyear Update: 4 Key Issues For Investors To Watch
By Michael T. Townsend, Charles Schwab & Co.
With Republicans having control of the White House, the Senate and the House of Representatives for the first time in a decade, 2017 began with high hopes for policy initiatives that could prove to be a boon for the markets and investors. Ambitious plans for sweeping policy changes — health care reform, an overhaul of the tax code, infrastructure spending and deregulation, among other things — were announced and the markets reacted positively.
But midway through 2017, Republicans have few major policy accomplishments. Dysfunction, drama and ethical issues in the White House have combined with Republican infighting on Capitol Hill to bog down the policy agenda. There’s growing concern among congressional Republicans that the much-anticipated policy changes will need to be significantly scaled back — or that they may not happen at all.
And things are likely to get even more complicated this fall, with critical deadlines looming for the federal budget and the debt ceiling. The markets will be keeping close tabs on how things shake out in the weeks and months ahead.
Here’s a brief update on four key issues in Washington that investors should be keeping an eye on as we move into the second half of the year.
1. Health care reform
The Senate is tentatively scheduled to vote on a health care reform bill before the end of June — a bill that was drafted in secrecy and was not unveiled, even to other senators, until June 22.
In early May, the House narrowly passed legislation to repeal and replace the Affordable Care Act, the signature health-care law of former President Barack Obama. But that bill was a non-starter in the narrowly divided Senate. Even President Donald Trump recently called the House version “mean.”
A working group of 13 Republican senators has been struggling behind closed doors for weeks to craft a bill that can get at least 50 votes to pass the Senate. But with only 52 Republicans in the upper chamber, the margin is very thin. Republicans can afford to lose only two votes since Vice President Mike Pence would cast the tie-breaking vote in the event of a 50-50 deadlock. No Democrat has been involved in drafting the bill, nor are any Democrats expected to support the legislation. Republican senators are far from unified, and it remains to be seen whether the bill can pass at all.
Even if the bill passes the Senate, it still faces a huge hurdle: The House must pass the exact same version before it can be sent to the president for his signature. It’s far from clear whether that can happen, given the difficulty the House had in passing a much different version just two months ago.
Bottom line for investors
Expect uncertainty to persist in the health care sector. The bill is likely to undergo further changes before the Senate vote as Republican leaders attempt to squeak it across the finish line. But there’s still no guarantee the bill will pass the House.
2. Tax reform
The biggest victim of the slow progress of health care reform over the last few months has been tax reform. Shortly after President Trump was inaugurated in January, Republican leaders were optimistically saying that an overhaul of the tax code could be signed into law by August. Today, they are hoping a bill can get introduced in the House by then.
The extended wrangling over health care has left tax reform on the back burner for most of the past six months. Even as President Trump has called it one of his highest priorities, his only contribution to date has been a one-page summary of broad principles of reform. And he has not yet really engaged the power of the bully pulpit to push for reform.
Among the key elements of the still-developing Republican plan is a reduction in the number of individual tax brackets from seven to three; a cut in the corporate tax rate; and elimination of the estate tax and the Alternative Minimum Tax. But without a draft bill to analyze, it is difficult to know exactly what trade-offs will have to be made.
There is a reason that comprehensive tax reform has not happened since 1986. It’s hard, really hard, perhaps the most politically complex issue of all. The tax code’s hundreds of credits, deductions and other incentives each have a constituency and a champion fighting to preserve them. Moreover, the cost of the kinds of big corporate and individual tax cuts that Republican leaders have been talking about is projected to run into the trillions of dollars.
Bottom line for investors
We have grown pessimistic about the chances of major tax reform being completed before the end of 2017. With no bill in sight and a host of other issues that must be dealt with in the early fall, it seems unlikely that Congress will turn its full attention toward tax reform before October or November. That may not leave enough time to finish something as complex and controversial as a rewrite of the tax code. One possible fallback is a smaller bill that cuts the corporate tax rate and provides an incentive for companies to repatriate some of the massive amounts of cash they have sitting overseas. For now, however, Republican leaders are continuing to push for a broad bill that encompasses both individual and corporate cuts — and that seems like a long shot.
3. Federal budget
This is one of the fast-approaching deadlines. Congress must approve a plan for funding government operations for fiscal year 2018, which begins on October 1. Without a plan in place by the end of September, a government shutdown could take place at the beginning of October. Congress just averted a shutdown in early May with a deal to fund the government through the end of September.
The annual budget is a two-step process. First, Congress must approve a “budget resolution,” which lays out the broad parameters of government spending for the coming fiscal year. Then lawmakers must draft and approve a dozen appropriations bills that allocate the dollars to each federal agency and program.
It has been years since Congress completed those tasks in time for the start of the fiscal year, and given the lack of progress to date, it is virtually impossible lawmakers doing so this summer. In all likelihood, Congress will need to craft a “continuing resolution,” a temporary measure that keeps the government open and operating for a specific amount of time, while Congress continues to negotiate a longer-term deal.
Bottom line for investors
The threat of a government shutdown this fall is real; even President Trump has tweeted that a “good shutdown” might help jumpstart negotiations. But some Republicans on Capitol Hill worry that a shutdown would be an embarrassing failure of leadership for the party that controls Washington. In past shutdowns — the most recent one was in 2013 — the markets have not been too rattled. But worries about whether it will happen and what impact it will have only add to the increasing level of uncertainty that is plaguing the entire policy agenda.
4. Debt ceiling
Perhaps no policy issue in Washington has the potential to affect the markets more directly than the debt ceiling. The debt ceiling was suspended for all of 2016 but came back in March of this year at just under $20 trillion. Since then, the Treasury Department has been using its so-called “extraordinary measures” to ensure the United States does not default on its debts.
But those measures are temporary and the clock is now ticking rapidly toward the time when the country runs out of cash to pay its bills. Treasury Secretary Steven Mnuchin recently stated that there is enough cash to make it through September. But Mnuchin urged Congress to act well before then to resolve the issue in order to avoid uncertainty and potential volatility in the global markets about whether the United States would default.
The politics around the debt ceiling are particularly complex. Some conservatives simply won’t vote to allow the government to incur more debt under any circumstances. Other Republicans have pushed for pairing a debt ceiling increase with a corresponding amount of spending cuts — something that has been anathema to Democrats.
In recent years, a tricky and fragile coalition of moderate Republicans and Democrats has been needed to deal with the debt ceiling. In the intensely partisan atmosphere of Washington today, however, that kind of bipartisan cooperation is hard to imagine. That makes the path to a resolution of the debt ceiling particularly hard to predict.
Senate Republican leaders recently began to float the idea of taking a debt ceiling vote in July, with the goal of getting the issue off the table as quickly as possible. There’s little precedent for that, but the markets would likely welcome such a development if it comes to pass.
Bottom line for investors
The United States has never defaulted on its debts. Even when Congress has gone to the very edge of default, lawmakers have always reached a deal on the debt ceiling in time. As a result, no one is quite sure what the ramifications of missing the deadline would be on the markets, on the nation’s credit rating, and on its creditors. Reason says that Congress will once again resolve the issue without testing out the unknowns of default. But the toxic political atmosphere brings a new level of uncertainty to the equation. This is the policy issue investors should track most closely in the weeks ahead.
Lawton Retirement Plan Consultants, LLC (LRPC) Monday Morning Minute is crafted to provide decision-makers with important information about the economy, investments and corporate retirement plans in a format that allows a reader to consume the information in less than 60 seconds. As an independent, objective investment adviser, LRPC has access to many sources of research and shares the best and most relevant information with its readers each week.
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