Tarriffs, Taxes, & Bad Stuff

This past weekend, China decided to let their currency, the Yuan, drop to the lowest level it has seen in ten years. This clearly appears to be a retaliatory move for our government’s action last Thursday when, surprisingly, we put a 10% tax (sometimes called tariff) on many consumer goods from China. This new tariff is due to start on September 1. When this was announced Thursday afternoon, the stock market was immediately hit hard. That day saw the Dow go from up to down in a 600-point swing.

What does it mean when China allows the value of their currency to fall? A lower currency means it will be more expensive for the Chinese people to buy American goods. It does, in effect, serve as a tax on the purchase of US products. As you probably know, the Chinese have also been large buyers of American Treasury securities. This may have the effect of curtailing these purchases.

In addition to letting their currency drop, China is also stepping back from further U.S. Farm imports. It has also been reported that the Chinese government has asked its stateowned enterprises to suspend purchases of our agricultural products. When a trade war starts (the Wall Street Journal referred to it yesterday morning as a “Trade Spat”), it is good to keep in mind that both sides have economic weapons they can deploy. In view of the weekend news, yesterday (Monday), the Dow dropped over 700 points. European markets were also slammed.

International trade is typically good for all countries involved, and disagreements can usually be resolved through extended talks and cooperation. We believe this trade war with China will also ultimately be settled through negotiation this way. In the interim, it is a continuing battle of words, tariffs, and threats; neither pleasant nor effective.

If you have been following our thinking over the last half dozen years or so, then you know our view can be very long term and it is our conviction that we remain in a secular or multi-year bull market. We believe this bull market started in May of 2013 when the S&P broke through to a new high after 13 years of being unable to do so. The Nasdaq Index did the same in 2016, taking 16 years to break through to a new high. These lengthy bear markets are long-term periods of virtually no significant gains in the major indices, but they are times when companies pay down debt, trim excess, and prepare themselves for the prosperous years ahead. Technological advances and new inventions have not slowed, but have actually broken through finding new, more effective, and more efficient ways of doing business.

 From studying long-standing history; 100 plus years of stock markets, we believe that secular bull markets can last between 15 and 20 years, gaining momentum before eventually reaching a top. We believe we are years away from reaching this important high point.

The previous bull market ran for 18 years from 1982 until 2000 culminating in the “dotcom-bubble” top in the year 2000. The bull market prior to that ran from the year 1950 until about 1968, once again about 18 years. It finally reached a high of about 1,000 in the Dow. We could go back further in history, but you would find similar moves and time frames. It doesn’t seem to matter what party is in office. According to a Bloomberg report released in 2017 that studied markets going back to the year 1853, they stated the following: “The truth is, presidents have far less control over the markets than most people would have you believe. The economy and stock market rarely operate in lockstep.”

Our point is that bull markets are periods when stock prices continue to go higher for very long periods of time. If we are correct with this one, and we still believe we are, we have a long way to go before encountering an important top. About three weeks ago, one of our clients asked us when we thought we would see a top. Our answer was this, “sometime around the year 2030, give or take a couple of years.” We do not say this in an attempt to be flippant, foolish, or arrogant. Bull markets are long, multi-year, very powerful financial events.

We are aware that many people do not agree with us, but that is probably a good thing. If the majority tells you to come on in, the water’s fine, you’d better become guarded. That resonates a little like people describing why we should invest in real estate in 2006. Bull markets truly do climb a wall of worry.

During a long-term bull markets there are periods of sudden unexpected negative news that can send markets reeling, but we believe these are merely backwashes in an overall rising tide. Declines in bull markets are sharp and fast and frequently seem to come out of nowhere. Don’t be caught up in the emotion turmoil, decide to sell your positions because of fear, not logic, then try to buy back at a lower price, because when the market starts moving higher, you will almost certainly be left sitting on your hands and watching from the sidelines.

This is why it is so important to recognize long-term bull markets, and carefully and logically plan for the future. These are periods when serious wealth can be accumulated. This is the wealth that will provide your income in the future.

The paragraph below is on a totally different subject. We have been asked several times about charitable giving from your IRA, so we asked Chris Mills, whom most of you already know, to provide this information. Chris is a CFP here in our office.

A Qualified Charitable Distribution is a strategy where you make a direct transfer gift from an IRA to a qualified charity. The client must be 70.5 years of age or older, can gift as much as $100,000, and it can offset a client’s RMD. Since a QCD is not included in income as a distribution, it is typically better than attempting to take a distribution from an IRA and then offset it with a charitable deduction. Simply put, it works this way: Let’s assume you are at least 70½ years of age, and you wish to give a gift to a charity. Further assume you wish this (or these) gifts to be $1,000, and you are in a 20% tax bracket: The check(s) are mailed to you directly made out in the name of the charity. You then give them to the charity, so that organization knows it is coming from you. There is no federal income tax paid on this gift and the charity(s) gets the full $1,000. If you took this money directly out of your IRA paid to you as a distribution, you would owe tax of $200. Depending upon your personal tax situation, this could be of benefit to both you and the charity. Call us for further explanation or call your tax advisor