Schwartz Financial Weekly Commentary 11/13/17

The Markets

Selling it overseas.

Most of the companies in the Standard & Poor’s 500 (S&P 500) Index have reported third quarter earnings per share (EPS), which is the profit earned per share of stock outstanding during the period. Many have done quite well.

With more than 90 percent of companies reporting, the total EPS growth rate for the S&P 500 has exceeded expectations, reported FactSet. In aggregate, the growth rate accelerated from 3.1 percent on September 30 to 6.1 percent last week.

It’s interesting to note companies that sell more products and services outside the United States experienced significant increases in EPS when compared to companies that sell more at home. S&P 500 companies with:

  • More than one-half of sales in the United States had an aggregate growth rate of 2.3 percent.
  • Less than one-half of sales in the United States had an aggregate growth rate of 13.4 percent.

The disparity owed much to the weaker U.S. dollar and faster economic growth in other countries, including emerging markets.

Investors weren’t all that appreciative of strong corporate performance. They rewarded positive EPS surprises less than average and penalized negative EPS surprises more than average. On November 10, FactSet explained:

“…it may be due to the high valuation of the index relative to recent averages. As of today, the forward 12-month P/E [price-to-earnings] ratio for the S&P 500 is 18.0… Prior to the month of October, the forward 12-month P/E had not been equal to (or above) 18.0 since 2002. Thus, despite the number and magnitude of positive earnings surprises in recent quarters, the market may be reluctant to push valuations even higher in aggregate.”

Last week, major U.S. stock indices ended their multi-week winning streaks and finished lower.

Data as of 11/10/17 1-Week Y-T-D 1-Year 3-Year 5-Year 10-Year
Standard & Poor’s 500 (Domestic Stocks) -0.2% 15.3% 19.1% 8.2% 13.4% 6.0%
Dow Jones Global ex-U.S. -0.3 21.3 23.0 4.0 5.7 -0.5
10-year Treasury Note (Yield Only) 2.4 NA 2.1 2.4 1.6 4.2
Gold (per ounce) 1.4 10.8 1.3 3.4 -5.8 4.8
Bloomberg Commodity Index 0.5 -0.3 4.1 -9.2 -9.1 -7.1
DJ Equity All REIT Total Return Index 2.7 9.9 17.9 8.2 11.1 7.3
S&P 500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT Total Return Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.
Sources: Yahoo! Finance, Barron’s,, London Bullion Market Association.
Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

The Winter holidays are almost here. It’s that time of year when people search and search for just-the-right gifts at just-the-right-prices for friends and loved ones. The National Retail Federation expects holiday sales to rise by 3.6 percent to 4.0 percent this year and total about $680 billion. The average consumer expects to spend about $970 on the holidays. Here are a few gift ideas for the hard-to-buy-for individuals on your list:

  • For coffee lovers. It’s an experience shared by coffee drinkers everywhere. You pour a cup, doctor it up, and before you can take a sip, you are called away. By the time you return, the coffee is cold. A ceramic mug with a microprocessor-controlled heating system can solve the problem.
  • For the outdoorsy. Anyone who spends time in the sun knows the importance of sunscreen. The mystery is when to reapply it. The outdoorsy folks in your family may appreciate a UV patch. It’s a wearable decal that changes color when it’s time to reapply sunscreen.
  • For the indoorsy. Series bingers and show streamers will love ‘wallpaper’ television. It’s a new kind of TV that viewers ‘peel and stick’ to their walls using magnetic mats.
  • For the fashion-conscious environmentalist. Soon, clothing may be made of synthetic spider silk and bio-manufactured leather. It’s unlikely they’ll be available this winter, but you could give tickets to the Museum of Modern Art in New York City. Clothing made of these fabrics is on display through January 2018.
  • For the insomniac. Know someone who has trouble sleeping? A white noise machine or an air purifier with a fan can provide constant, soothing sound that may help lull them to sleep.
  • For the vision impaired. There are all kinds of gadgets that can make life a little easier for people with low or no vision. Try a wristband that shakes to give directions or a new ‘feeling fireworks’ display that simulates the visual experience through touch.

If you’re stressing because you cannot find the right gift, remember the best gift is time. Instead of buying things, invite the people on your gift list to join you for an event or an activity.

Weekly Focus – Think About It

“I slept and I dreamed that life is all joy. I woke and I saw that life is all service. I served and I saw that service is joy.”

–Kahlil Gibran, Lebanese writer and poet

Value vs Growth Investing (11/10/17)

Name 1-Week YTD 4-Week 13-Week 1-Year 3-Year 5-Year
US Market -0.21 16.92 1.16 6.60 21.60 10.29 15.66
US Core 0.13 16.97 1.39 5.96 21.73 10.34 16.43
US Growth 0.04 25.98 2.74 8.59 28.38 11.55 16.50
US Large Cap -0.19 18.40 1.45 6.53 22.52 10.72 15.74
US Large Core 0.21 18.99 1.96 5.88 23.20 10.99 16.96
US Large Growth 0.18 27.67 3.11 8.31 29.53 12.34 17.07
US Large Val -0.99 9.21 -0.84 5.21 15.14 8.76 13.22
US Mid Cap -0.03 14.35 0.94 6.69 19.52 9.35 15.75
US Mid Core 0.12 14.21 0.72 6.40 19.23 9.02 15.45
US Mid Growth -0.03 22.02 2.09 9.08 25.04 9.07 14.81
US Mid Val -0.21 6.97 -0.12 4.35 14.10 9.86 16.95
US Small Cap -0.94 9.58 -1.20 7.05 18.00 8.48 14.45
US Small Core -0.63 6.57 -2.06 5.48 15.53 8.17 14.41
US Small Growth -1.19 19.95 0.71 10.19 25.73 10.16 15.11
US Small Val -0.97 2.61 -2.43 5.34 12.68 7.00 13.71
US Value -0.84 8.31 -0.81 5.05 14.81 8.88 14.03
 ©2004 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar; (2) is not warranted to be accurate, complete or timely. Morningstar is not responsible for any damages or losses arising from any use of this information and has not granted its consent to be considered or deemed an “expert” under the Securities Act of 1933. Past performance is no guarantee of future results.  Indices are unmanaged and while these indices can be invested in directly, this is neither a recommendation nor an offer to purchase.  This can only be done by prospectus and should be on the recommendation of a licensed professional.

 Office Happenings:

Republican Tax Plan Q&A

Q: What exactly are Republicans trying to do – and why? 

Might as well start with the basics.  During last year’s presidential campaign, Donald Trump promised significant tax cuts, something long advocated by most Republican politicians.  But because Republicans now control the White House and both chambers of Congress, they decided to pair tax cuts with a more ambitious goal: rewriting the entire tax code.

Over the decades, our nation’s tax code has ballooned in size.  It contains so many provisions, credits, loopholes, and deductions that it takes a true professional – or a well-coded piece of software – to understand it all.  In fact, Republicans claim the tax code has inflated 169% over the past thirty years.1

Both parties generally agree tax reform is needed, but it’s there that consensus ends.  That’s because tax reform inevitably means changes…and even members of the same political party often disagree on what those changes should be.  That’s why there hasn’t been a significant overhaul of the tax code since 1986.

Q: What have Republicans done so far? 

On September 27, President Trump unveiled his version of tax reform, as decided on by members of his cabinet and certain key members of Congress.  From there, the action moved to the House.  (That’s because Article I of the Constitution dictates all bills raising revenue must originate in the House.)

After over a month of debate, the House Ways and Means Committee released the “Tax Cuts and Jobs Act.”  On November 6, the Committee began what’s called a “markup” of the bill, where members can propose changes and rewrites before the bill goes to the rest of the House for a vote.

On November 9, the Senate Finance Committee released their own version of the bill, which contains some significant differences.  Let’s start by examining the House version.

Q: What does the “Tax Cuts and Jobs Act” do, exactly? 

Okay, take a deep breath.  There’s a lot of ground to cover here.  Broadly speaking, the bill does the following:

  • Reduce the number of personal income brackets
  • Remove or restrict many different tax breaks
  • Abolish both the estate tax and the alternative minimum tax
  • Cut corporate tax rates

Let’s take each of these one at a time.

Personal Income Brackets

Currently, there are seven tax brackets.  This bill will reduce that number to four.  (This differs from President Trump’s original plan, which called for only three brackets.)  See the table on the following page for more information. 2

Current Tax Brackets Proposed Tax Brackets Income for Individuals Income for Married Couples
10% 12% $12,000-$45,000 $24,000-$90,000
25% 25% Up to $200,000 Up to $260,000
33% 35% Up to $500,000 Up to $1 million
39.6% 39.6% Above $500,000 Above $1 million

For most individuals earning $12,000 or less, and couples earning $24,000 or less, the tax rate is essentially zero.

Naturally, whether people actually pay more or less will come down to a variety of factors, not just which bracket they fall in.  That’s because of changes to both…

Standard & Itemized Deductions

As the IRS explains it, the standard deduction is a “dollar amount that reduces the amount of income on which you are taxed.”3  Under the Tax Cuts & Jobs bill, the standard deduction would go from $6,350 to $12,000 for singles, and from $12,700 to $24,000 for married couples filing jointly.4

But when it comes to the standard deduction, there’s a catch: you can’t take it if you itemize deductions.  So, while the bill doubles the standard deduction, that benefit could be offset for many people because of changes to itemized deductions.

Here are some changes to common itemized deductions.

Mortgage interest: Currently, people can deduct up to $1 million on mortgage interest payments for newly purchased homes.  The bill retains this deduction, but lowers the cap to only $500,000.  Additionally, homeowners can only deduct mortgage interest on their principal residence.  This deduction does not apply to a second home.4

State and local taxes: A popular deduction is to write off state and local tax payments from federal tax payments.  Originally, the Republican tax plan called for removing this particular tax break altogether, and you may have seen that reported in the news.  This did not sit well with representatives from high-tax states, however, so a compromise was reached.  Now, the bill specifies that people can still deduct up to $10,000 on local property taxes, but can no longer deduct other state and local taxes, like income or sales taxes.4

Medical expenses, tax preparation fees, alimony payments, student loan interest and moving expenses:  All these tax breaks are eliminated under the bill.5

On the other hand, the bill expands the child tax credit from $1,000 to $1,600 for any child under seventeen.  Additionally, this credit would be available to more people.  Currently, married couples making over $110,000 a year are ineligible for the tax credit; the bill raises that level to $230,000.5

Eliminating the AMT and Estate Tax

The Alternative Minimum Tax (AMT) is a tax on a certain range of high-income people, specifically those who make between $200,000 and $1 million.  It was designed to “prevent taxpayers from escaping their fair share of tax liability through tax breaks8”; however, the AMT has often been derided as unfair and needlessly complex.  The House Republican tax plan would abolish the AMT, which is welcome news for many investors.

The estate tax, meanwhile, has long been in the cross-hairs of many Republicans, who believe it’s inherently unfair to tax someone’s estate after death, since they have already paid taxes on that estate while alive.  The bill would repeal this tax entirely, albeit not until 2024.

Corporate Tax Rates

One of the centerpoints of the bill is what it does for businesses.  Here are some of the most significant changes:

  • Permanently reduce the top corporate tax rate from 35% to 20%. Additionally, the bill would abolish the corporate version of the AMT.6
  • Allow businesses to write off any new equipment costs. However, this deduction expires after five years. 6
  • Decrease the pass-through rate to 25% from 39.6%.6 A pass-through is a type of business where business income is passed directly to the owners.  That means only the owner is taxed, not the business itself.  This is designed to prevent business owners from effectively having to pay taxes twice, on both their personal income and their business income.
  • Create a minimum tax on foreign earnings so corporations can’t just move their money overseas and not pay taxes. 6

Q: What does the bill NOT do? 

During the runup to the bill’s release, the media reported many possible changes, some of which didn’t end up making it into the final bill.  For example:

  • Previously, it was reported that some Republicans were considering lowering the cap on 401(k) pre-tax contributions. This is NOT in the current bill.
  • The bill also does NOT make any changes to the Earned Income Tax Credit, a break specifically for lower-income families.
  • Most importantly for investors, the bill leaves taxation on investment income untouched. This includes taxes on dividends and capital gains.  However, it should be noted that some investors may pay less in taxes on investment income because the plan would move them to a lower tax bracket.

Q: Okay, so what happens now? 

In two words: a lot.

In more words: as of this writing, Senate Republicans have just released their own tax plan.  (More on this in a moment.)  Assuming both bills pass in their respective chambers, the Joint Committee on Taxation would take over.  This is a small group of senators and representatives whose job is to meld the two bills into one before sending it to the White House for the president’s signature.

Here’s the thing: while all that sounds simple enough, politics make it anything but.

Currently, Republicans own a much slimmer majority in the Senate than they do in the House.  As a result, they have two options when it comes to passing a tax bill: recruit Democratic support, or use a process called budget reconciliation.

Given the unlikelihood of the two parties working together, Republicans are likely to use the second approach.  Reconciliation allows certain bills that change spending, revenue, or federal debt to be passed with a simple majority.  That means Republicans in the Senate can pass their bill with only 51 votes.  To use budget reconciliation, though, the bill must not increase the Federal deficit by over $1.5 trillion over ten years.7

While budget reconciliation effectively gives Republicans a way to hold off Democratic opposition, it also creates a problem.  They cannot afford any dissension in their own ranks.  If more than a few Republicans decide not to back the bill, reconciliation dies – and in all likelihood, the bill with it.  This is what happened when Senate Republicans tried to repeal the Affordable Care Act earlier in the year.

Here’s why this little civics lesson matters: the Senate Republicans’ plan contains significant changes from the House version, in order to win the support of both moderate and conservative Republicans senators, who tend to have different priorities.

Q: What differences does the Senate version of the bill contain? 

A few examples: under the Senate version, the new corporate tax rate described above does not go into effect until 2019, whereas the House version kicks in immediately.9  Additionally, the Senate bill does not repeal the estate tax, in order to appease members of the party’s moderate wing.

But those probably aren’t even the biggest changes.  Remember how the House plan reduced the number of individual tax brackets from seven to four?  The Senate bill retains those seven brackets, although the rates for some of those brackets have changed.  The top tax bracket, for instance, would decrease from 39.6% to 38.5%.9

Furthermore, the Senate version “fully removes the ability of households to deduct their state and local taxes” from their federal taxes.9  (The House version, you’ll recall, allows people to still deduct their state and local property taxes.)

These are major departures from both the House bill and President Trump’s original plan.  It remains to be seen how the two bills will be reconciled…or if they even can be.

Q: So that means we don’t really know what the final tax bill will look like? 

Exactly.  In the end, it could be fairly close to everything we talked about in this letter.  Or, certain provisions could look very different.

Q: Then why do I need to know about any of this? 

Preparation!  When it comes to your finances, it’s always good to avoid surprises.  By knowing which changes are being considered, we can start to prepare ourselves for how those changes will affect us.  As Shakespeare said, “All things are ready, if our mind be so.”

Or, as I like to put it: “No one ever wished they were less prepared.”

Q: What do we do now? 

My team and I will continue to monitor all the news coming out of Washington.  As both the Senate and House bills move down the pipe, we will keep tabs on any changes and how they may affect you.

This letter is not intended to be a complete, exhaustive breakdown of everything in the Republican tax plan.  So, here’s what you should do: stay informed, and write down any questions you have whenever they occur to you.  Hear something on the radio that doesn’t make sense?  Write it down.  Read something in the newspaper and want to know what it means?  Write it down.  Then, feel free to contact me with any questions.  As always, I’ll do my best to answer them.

Additionally, if you would ever like me to confer with your personal tax advisor, I would be happy to do so.

Finally, always remember that we at Schwartz Financial are here to help you feel confident about your financial future.  Please let us know if there’s ever anything we can do.


1 “A Better Way: Our Vision for a Confident America,” Speaker of the House, June 24, 2016.
2 Alice Parlapiano, “Six Charts That Help Explain the Republican Tax Plan,” The New York Times, November 2, 2017.
3 “Standard Deduction at a Glance,” Internal Revenue Service,
4 “What’s in the Republican tax reform bill,” The Washington Post, November 2, 2017.
5 Jeanne Sahadi, “What’s in the House tax bill for people,” CNN Money, November 3, 2017.
6 David Floyd, “Trump’s Tax Reform Plan,” Investopedia, November 9, 2017.
7 Bob Bryan, “Republicans just passed a huge tax reform test by the skin of their teeth,” Business Insider, November 2, 2017.
8 “Alternative Minimum Tax – AMT,” Investopedia,
9 Richard Rubin, “Senate Tax Plan Differs from House,” The Wall Street Journal, November 9, 2017.


Michael L. Schwartz, RFC®, CWS®, CFS

P.S.  Please feel free to forward this commentary to family, friends, or colleagues.  If you would like us to add them to the list, please reply to this email with their email address and we will ask for their permission to be added.

Michael L. Schwartz, RFC, CWS, CFS, a registered principal offering securities and advisory services through Independent Financial Group, LLC., a registered broker-dealer and investment advisor.  Member FINRA-SIPC. Schwartz Financial and Independent Financial Group are unaffiliated entities.


This information is provided for informational purposes only and is not a solicitation or recommendation that any particular investor should purchase or sell any security. The information contained herein is obtained from sources believed to be reliable but its accuracy or completeness is not guaranteed.  Any opinions expressed herein are subject to change without notice.  An Index is a composite of securities that provides a performance benchmark.  Returns are presented for illustrative purposes only and are not intended to project the performance of any specific investment.  Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly.  Past performance is not a guarantee of future results.


* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.


* The DJ Global ex US is an unmanaged group of non-U.S. securities designed to reflect the performance of the global equity securities that have readily available prices. 


* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.


* Gold represents the London afternoon gold price fix as reported by the London Bullion Market Association.


* The DJ Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.


* The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.


* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.


* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.


* Past performance does not guarantee future results.


* You cannot invest directly in an index.


* Consult your financial professional before making any investment decision.


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