Market News – Week of March 5th, 2018

TARIFF TANTRUM:

On Thursday, President Trump announced plans to slap tariffs on imported steel (25%) and aluminum (10%). The markets immediately tumbled about 2% on the news. Investors are concerned about its impact on prices of goods as well as the prospect of a retaliatory trade war. Markets stabilized on Friday, but still ended the day, and ultimately the week, down. This coming week, watch for details of these tariff plans and for announcements by foreign governments about their responses.

The big, market moving news of the week was supposed to be new U.S. Fed Chair Jerome Powell’s first appearance before Congress. That testimony turned out to be non-consequential, although it looked like it would have positive market impact. It was completely crowded out by tariff talk. Mr. Powell was generally upbeat about the economy, and offered calming discussion regarding fears of inflation.

UPCOMING ECONOMIC NEWS:

Alas, it is likely that the tariff drama will be the major market mover all week. However, on Friday, we will get the February employment report, which is normally a key influencer on market activity. The Census Bureau’s Trade Balance report will be produced on Wednesday morning (before the markets open), and that, coupled with all the tariff talk, could be an interesting day. For those curious as to what the trade deficit has looked like, see below:

EUROPEAN ELECTORAL DRAMA:

One of the things keeping the U.S. economy and markets healthy has been the recovery in Europe. One of the dangers to that recovery is political instability. In Germany, prolonged uncertainty ended as a coalition came together to allow Angela Merkel to begin her fourth term as Chancellor. A caretaker administration has been in charge since September. In Italy, the vote is this weekend (Sunday). Pre-election polls indicate that no party will have enough votes to form a parliamentary majority. Now that Germany is finished with their jockeying, Italy will begin theirs. Meanwhile, the Brexit negotiations between the UK and the European Union continue to slog along.

EMPLOYMENT DATA REMAINS STRONG:

In the week ending February 24, there were 210,000 initial claims for unemployment. This lowered the four week moving average from 222,000 to 220,000. That is the lowest level for this average since Nixon’s first term.

IRS AUDITS:

The IRS audited less than 1% of returns last year. According to an article in The Wealth Advisor, here are some red flags that can put you on that list.

• Taking higher-than-average deductions. This can come from charitable contributions, real estate interest or student loan interest. If you are generous (which I highly recommend), have proof ready in case of an audit. Keep your receipts safely stored.
• Claiming a loss on your “business”. Know the difference between a business and a hobby. The IRS allows hobby deductions for expenses up to the amount of income generated by the hobby, but no more.
• Taking money out of retirement accounts early and not paying the 10% penalty. There are some scenarios where a taxpayer is allowed to withdraw retirement account money prior to the magic age of 59.5, but the IRS charges a 10% penalty if you don’t qualify for one of the exceptions. The IRS’s system of detection will usually figure out when you have taken the money early and not paid the 10% so you better have your documentation as to how you met an exception ready.
• A sudden avalanche of business expenses. Employers can deduct more than 2% of their adjusted gross income for unreimbursed employee expenses (no longer allowed in 2018 and thereafter). Now that the deduction is going away, if you, all of a sudden, have a whole bunch of expenses you try to squeeze into 2017 (knowing it goes away in 2018) it might get the attention of the IRS.

References:

EMPLOYMENT DATA REMAINGS STRONG: http://www.calculatedriskblog.com/2018/03/weekly-initial-unemployment-claims.html
IRS AUDITS: https://www.thewealthadvisor.com/article/beware-irs-looking-these-red-flags-tax-season?
EUROPEAN ELECTORAL DRAMA: https://www.wsj.com/articles/merkel-gets-backing-for-fourth-term-after-months-of-suspense-1520153473; https://www.wsj.com/articles/italians-cast-votes-amid-a-fractured-political-landscape-1520143844
UPCOMING ECONOMIC NEWS: http://www.calculatedriskblog.com/2018/03/schedule-for-week-of-mar-4-2018.html