Quite A Rally…

Off the bottom have come market prices with a January run for the record books. Why has there been the relief? Predominantly, we think that the news has changed. It has recently become a bit more hopeful. First, the gurgling out of Washington and Beijing sounds less bellicose. Meetings have been held in both capitals. The principals are talking, which is a good sign. President Trump has signaled he wants a deal. Beijing has made legislative moves which suggest that the Chinese are conceding points on the American agenda. Nirvana has not yet been achieved, but the talks are going in the “right direction”. Second, the Federal Reserve is sounding more “dovish” than in December. While we were not surprised by the summary of the Fed’s December meeting, the markets were, prompting a precipitous downdraft. The “Fedspeak” has since become a lot less worrisome and the markets have rallied. Next, U.S. economic data have brightened some. Certain industries (think housing) still show perplexing softness, while other datapoints (like employment and inflation) portray something of a “Goldilocks” economic environment. Recently, the trend has changed to the more positive vs. the news flow in Q4 of 2018. Finally, the price of oil has recovered. Having become a major exporter of oil in the past few years, it is no longer the case that a collapse in oil prices is unabashedly good for the U.S. economy (think Texas). OPEC met in December and agreed to cut production, which they implemented. Oil rallied and this concern for the markets has dissipated. We are now in the midst of corporate earnings season and so far, company results and 2019 outlooks have generally pleased investors. So, the New Year is off to a good start.

Politicians are “stirring the pot” and some of the new “firebrands” in addition to some of the old standard-bearers are calling for much higher income taxes and even new wealth taxes. Paying one’s “fair share” is the rallying cry. Following is a chart from the IRS dated 2015, which is the most recently available data.

The reader will note that the Top 5% earners in the U.S. earn 36.07% of Total Adjusted Gross Income (AGI) and pay 59.58% of Total Income Taxes. Further, the Top 10% earners get 47.36% of Total AGI, but pay 70.58% of the total tax bill. Lastly, the Bottom 50% earners earn 11.28% of Total AGI but pay just 2.83% of the taxes. Recently Howard Marks, a co-founder and co-Chairman of Oaktree Capital Group LLC, wrote that ….
“Slowing growth is fueling discontent among those outside the elite. Their unhappiness crystallizes in populism. And it needs a target. Why not capitalism? Historically successful democracies have declined when the majority of a population realizes that they can appropriate more for themselves by taxing those at the top. Without the contributions of those who aim for the top, everyone will have less to enjoy.”
Enough said……..