As expected, markets remain volatile and we saw incremental downturns for the S&P 500, Dow and NASDAQ this week. Still, while the bull market is aging, it is alive. U.S. jobs and improved wages, among other factors, support our confidence. Additionally, a 7-week long rally from mid-Feb lows climbed the wall of worry. 2016 will likely be a rough ride – stay steady! Now, on to this week’s digest…
The Fed’s Inside Debate – a review of the notes from the last Fed meeting showed policymakers debating over whether an interest rate hike was necessary in March, with the consensus being that a cautious approach was warranted in light of a ‘global economic slowdown.’ Voting governors felt that raising the target range in the wake of the pronounced market volatility would send a signal of urgency that they did not necessarily want to communicate. Long-time readers know how we at Zacks Investment Management feel about analyzing minutes of Fed moves – which will almost certainly be gradual hikes over the course of the year.
The Mysterious Panama Papers – the world was rocked this week by the release of the still-baffling “Panama Papers,” which exposed multiple shell-company accounts tied to world leaders and multi-national corporations (the list involved corporations that could be released next week). The 11.5 million documents came from Panama-based law firm Mossack Fonseca and were released to the German publisher Suddeutsche Zeitung whose journalist Frederik Obermaier has been pouring over the documents for over a year. Iceland’s Prime Minister had already resigned when it was discovered that his wife had a shell corporation in the British Virgin Islands. Also, several accounts have been linked to friends and family of Vladimir Putin and even British Prime Minister David Cameron, whose father allegedly had an offshore company that hasn’t paid taxes since the 1980’s. In the wake of the scandal, the U.S. Treasury Department is set to issue a rule forcing banks to seek the identities of people behind shell-company accounts, and it is thought that the law will soon be sent to the White House for review and issuance. Expect more fallout in the weeks ahead.
New Regulations on Corporate Tax “Inversions” – the U.S. Treasury Department created new rules making it more difficult for companies to move their tax addresses out of the U.S., a move used to dodge the U.S.’s globally uncompetitive 35% corporate tax rate. Companies love doing business in the U.S. because of the intellectual capital and well developed capital markets, but balk at the high corporate tax rates. So, many multinationals will shift profits to low-tax companies abroad using a tactic known as earnings stripping. What’s weird about this regulation is that the Obama administration and congressional Republicans actually agree that the U.S. should cut its corporate-tax rate, as lowering it could be a resourceful way to incentivize corporations to keep more profits here. But, neither party has been able to push the measure any further and, in an election year, it’s the last thing anyone should expect. Meanwhile, many CEOs are up in arms about the new rules, and Pfizer and Allergan made a splash by terminating their planned $150 billion merger. Both CEOs had scathing remarks for the U.S. government, some of which were grounded in truths (the Treasury changes ignore the reason many companies pursue inversions in the first place: the U.S. corporate tax structure puts American companies at a competitive disadvantage to foreign companies with lower rates).
Raising the Minimum Wage – governors in California and New York have signed laws enacting raises to the minimum wage to $15 per hour. The federal minimum wage currently sits at $7.25 per hour, though 29 states and Washington D.C. have set theirs higher. This will almost certainly re-ignite the long-standing debate over whether there should be a minimum wage at all and, if so, what it should be. The economics of the matter tells us that raising the minimum wage incrementally over time will not significantly impact the lower-level jobs, but doubling the minimum wage creates a decent chance that companies will respond with cost-cutting measures, more than likely aimed at shedding the amount of employees they have.
Disclosure