April Market Recap
Global markets reacted violently to President Trump’s widespread tariff measures announced on April 2nd. Every major global market experienced some of the worst days since the COVID-19 pandemic. “Liberation Day” was more like “Capitulation Day” for investors. However, following the President’s April 9th announcement of a 90-day pause on tariffs for most countries, markets exploded higher. For the S&P 500 and Dow, April 9th marked the best one-day rally since 2008. The Nasdaq has only one better day on record – a 14% gain back in 2001.
By now, it is clear that the trade war is mainly between the US and China. The timing and terms of a deal between these two powerhouses will be key to stabilizing the heightened global trade tension.
What To Look For in the Coming Weeks and Months
Aside from the ongoing trade headlines, three economic measures to pay attention to are consumption, jobs, and inflation.
March saw a surprise jump in consumer spending despite a souring outlook on the economy (see chart below). We could see that trend continue as consumers frontload or accelerate certain purchases in anticipation of higher prices that may result from tariff policy.
The labor market also reflects the changing economic landscape. So far, the job picture remains healthy. Sudden spikes in initial jobless claims or higher-trending continuous claims numbers would indicate a weakening job market due to layoffs.
Finally, thanks to tariffs, consumers could face higher prices. Fed Chair Jerome Powell indicated during his April 16th press conference that this is on the Fed’s radar. Unexpected inflation would further weaken consumer spending and confidence and could lead to a dreaded quandary – stagflation. A slowing economy calls for the Fed to reduce interest rates but inflationary pressure pulls the rates to go higher.
What is in the Tax Bill?
One of the main items on Congress’s GOP-led agenda is extending the 2017 Tax Cuts and Jobs Act (TCJA) provisions. If Congress does not act, many of the current tax rules will expire at the end of 2025.
Most tax professionals expect the TCJA will be extended, possibly permanently, with certain modifications. What changes can we reasonably expect?
- The standard deduction was effectively doubled by TCJA, making it more beneficial for most taxpayers than taking itemized deductions. We can expect these larger standard deductions to continue (and be adjusted for inflation).
- State and local taxes (SALT) have been a pain point for taxpayers living in high-tax states. The 2017 TCJA capped the SALT deduction at $10,000, regardless of filing status. A bigger SALT deduction could be introduced in the next tax bill.
- Section 199A deduction has been a boon for many small business owners. In many cases, sole proprietors and pass-through entity owners can deduct up to 20% of their qualified business income (QBI), subject to a couple of requirements. GOP lawmakers are hoping to extend this QBI deduction to individuals who own a Specified Service Trade or Business (SSTB) and are currently ineligible for this tax break due to their income exceeding certain levels.
- We can expect the generous federal estate and gift tax exemption to continue. Very few estates will be subject to the federal estate tax. Therefore, planning should focus on state-level exemptions for residents in states with estate and/or inheritance taxes. For example, Oregon has one of the lowest estate-tax exemption amounts at $1 million, and it does not take much to reach that level.
In addition to these, other ideas that the President “promised” on the campaign trail include no tax on tips and Social Security benefits. Chances of these becoming reality are quite slim at this point. That is because lawmakers will have to find ways to pay for them. Of course, we will monitor the developments and keep you posted.
