Updates from Washington

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How elections, policy and other developments in Washington could affect the markets and your financial life
March 25, 2019

What's deductible? IRS clears up confusion around the tax law

The opinions are those of the author(s) and subject to change.
If you have questions about how the 2017 "Tax Cuts and Jobs Act" could affect your returns for 2018 and beyond, you're not alone. For months, the Internal Revenue Service has been working to clear up "a lot of holes and unanswered questions," says noted tax expert and CNBC contributor Andrew H. Friedman, principal and founder of The Washington Update. Some of the IRS's clarifications may help taxpayers maintain deductions they had feared were lost under the new law, Friedman notes in his latest report, "Tax Reform Aftermath: New Guidance for Investors."
Some of the IRS's clarifications may help taxpayers maintain deductions they had feared were lost under the new law.
For example, at first glance the law seemed to have eliminated the ability of homeowners who itemize their returns to deduct any interest on home equity loans and lines of credit (HELOCs). According to the IRS, you can still claim a deduction if the loan is specifically for home improvement. "If you build a new wing or renovate your kitchen, and you tap into your line of credit, the interest is deductible," Friedman notes. Likewise, many business owners had feared that the law's elimination of deductions for entertainment expenses would include meals. The IRS delivered the good news that meals are still deductible (at the traditional 50%) so long as the expense doesn't include entertainment.
Even with the new clarity from the IRS, many aspects of the law may be confusing, Friedman cautions. Be sure to consult your tax specialist before making any decisions.
For more insights, check out "Tax Law Update: New Information on What's Deductible — and What's Not." And for a more detailed look at the latest IRS rulings, read Andrew H. Friedman's report, "Tax Reform Aftermath: New Guidance for Investors."
Investing involves risk including possible loss of principal.
The opinions are as of 03/25/2019 and those of the author and subject to change.
Merrill, its affiliates, and financial advisors do not provide legal, tax, or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.
February 15, 2019

Second shutdown averted as President signs funding bill

The opinions are those of the author(s) and subject to change.
The federal government will remain open for business, thanks to a budget deal averting a shutdown that had been set to begin at midnight on Friday, February 15. President Trump signed the funding bill, which earmarked $1.375 billion for fencing along the southern border, on Friday afternoon, after declaring a national emergency to obtain additional funding for a border wall.
The bill includes $333 billion in federal spending, keeping the government open at least through September and preventing a new round of pain for federal workers and the economy.
The next fiscal challenge facing Congress and the President: passing a budget for fiscal year 2020, which begins on October 1, and addressing the nation's debt limit.
The next fiscal challenge facing Congress and the President: passing a budget for fiscal year 2020, which begins on October 1, and addressing the nation's debt limit. If the debt limit is not raised or suspended by March 1, the Treasury Department could face challenges paying the government's obligations later this year.Footnote 1
Watch for updates on the intersection between politics, the economy and the markets here.
Footnote 1 https://www.brookings.edu/blog/fixgov/2018/12/27/congress-in-2019-five-things-to-watch-for-in-the-budget-battles-to-come/Investing involves risk including possible loss of principal.
Investing involves risk including possible loss of principal.
The opinions are as of 2/15/2019 and those of the author and subject to change.
The views expressed are those of the Chief Investment Office (CIO) only and are subject to change. This information should not be construed as investment advice. It is presented for information purposes only and is not intended to be either a specific offer by any Merrill Lynch or U.S. Trust entity to sell or provide, or a specific invitation for a consumer to apply for, any particular retail financial product or service that may be available.
January 29, 2019

Government reopens … but for how long?

The opinions are those of the author(s) and subject to change.
The federal government reopened January 25, ending the longest shutdown in U.S. history after 35 days. That's good news for everyone from delayed air travelers to taxpayers hoping for timely refund checks to some 800,000 federal workers awaiting paychecks. It's also good news for the economy: The shutdown cost some $3 billion in lost economic activity during the last quarter of 2018, according to the Congressional Budget Office (CBO). The CBO also projects that real GDP could be $8 billion lower in the first quarter of 2019 as a result of the shutdown.Footnote 1
The Congressional Budget Office projects that real GDP could be $8 billion lower in the first quarter of 2019 as a result of the shutdown.Footnote 1
What's next? A 17-member bipartisan panel of House and Senate members have convened to hash out a compromise. If that panel isn't able to negotiate a veto-proof spending bill that includes funding for border security, the government may shut down again at midnight on February 15. Check back for updates on developments as they unfold, as well as any further potential effects on the economy, the markets, and your portfolio.
Footnote 1 https://www.cbo.gov/publication/54937
Investing involves risk including possible loss of principal.
The opinions are as of 1/29/2019 and those of the author and subject to change.
The views expressed are those of the Chief Investment Office (CIO) only and are subject to change. This information should not be construed as investment advice. It is presented for information purposes only and is not intended to be either a specific offer by any Merrill Lynch or U.S. Trust entity to sell or provide, or a specific invitation for a consumer to apply for, any particular retail financial product or service that may be available.
January 16, 2019

Could the government shutdown hurt the economy?

The opinions are those of the author(s) and subject to change.
With politicians locked in a stalemate over a proposed border wall, the longest government shutdown in U.S. history "is likely to continue, in our view, until it has a noticeable impact on economic growth," says Chris Hyzy, Chief Investment Officer for Merrill Lynch and U.S. Trust. For every two weeks without a resolution, economic growth could drop by about 0.1 percent, he adds. "If the situation continues to the end of March, first-quarter growth could drop by more than one-half of 1%."
If the situation continues to the end of March, first-quarter growth could drop by more than one-half of 1%.
— Chris Hyzy, Chief Investment Officer for Merrill Lynch and U.S. Trust
A recent Investment Insights report from the CIO, "Government Shutdown," showed that, historically, shutdowns have had minimal impact on the economy and markets. Yet the current shutdown, which started December 22, represents uncharted territory. "The longer the freeze lasts, the more it could hurt those businesses with exposure to government contracts and services," Hyzy says.
The ripple effect could eventually spread to consumer spending, especially in areas such as travel, leisure, entertainment and municipal services. Beyond the human costs to 800,000 federal workers and their families going without paychecks, the shutdown could also disrupt the flow of key government economic data, such as retail sales figures and fourth-quarter GDP, Hyzy notes.
Investing involves risk including the possible loss of principal investment.
The opinions are as of 1/16/2019 and those of the author and subject to change.
The views expressed are those of the Chief Investment Office (CIO) only and are subject to change. This information should not be construed as investment advice. It is presented for information purposes only and is not intended to be either a specific offer by any Merrill Lynch or U.S. Trust entity to sell or provide, or a specific invitation for a consumer to apply for, any particular retail financial product or service that may be available.
December 20, 2018

Another rate hike to close out the year: Is it good for the economy?

The opinions are those of the author(s) and subject to change.
As expected, the Federal Reserve raised rates a quarter point on Wednesday, citing the continuing strength of the U.S. economy. "Job gains have been strong, on average, in recent months, and the unemployment rate has remained low. Household spending has continued to grow strongly," it noted in its statement announcing the increase. This fourth hike of the year places the central bank's benchmark interest rate in a range between 2.25 and 2.5 percent.
What higher rates could mean for the economy and the markets: The major indexes fell on news of the rate hike, despite indications from Fed committee members that only two hikes might be needed in 2019 — down from three or four previously forecast. Given current investor concerns about slowing growth, "the Fed needs to pause and allow the current hikes to filter through the broader economy before they resume future rate increases," says Chris Hyzy, Chief Investment Officer for Merrill Lynch and U.S. Trust. "We continue to expect investor risk appetite to stay low until several issues are resolved," he adds. Among them: a more dovish Fed in 2019, resolution of U.S.-China trade tensions, and proof of resilience in corporate earnings.
The Fed needs to pause and allow the current hikes to filter through the broader economy before they resume future rate increases.
— Chris Hyzy, Chief Investment Officer for Merrill Lynch and U.S. Trust
"Earnings each quarter will need to maintain a trend that is positive around 5 percent growth and not fall close to zero growth," Hyzy notes. "Given the low base of 2506 on the S&P 500, relative to our fair value price of 2900, we could see the potential for 12-15 percent returns for 2019, from current levels. Volatility is not expected to subside, however, until there is full clarity on rates, trade, and earnings."
What higher rates could mean for your investments: "We remain constructive in equities for the longer-term investor," says Hyzy. "In our view, it would be useful for investors to have a disciplined plan ready to add to equities in three separate re-balancing episodes in the first half of 2019." As for fixed income, "we view shorter-term fixed income and cash yields as attractive relative to dividend yields and longer term debt."
For more insights, on what future hikes could mean for the economy and the markets, check out the latest "Investment Insights from the CIO, "A Liquidity Recession, Not an Economic One." And for a look ahead to 2019, read "Outlook 2019: Answers to 7 Key Questions."
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Investing in fixed income securities may involve certain risks, including the credit quality of individual issuers, possible prepayments, market or economic developments and yields and share price fluctuations due to changes in interest rates. When interest rates go up, bond prices typically drop, and vice versa.

Neither Merrill Lynch nor any of its affiliates or financial advisors provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.

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