In This Month's Issue:
You can read the full Investment Perspectives here.
China Stimulates but No "Flood Irrigation"
Mark Luschini, Chief Investment Strategist
The late Chinese Premier Li Keqiang, who once quipped that China’s reported GDP growth was man-made, also uttered back in 2018 that the Middle Kingdom’s economy does not require “flood irrigation” stimulus. He was referring to policymakers needing to take a more measured and precise approach in their efforts to reflate stalled economic activity as opposed to the precedent of an “all of the above” philosophy that led to malinvestment and unintended consequences.
A blitz of announcements recently from Chinese officials taking myriad steps to stabilize, if not reaccelerate, economic growth has received an inordinate amount of attention. Deservedly so, given that China’s economy, the second largest in the world at an estimated $18 trillion but a distant second to the United States’s $29 trillion, has been relatively weak over the past several years and dangerously close to missing its stated target of 5% annual growth.
Municipal Tax Exemption
Guy LeBas, Chief Fixed Income Strategist
“The avoidance of taxes is the only intellectual pursuit that carries any reward.” Frequent readers might notice that Janney ISG’s economic philosophy is broadly Keynesian, and those words were from the founder of said philosophy, John Maynard Keynes. Keynes spent most of his life 3,000 miles on the other side of the Atlantic; however, he did witness the creation of the U.S. tax-exempt municipal bond market in 1913, if not its expansion in 1986. Keynes’ tacit approval of the U.S. municipal bond markets clearly makes those of us who write about those markets the most prized of intellectuals.
Humor aside, the long-term value proposition offered by U.S. municipal bonds (munis) is that income generated by said bonds is exempt from federal and, in many circumstances, state and local taxation. For investors in a 32% or higher marginal tax bracket, the exemption (depending on market conditions) generally provides a net benefit. Said another way, while gross yields on munis may be lower than, say, yields on corporate bonds, the tax exemption makes the after-tax returns more attractive on munis so long as a single filer’s adjusted income is $182,101 or higher ($364,201 for joint filers). The actual “breakeven” tax rate is more like 28% at present, but tax brackets jump from 24% to 32%.
Is It the FOMC or FOMO That Matters?
Gregory M. Drahuschak, Market Strategist
The November 5 election will dominant the news flow this month, but the last half of the month might contain more important news for investors.
In the long run, earnings expectations drive stock prices. Standard & Poor’s began reporting 2025 earnings expectations 24 weeks ago. At that time, the expectation was for 2025 earnings to be more than 14% above 2024 earnings. Expectations for 2025 earnings continued rising through the next nine weeks before going sideways until the current high reached $276.45, 15.4% above the initial estimate. The upside in the estimate stalled until the first week of September and then fell for three consecutive weeks to a level only 0.4% above the initial 2025 estimate.
You can read the full Investment Perspectives here.
