Lawmakers will return to Washington on Monday as Congress gets back to work after a six-week recess. Here’s a look at some things investors should be keeping an eye on in the weeks ahead.
Trade remains the biggest potential market mover
There’s little question trade issues are likely to continue to be the most significant potential market mover this fall. But Congress has relatively few ways to affect the current trade war with China. Instead, it’s the White House, the Treasury Department and the U.S. Trade Representative that will continue to lead negotiations.
There was a positive sign on September 4, with the news that U.S. and Chinese negotiators will resume face-to-face talks in early October. But few in Washington are optimistic that a major trade agreement can be forged anytime soon.
One trade issue that is in the hands of Congress is the U.S.-Mexico-Canada Agreement (USMCA), the trade deal crafted to replace the North American Free Trade Agreement (NAFTA). The deal has been approved by the three countries, but still must be ratified by Congress.
Administration officials reportedly have been having talks in recent weeks with Democratic leaders on Capitol Hill in an attempt to resolve concerns and bring the deal to a vote. But trade is a tricky issue that doesn’t break on purely partisan lines—each lawmaker’s position tends to have less to do with party principles and more with how businesses in his or her district would be affected. And some Democrats are wary of handing the president a major trade victory just a year before the presidential election. So it remains uncertain whether Congress will vote on the USMCA this fall.
Government shutdown is unlikely … but possible
The biggest issue facing lawmakers in September is the need to fund government operations for fiscal year 2020, which starts on October 1. The two-year budget deal signed into law at the beginning of August sets the overall federal spending limits for FY 2020 and FY 2021, but Congress still must pass the 12 appropriations bills that allocate those dollars to each federal agency and program.
The House had approved 10 of the 12 bills prior to the August recess, but the Senate has not passed any. With just three weeks to go until the September 30 deadline, it is impossible to imagine that both chambers could pass all the bills, produce consensus legislation that reconciles the inevitable differences between the two versions, and then pass the consensus bills before the deadline.
That’s where a temporary extension of government funding, known as a “continuing resolution,” comes in. Congress has used these temporary funding measures almost annually for decades. A continuing resolution averts a government shutdown by funding government operations at the current rate for a specific time period. Lawmakers are reportedly already preparing to pass such a bill in late September. Some reports are that the bill would fund the government through early December, though it could be a shorter or longer period than that.
Without a continuing resolution, the second partial government shutdown of 2019 would begin on October 1. We think that is unlikely, but it cannot be ruled out.
The stock market historically has had a mixed, but generally mild, . In fact, during the 35-day partial shutdown that started just before last Christmas and continued into late January this year, the S&P 500® index gained more than 10%. However, a shutdown this fall would add another layer of complexity to an already-complicated market environment, so it could spark additional volatility.
Retirement savings legislation remains in limbo
The House of Representatives approved a sweeping retirement savings bill, known as the SECURE Act, by an overwhelming 417-3 margin in May, and there was optimism at the time that the Senate would quickly follow suit. That did not happen, and the bill remains in limbo in the Senate as we move into the fall.
The legislation’s most notable provision for individuals would increase to 72 from 70 ½ the age at which savers must begin taking required minimum distributions from their retirement accounts. It would also lift the prohibition on making contributions to a traditional individual retirement account (IRA) after age 70 ½; require a new annual disclosure to help savers understand how their current savings would translate into a monthly income in retirement; and allow small businesses to band together to offer a retirement savings opportunity to their employees, among other provisions.
The bill also would change the rules for inherited retirement accounts. Under current law, individuals who inherit a retirement account can spread distributions from that account over their lifetime. The SECURE Act would require those assets to be distributed within 10 years, with a number of exceptions.
Proponents of the bill remain optimistic that it can be passed this fall and take effect on January 1, but this is far from certain. Several senators have expressed concern with specific elements of the bill; negotiations are underway to address those concerns. We will continue to monitor this bill, as it has potentially significant ramifications for investors.
White House is still mulling the indexing of capital gains
The concept of indexing capital gains to inflation has been floating around Washington for years. The idea is to exempt from taxation any capital gains that are attributable to inflation. For an individual who has held a stock position for a long time, this would have the effect of increasing the cost basis and thereby reducing the amount of the gain that is taxable.
The president has mentioned this idea several times over the last year, most recently just two weeks ago. The administration is reportedly considering whether such a change could be implemented by an executive order from the president.
There is genuine uncertainty about whether such an order would be constitutional, since it would effectively be an end-run around the Congress’ responsibility for making tax law. Democrats on Capitol Hill have made it clear they will challenge the idea in court, and the administration appears internally divided over whether such an action would survive a court challenge.
President Donald Trump himself appeared to declare the idea dead in late August, only to rekindle interest with a cryptic August 30 tweet that again expressed his support for the idea.
In the face of a slowing economy, the administration has been openly considering whether some kind of tax cut, such as a payroll tax cut or the indexing of capital gains, could boost the economy. While we think the risks of a nasty court battle make it unlikely the administration will move forward with action to index capital gains, it has not been formally ruled out.
Health-related bills could get bipartisan support this fall
With Democrats controlling the House of Representatives and Republicans holding a slim Senate majority, opportunities for bipartisanship have been rare this year. But some in Washington believe this fall could see bipartisan action in the health-care area.
Earlier this year, the House easily passed a bill that would repeal the tax on so-called “Cadillac” health plans. The tax on high-cost plans was part of the Affordable Care Act back in 2010, but it wasn’t supposed to kick in until 2018. Congress has since delayed it twice—it currently is set to take effect in 2022—and now its repeal entirely appears nearly certain. There is also bipartisan interest in repealing the 2.3% tax on medical devices that is set to go into effect at the end of this year.
Other areas for possible bipartisan work this fall include addressing prescription drug prices and protecting patients from so-called “surprise” medical billing, which occurs when a patient visits an emergency room and later finds that one of the doctors or other service providers is not in the patient’s insurance network. The latter issue had bipartisan momentum earlier this summer. However, it has sparked a massive lobbying campaign, with doctor and hospital groups pushing back against the mechanics of how they would be paid under the proposal. That has slowed momentum and increased uncertainty about whether the bill could pass this fall.
Federal Reserve vacancies could be filled
A final item to watch is the Senate’s consideration of President Trump’s nominees to fill two vacancies on the Federal Reserve Board of Governors. The president said in July that he would nominate Judy Shelton, the U.S. executive director at the European Bank for Reconstruction and Development, and Christopher Waller, an economist at the St. Louis Federal Reserve Bank, to fill the seats. The Senate Banking Committee is likely to hold confirmation hearings this fall, followed by votes in the full Senate.
But Trump’s last four choices to fill the vacancies have been controversial; all stepped aside before even getting to the hearing stage. While Waller seems likely to win confirmation, Shelton will be under scrutiny for some of her past comments, including advocating for a return to the gold standard.
With the Fed’s monetary policy being closely watched this fall, coupled with the president’s frequent tweets expressing his frustration with the Fed, hearings on the two nominees could generate significant attention.
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