March Madness took on a whole new meaning in the world of Wall Street and for one lucky person in Wisconsin, the sole winner of the record setting $768 million Power Ball lottery. Many of us think of the month of March and automatically think of basketball. For corporate America it means billions of dollars in lost productivity. It is estimated that during this year’s NCAA tournament, 75 million workers will spend an average of six hours on tournament related activities resulting in over $13 billion of lost productivity.
These were just two of the distractions in the headlines during the past month. Boeing unfortunately dominated the news with the crash of the second plane in six months, killing all 157 passengers. President Trump appears to be making progress toward a trade deal with China, but has not yet been able to wrap up some of the most pressing details. Drama from Europe played out daily as they failed to approve a plan for Brexit. Markets struggled to start the month, but went on to post gains amid conflicting economic data. All this while Americans across the country began the annual ritual of filing their taxes, with the usual stress compounded by a new tax law and an IRS still recovering from the shutdown.
Although the major indices were marginally positive for the month, it topped off the end of the first quarter with the S&P 500 posting the strongest performance for the first quarter since 1998 and the strongest quarter overall since 2009. For the month, the Dow was up just .05%, the S&P gained 1.79%, and the Nasdaq finished the month 2.61% higher. The quarterly numbers came in at 11.15%, 13.07% and 16.49% respectively. The surprise for the month was the collapse in interest rates. Yields across the entire curve declined, with long term rates dropping the most. It was welcome news to the housing market as long-term mortgage rates headed back down again, but the signal to investors of a more than 10% decline in ten-year treasury rates was not interpreted necessarily as a positive. Rates had already begun to decline earlier in the year as the Federal Reserve announced its’ policy intention in January to hold off on further rate increases. The continued decline however, from 2.715% to 2.405% during the month, led many to question if the bond market is signaling a recession. Those fears were further fueled with the inversion of rates at the shorter end of the curve. This came in conjunction with 10-year yields turning solidly into negative territory in Europe again amid the turmoil surrounding Brexit. Declining rates took their toll on the banking sector with Financials being one of only two sectors negative for the month. Oil traded higher, leading to good news for investors in the energy sector but bad news to consumers as gas prices ticked higher during the month.
March exemplified the impact of single stock performance and the influence one name can have on the thirty-stock index of the Dow Jones Industrial Average. Dow component, Boeing, carries the largest weight in the index, representing almost 11% of this price weighted index. Early in the month, Boeing was the top performing stock in the index and was responsible for nearly 30% of the returns for the year. However, on March 11th, as news circulated about the crash of the second 737 plane in Ethiopia over the weekend, Boeing stock was down 10% in pre-market trading. On March 1st, Boeing closed at $440.62, its highest level for the year up a blistering 36.6% for the year. It closed on March 11th at $365.55, down just over 17% in less than two weeks. It ended the month of March down 13.3%, although still up 18.27% on the year. Due to its weight in the Dow, it accounted for just over 400 points of decline, which influenced the return of the entire index by 1.55%. Therefore, if Boeing was not in the Dow for the month of March, it would have been up by 1.6% versus the .05% that it posted. For some perspective on this dominance, the next highest weight is United Health Care at just over 6%, Apple comes in at just over 5% and Microsoft a little over 3%. According to Data Trek, five times as many people Google the Dow on a daily basis than they do the S&P 500. It can sometimes be difficult to correlate performance to this limited basket of stocks.
In addition to watching some basketball, most of us spend some time during March preparing to file or completing filing our taxes for the previous year. For those of you that are still working, by the end of this month you can actually start working for yourself. It takes the average worker until late April to pay for all the federal revenue that will be collected from you. Here in New York, along with other high tax states, the reality of recent tax reform is beginning to surface. With the limits imposed on state income tax deductions and property tax deductions, New Yorkers are responding with a very clear message. New York Governor, Andrew Cuomo, recently announced that income tax revenues were coming in $2.3 billion below the expectation of just a month ago. “That’s a serious heart attack,” he said. According to United Van Lines in its 42nd annual National Movers Study, which tracks comings and goings from all states, 61.5% of New York movers left the state. Among those who left, 41% earned more than $150,000 and just 8% earned less than $50,000. It may come as no surprise that the states gaining the most population were the five low tax states of Texas, Florida, North Carolina, South Carolina and Washington. This may also explain why Florida took four of the top five Cities that are attractive to retire to.
The exodus of New Yorkers in search of tax friendly states would help to explain the slump in New York city real estate sales. The first quarter was the worst quarter in ten years and prices continued to fall for the fifth consecutive quarter. As homeowners look for relief and consider their options, the situation just got worse as New York imposed a new “mansion tax” and imposed an extra .25% transfer tax on residential properties that sell for more than $3 million. The new tax will take effect July 1st of this year and is projected to generate $365 million in revenue. In the last 10 years, New York lost 1.3 million net residents and this most recent move could accelerate those looking to escape to more tax friendly states. For those that do choose to leave, New York does not let go easily. New York conducted about 3,000 “non residency” audits between 2010 and 2017 and collected around $1 billion in revenue. More than half of those who were audited lost their cases, and according to Barry Horowitz, a partner at WithumSmith and Brown accounting firm, “If you are a high earner in New York and you move to Florida, your chances of a residency audit are 100%.” If you are thinking of faking a move to avoid the tax, think twice. It is no longer as easy as counting your days and proving you spent 183 days in Florida. Auditors have become very aggressive, checking everything from cell phone records, social media, dentist and vet bills, and where you choose to keep your prized possessions. Auditors have gone so far as to do in-home inspections and check the refrigerator and dresser drawers. Unfortunately for those looking to beat the system, auditors return year after year looking to collect any tax it can determine they are entitled to.
With a record $4.746 trillion proposed budget and an estimated $3.645 trillion in revenue, we will add another $1.1 trillion deficit for the fiscal year, adding to the already unbelievable national debt. For now, markets seem to not care about the debt, and we should take note that even at these low interest rates, the interest on our national debt is $479 billion. So, as we all tally our contribution for another year, it may help to know that our tax dollars represent about 50% of the revenue collected to support government spending. We can at least hope for better choices and fiscal discipline!