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Economic Update from Alvini & Associates, P.A. – May 2018

Now that tax season has passed, business owners should be preparing for the 2018 Tax Reform changes, specifically their deduction for Qualified Business Income (QBI). In short, the amount of the deduction (QBI deduction) is generally 20 percent of the taxpayer’s qualifying business income from a qualified trade or business.

The first quarter for 2018 saw a lot of market volatility for both US and International markets. The largest losses came from real estate and MLP asset classes. The S&P 500 was down 2% and Russell 2000 was down 1.3%.  This volatility can be attributed to several factors:

  • Fears of a trade war with China
  • Sell-off of traditional assets by hedge funds and institutional investors to cover their losses shorting the VIX
  • Interest rate hikes by the Fed with future rate increases projected in June and September
  • Rising budget deficit
  • Treasury spreads narrowing

Another item worth following closely is the narrowing of US Treasury spreads between the 10-year and 2-year T-Bill.  For reference, in 2008 the spread was 108bp (1.08%). This has fallen to 47bp (0.47%) in 2018, a 56% drop.  This has created fear of inversion.  An inverted yield curve happens when yields on shorter term bonds are higher than that of longer term bonds. This is considered a leading indicator of recession.  Given the two additional projected Fed rate hikes, risk of inversion will increase throughout this year.

Despite the volatility of the markets, it is important to point out that the US Economy remains strong.  Based on preliminary data it appears that Q1 had real GDP growth of 2.5%-3.8%, double that of Q1 2017.  Unemployment has stayed at 4.1% for six months, near historic lows.  On the downside, consumer prices rose 2.5%, slightly over the Fed target of 2.0% sparking some inflation fears.

To explore these topics and more for you and your business, please contact Alvini & Associates, P.A. by calling 302.836.8490 and ask for Michael or Matt.