THE WEEK ON WALL STREET
Stocks fell last week as the postelection rally lost momentum amid an inflation uptick and cautious comments from Fed officials. The S&P 500 Index fell 2.08 percent, while the Nasdaq Composite Index declined 3.15 percent. The Dow Jones Industrial Average lost 1.24 percent. The MSCI EAFE Index, which tracks developed overseas stock markets, dropped by 2.38 percent.
FACT OF THE WEEK
At exactly noon on November 1883, American and Canadian railroads began using four continental time zones to end the confusion of dealing with thousands of local times. The bold move was emblematic of the power shared by the railroad companies.
The need for continental time zones stemmed directly from the problems of moving passengers and freight over the thousands of miles of rail line that covered North America by the 1880s. Since human beings had first begun keeping track of time, they set their clocks to the local movement of the sun. Even as late as the 1880s, most towns in the U.S. had their own local time, generally based on “high noon,” or the time when the sun was at its highest point in the sky. As railroads began to shrink the travel time between cities from days or months to mere hours, however, these local times became a scheduling nightmare. Railroad timetables in major cities listed dozens of different arrival and departure times for the same train, each linked to a different local time zone.
MARKET MINUTE
Rally Fizzles, Data Rattles
Stocks began the week with modest gains as all three major indexes hit record highs. On Tuesday, stocks took a breather with monthly inflation pending. News that the Consumer Price Index (CPI) ticked up slightly in October injected some uncertainty into the markets. The Producer Price Index released the following day showed wholesale inflation ticked up last month. While both the CPI and PPI aligned with expectations, investors hoped for better news. Comments from Fed Chair Powell that the Fed wasn’t “in a hurry” to cut rates were a bit unexpected, which put stocks under more pressure. Stocks dropped again on Friday as strong October retail sales seemed to reinforce Powell’s comments about Fed rate adjustments. News that Boston Fed President Susan Collins expressed doubts about what the Fed might do in December, putting further pressure on stocks.
Tug-O-War
The inflation data that came in last week—retail and wholesale—show that the path to the Fed’s stated goal of 2 percent inflation may prove bumpy. For the past couple of years, inflation has been the focus of the Fed's efforts to manage rising prices by tightening the money supply. Ironically, strong retail sales numbers—while a sign of a strong economy—send a mixed message to investors. Confident consumers tend to spend money, which may take some pressure off the Fed as it looks to manage economic activity.
FINANCIAL STRATEGY OF THE WEEK
A Brief History of Estate Taxes
Federal estate taxes have been a source of funding for the federal government almost since the U.S. was founded.
In 1797, Congress instituted a system of federal stamps that were required on all wills offered for probate when property (land, homes) was transferred from one generation to the next. The revenue from these stamps was used to build the Navy for an undeclared war with France, which had begun in 1794. When the crisis ended in 1802, the tax was repealed.
Estate taxes returned during the build-up to the Civil War. The Revenue Act of 1862 included an inheritance tax, which applied to transfers of personal assets. In 1864, Congress amended the Revenue Act, added a tax on transfers of real estate, and increased the rates for inheritance taxes. As before, once the war ended, the Act was repealed.
In 1898, a federal legacy tax was proposed to raise revenue for the Spanish-American War. This served as a precursor to modern estate taxes. It instituted tax rates that were graduated by the size of the estate. The end of the war came in 1902, and the legacy tax was repealed later that same year.
In 1913, however, the 16th Amendment to the Constitution was ratified – the one that gives Congress the right to “lay and collect taxes on incomes, from whatever source derived.” This amendment paved the way for the Revenue Act of 1916, which established an estate tax that in one way or another, has been part of U.S. history since then.
In 2010, the estate tax expired – briefly. But in December 2010, Congress passed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. The new law retroactively imposed tax legislation on all estates settled in 2010.
In 2012, the American Tax Relief Act made the estate tax a permanent part of the tax code.
As part of the 2017 Tax Cuts and Jobs Act, estate tax rules were adjusted again. The estate tax exemption was raised to $11.2 million, a doubling of the $5.6 million that previously existed. Married couples were able to pass as much as $22.4 million to their heirs. As of 2024, that rate has risen to $13.61 million per individual (and $27.22 million for married couples). The Act is set to expire in 2025. If you’re uncertain about your estate strategy, it may be a good time to review the approach you currently have in place.