Jack Ablin, BMOs CIO talks fiscal cliff results and the economy

By Dian Vujovich

Earlier this month I had a chance to speak with Jack Ablin,  executive vice president, CIO and a CFP at BMO Private Bank.

During that telephone conversation we spoke about everything from the fiscal cliff outcome to what he expects to see in the markets this year. Below are  Qs&As from that conversation:

Q: What was your reaction to the outcome of the fiscal cliff negotiations?

A: I was a little disappointed that there was virtually no spending restraint at all in the agreement. So pretty much, the deal was entirely weighted towards tax increases and increased spending. Nothing was in there that really cut back on anything.

Q: I talked to a small biz owner last week whose accountant had told him to expect his taxes to go up $20,000 to $30,000. Did he really get hurt tax wise?

A: He probably earns over $400,000 and less than a million. And, yes he did.

Some of the reasons why? One was income tax rates have now gone up to 39.6 from 35 for any income over the $450,000 per household. That’s one piece.

The taxes on capital gains and dividends for those families earning in that category has gone from 15 percent to 20 percent

There will be an additional 3.8 percent tax on for the Affordable Care Act, so the capital gains and the dividend tax is effectively 23.8 percent now up from 15 (percent).

Overall, if you just take this deal and extend it out, according to Congressional Budget Office estimates, this deal actually expands deficits over the next 10 years by a total of $3.6 trillion.

So while there were tax increases, remember those (top income earning) households really only account 0.7 percent of households in this country.

Q: Back to capital gains, didn’t the capital gains and dividend rates go up for everybody?

A: No, just for the families that are in that category.

-Q: So, why do you think that did they put off any spending cuts?

A: Because it (the fiscal cliff deal) was formulated in the Senate and I think President Obama and the Democrats had the political advantage.

Q: Moving on to the economy and investments, do you think the economy is going to recover a little bit quicker now because the fiscal cliff is no longer the focal point? Or, are you expecting economic growth to be slow?

A: I think it’s going to be  slow growth.

Now that we entered 2013, it’s a whole new world. There is a higher payroll tax and it’s coming out of worker paychecks. And, wealthy Americans are going to have to pay a lot more, too.

So we are looking at some form of austerity here. Whether it happens now or in March, there will be spending cuts and there will be tax increases. There have to be. And that’s going to create an incremental  head wind.

Q: What do you want to tell your wealthiest clients? What do you want them to know?

A: What I want them to know is that I still believe the economy will inch forward. But, I don’t want them to expect the same types of returns we’ve had over the last couple of years.

I’m looking for mid-single digit growth rates in equities and I think dividend oriented strategies will continue to do okay.