Market Movement Archives | Page 13 of 20

2021 in the rear-view mirror

As 2021 comes to an end, let’s reflect on the rollercoaster ride we took together.

In January, while we were still in the midst of the global pandemic, we witnessed an insurrection at the Capitol. Thankfully, our government was able to usher in a smooth presidential transition and we quickly returned to business as usual.

Throughout the year, different market themes arose — and some repeated themselves often. Some of the trends and headlines seemed transformational, but in hindsight, the market continued marching on — so much so that you may not even remember some of the issues that captured our attention.

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• Special-purpose acquisition companies — better known as SPACs — became one of Wall Street’s hottest trends, accounting for more than two-thirds of Nasdaq’s initial public offerings in January.

• “Meme stocks” — including GameStop, AMC Entertainment and Blackberry — made headlines with excessive trading volume from investors who targeted them on social media.

• Cryptocurrency investors saw high volatility with fluctuating valuations and changing regulations.

• COVID continues to weigh heavily on the minds of investors, from the availability and adoption of vaccinations and boosters to the emergence of variants.

• Inflation – from transitory to the highest inflation reading since the early 1980s — caused some investors to worry about a market correction.

• The cost of shipping a container spiked, and supply-chain bottlenecks sent a ripple effect through the economy.

• Commodity prices — such as lumber and used car prices — rose and fell.

• Housing prices reached record-setting levels, thanks to the pandemic and a move toward a remote workforce.

• The pandemic intensified discussions about sustainability and the financial markets, bringing Environmental, Social and Governance (ESG) investing more into the mainstream.

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Panic is not a strategy when dips occur. When the market falls and volatility rises, the plan is to stay the course and consider those opportunities as buying chances, not as a time to panic and sell.

We gladly welcomed clients back to our office in 2021, and we look forward to seeing you again in our office in 2022. We continue to stay connected with you through Zoom or in person. Our team continues to have our daily internal meetings every morning and night via Zoom to ensure we stay connected and work together.

Our No. 1 priority is to take care of you, our clients, and we are proud of the work we have done this year. We are grateful for you!

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This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS) an affiliate of Kestra IS. Kestra IS and Kestra AS are not affiliated with CD Wealth Management. Investor Disclosures: https://bit.ly/KF-Disclosures

Here’s why market volatility doesn’t change our outlook

Last week, the stock market pulled back in a very volatile week as investors grappled with the potential impact of the Omicron COVID variant and commentary from Fed Chair Jerome Powell that the risk of inflation has increased. Powell also said the Fed may consider speeding up its bond purchase tapering plans and hinted at potential earlier rate hikes in 2022.

As a refresher, the VIX index is a measure of forward-looking stock market volatility for the next 30 days. The VIX is known as the fear gauge; it reflects the market’s short-term outlook for stock price volatility as derived from option prices on the S&P 500. On Monday, the VIX topped out at 35, after having traded at below 20 for most of October and November — that’s a 75% increase in the volatility index in a very short period. As the chart below shows, we have had many short-lived, volatile market movements over the past 20 months. In hindsight, the spikes in volatility have allowed investors to continue to “buy the dip” in the accompanying market sell-offs. As volatility then wanes, the market recovers.

Chart showing the VIX volatility index from 2015 to today

One of the primary causes of the recent increase in volatility is inflation. The Fed belatedly acknowledged inflation risks, and we expect it to start raising rates next year. What matters is not that they are going to raise rates, but the rate trajectory and where they end up next year and going forward. The chart below shows the Fed estimate as well as the market estimate for interest rates. Both the market and the Fed predict that short-term rates will be around 1.75% in 2024, which would be a slow, steady increase from where they are now: 0-0.25%.

The Fed’s view of the path of rate hikes vs. the market’s view

Chart showing the Fed's view of interest rates versus the market's view from now until 2024 and beyond

Note: The 12/15/2027 eurodollar futures rate was used for the Longer-Run market rate. Source: Bloomberg. Fed estimate as of 9/22/2021. The market estimate of the federal funds rate using eurodollar futures (EDSF). As of 11/10/2021.

Also weighing on the markets and causing increased volatility is the work Congress still has to do before the end of the year, with several large issues to resolve:

* Defense spending bill: Congress is near agreement to authorize $770 billion in military spending.

* Keeping government open: President Biden signed a stopgap spending bill that will keep the Federal Government running through Feb. 18.

* Social spending bill: The Build Back Better Plan could also drag into next year as negotiations on how to fund the bill continue.

* Raising the debt ceiling: The estimated deadline is Dec. 15. Raising the debt ceiling does not allocate new spending; it only authorizes the Treasury to make good on current obligations.

This year’s series of events has no historical parallel: a growth surge from a global pandemic, a supply-driven spike in inflation and a change in Federal Reserve monetary policy that is being tested in real time.

The COVID shock was more like a natural disaster than the economic restart from a global financial crisis. Economic activity surged, and corporate profits rebounded at a rapid pace.

Demand for goods — rather than services — along with supply-chain bottlenecks have driven prices higher. We expect that prices eventually will be higher than pre-COVID levels, but supply and demand ultimately will determine where they settle. As supply-chain bottlenecks open and more goods are available to the public, prices will come down as demand decreases. At the same time, the service industry also will begin to see increased demand, which may reduce the demand for goods, in turn reducing prices as well.

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So, what can we learn from all this? COVID is still taking a terrible toll on the U.S. and the world. Even with the new Omicron variant, the U.S. economy looks solid and supply-chain bottlenecks may be easing. We think investors need to be ready to ride the COVID rollercoaster for years to come. Panic is not a strategy when dips occur. When the market falls and volatility rises, the plan is to stay the course and consider those opportunities as buying chances, not as a time to panic and sell.

From a portfolio perspective, we continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, while not making investment decisions based on where we have been. Making market decisions based on what might happen may be detrimental to long-term performance. The key is to stay invested and stick with the financial plan. Markets go up and down over time, and downturns present opportunities to purchase stocks at a lower value. As we say each week, it is important to stay the course and focus on the long-term goal, not on one specific data point or indicator.

It all starts with a solid financial plan for the long run that understands the level of risk that is acceptable for each client. Regarding investments, we believe in diversification and having different asset classes that allow you to stay invested. The best option is to stick with a broadly diversified portfolio that can help you to achieve your own specific financial goals — regardless of market volatility. Long-term fundamentals are what matter.

Sources: Bloomberg, Blackstone, Fidelity

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

How we’re handling the market sell-off and talk of inflation

Last Friday, news of a COVID-19 variant identified in South Africa and new travel restrictions sent markets tumbling and injected volatility into the markets. The Dow Jones Index slid 900 points to suffer its worst day since October 2020. The news was exacerbated in the stock markets, as the Friday after Thanksgiving is typically a low-volume trading day and a shorter trading day due to the holiday. Oil prices fell more than 12% in one day, with news of potential lockdowns across the globe, though President Biden reiterated that the U.S. will not initiate economic lockdowns or new travel restrictions.

The market has continued its sell-off this week as Moderna and Regeneron separately commented on the effectiveness of the current vaccines against the new variant. At the same time, Fed Chairman Jerome Powell told the Senate that he expects tapering could wrap up a few months sooner than anticipated and that it is time to stop describing inflation as “transitory,” opening the possibility for the Fed to raise rates in early 2022.

The chart below reflects the overall market returns through Nov. 26. While the markets have had a strong year, most underlying holdings are trading in a correction mode. This further supports that the underlying market may not be as expensive as many people fear.

Chart showing year to date return and drawdown numbers for major indexes

It hasn’t been the smoothest of sailing for fixed income investors in 2021. Bond yields have ridden waves of optimism and pessimism about the economic outlook for most of the year. The chart below reflects the year’s big swings in the 10-year Treasury. As we near the end of the year, short-term yields have moved up in anticipation of tightening monetary policy — while the 10-year Treasury has fallen back from the levels seen in October, despite inflation.

Chart showing the 10-year Treasury yield

With more discussion of inflation — and more economists predicting that rates will rise next year — we recently made a portfolio reallocation within our fixed income portion of the portfolio:

1. We are shortening the duration of the fixed income portion of the portfolio. As a refresher, duration is a measure of how long it takes for a bond to repay the principal using both income and principal. In an environment of rising interest rates, we are hopeful that a shorter duration will protect against falling principal compared to longer-duration bonds.

2. We are maintaining similar credit quality within fixed income but adding a short-duration position to hedge against rising rates. We removed our longer-duration investment grade corporate bond position.

3. We also increased the weighting in our strategic income holding to produce additional income in a low interest rate environment.

Our focus remains on long-term investing with a strategic allocation while maintaining a tactical approach. Our decisions to make changes are calculated and well thought-out, looking at where we see the economy and rates heading.

We are not guessing or market timing. We are anticipating and moving to those areas of strength in the economy. We strategically have new cash on the sidelines and buy in for those clients on down days or dips in the market, as one does in a 401(k) every other week. We speak with our clients regularly about staying the course, not listening to the economic noise and trading memo stocks.

So, what can we learn from all this? Hoping that an outcome will or will not occur is not a strategy. In light of new COVID variants, we think investors need to continue to be ready to ride the rollercoaster for years to come. With the most recent quarter’s record earnings, the overall valuation of the market has come down. That does not mean we won’t experience dips and corrections, but when they happen, the plan is to stay the course and consider those opportunities as buying chances — not a time to panic and sell.

It all starts with a solid financial plan for the long run that understands the level of risk that is acceptable for each client. Regarding investments, we believe in diversification and in having different asset classes that allow you to stay invested. The best option is to stick with a broadly diversified portfolio that can help you to achieve your own specific financial goals — regardless of market volatility. Long-term fundamentals are what matter.

Sources: CNBC, Schwab

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Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

Energy prices, interest rates and inflation: Your questions answered

What’s driving interest rates higher? What is inflation — and is it transitory or here to stay? What is stagflation? What are real rates versus nominal rates? Why does everyone keep talking about inflation and interest rates? Why are energy prices so high?

With so many unanswered questions, the noise in the financial markets remains at a high level. The energy world has changed drastically since April 2020, when we wrote about the negative price of a barrel of oil! West Texas Crude oil prices are now over $80 a barrel. Energy prices, as measured by the CPI index, are up 25% over the last year, as seen in the chart below. If you remove food and energy from the CPI calculation, the year-over-year change in consumer prices is only 4%, not the reported 5.3%. A perfect storm of energy shortages and high demand has made the outlook uncertain for energy prices globally. Prices are surging for oil, natural gas and coal, along with other commodities such as lumber, used cars and shipping costs — and there are supply chain disruptions as well. The demand for energy is outpacing the supply, and when that happens, prices will rise to meet the demand.

For those who want to compare this oil surge to the 1970s, there are several critical differences:

* The energy intensity of gross domestic product (GDP) is half of what it was in the 1970s.

* Fracking wasn’t available in the 1970s, and now, it can rapidly increase production.

* The U.S. is now an exporter of oil versus being a major importer 50 years ago.

Chart showing changes in consumer price index

All these factors are making economists question how transitory inflation is. What if we have inflation with lower growth, which we call stagflation? Stagflation refers to an economy that is experiencing a simultaneous increase in inflation and stagnation of economic output (slow or negative economic growth). Investors have had little experience with stagflation in recent decades. Only 41 quarters since 1960 (17% of the time) have been in a stagflation environment, and most of those occurred in the 1970s. We believe the equity market should continue to be strong as investors gain confidence that the current pace of inflation is transitory and not permanent.

As shipping costs come down, the supply of goods increases, prices will drop and some of the inflationary pressures that we feel today will dissipate. Eventually, the boats that are floating at sea full of goods will be offloaded, and those goods will make their way into the economy. Therefore, the Fed continues to say that the inflation we are experiencing today is transitory and expected to level off — even if it takes a year or two to do so.

So what’s driving interest rates higher? Interest rates are largely impacted by two factors: policy decisions made by the Fed and investor expectations of those decisions over the long run. The Fed would like to moderate the speed at which Treasury yields rise through its tapering of asset purchases. The Fed is maintaining a dual mandate of price stability and maximum employment before it considers raising short-term rates. The chart below reflects the difference between nominal rates and real rates.

Nominal rates are the rates we commonly discuss and read about — the 10-year Treasury rate, for example. Real rates are the interest rates that an investor receives after adjusting for inflation – the real yield you receive from owning an asset. If a Treasury bond were to pay you 5% nominal yield per year, but inflation is 3% per year, you would have a real rate of only 2%. As seen in the chart below, if the 10-year Treasury rate is 1.3% and inflation is running around 2.3%, then the real yield is now a -1%. This means investors who are buying Treasuries now are essentially expected to earn a negative 1% in real yield annually.

Chart showing nominal yield versus real yield

So, what can we learn from all this? More and more noise is creeping into the markets today: worries about inflation, higher energy prices, slower growth and possible stagflation. The amount of liquidity in the markets remain at record levels. There still exists a chance that we will see additional stimulus into the economy through an infrastructure package. While questions exist about the state of the economy, there remain many reasons to be optimistic. As we say each week, it is important to stay the course and focus on the long-term goal, not on one specific data point or one indicator.

Sources: Blackrock, CNBC, Horizon, Schwab

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

October can be scary for investors, but there’s no reason to panic

September held true to its history of being the worst month for performance on average since the S&P 500’s inception in 1928. The month ended with increased volatility (as measured by the VIX index) and negative market sentiment. Its negative market returns marked the first time in eight months that the S&P 500 ended a month in negative territory. There was no shortage of risks working against the financial markets, including debt ceiling negotiations, fiscal policy uncertainty, monetary policy uncertainty, global supply chain bottlenecks, slowing economic growth projections from the Delta variant and ongoing inflation fears.

How does the VIX index work? Read “Coping with Volatility in the Market.”

The chart below depicts the VIX index over the last 27 years. Volatility has risen recently, reflecting the possibility of a broader distribution of potential market outcomes based on many of the risks listed above. We are a far cry from volatility levels seen during the financial crisis of 2008 or the global pandemic in 2020, however; the VIX index remains below average heading into the fourth quarter of the year.

Chart showing stock market volatility over the last 27 years, up until October 2021

October remains the most volatile month of the calendar, as you can see from the chart below. October’s above-average volatility isn’t a function of any one year or a presidential cycle; it has been consistent over decades and market cycles. As volatility increases, it doesn’t necessarily mean that the market will go down more — but it does mean that the ranges of market movements increase. Often, with increased volatility comes increased emotion accompanying the ups and downs. The feeling of panic when the market is moving down feels greater than the relief or joy feels when the market is moving up.

Chart showing stock market volatility by month, with the highest being found in October

As we wrote last week, more than 90% of the S&P 500 holdings have had at least a 10% correction from their highs this year. The same now holds true for both the NASDAQ and Russell 2000 (small cap stock index). Looking further under the hood of each index below, the average stock decline is far greater than the 10% correction.

Chart showing year-to-date correction for three indexes

So, what can we learn from all this? With many stocks already in correction mode and potential increased volatility on the horizon, it is important to remember that investing is a disciplined process and not a game of timing when to get in or when to get out of the market. “Buy the dip” continues to be a prominent strategy among many investors and one of the reasons market pullbacks have not been as prominent in 2021. The larger dips we have seen recently as volatility has increased have led to some larger declines, followed by stronger bounce backs. As we say each week, it is important to stay the course and focus on the long-term goal — not on one specific data point or indicator.

Sources: JP Morgan, MarketWatch, Schwab

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

Here’s why the market’s climb is a bumpy ride

Although the stock market has experienced a steady climb this year, the TRIP is always an interesting ride — and rarely a steady one. Along the journey, the market typically faces many hurdles; currently, those speed bumps are Taxes, Rates, Inflation and Prices (valuation).

Global stocks will always have a myriad of worries, despite favorable longer-term economic forecasts and bright spots. The Organization for Economic Cooperation and Development forecasts that every one of the 45 major economies in the world should be growing next year, with about half experiencing slower growth than last year. Global economic growth is expected to be 6% for this year and 4.9% for 2022, according to the International Monetary Fund. For context, growth above 4% is understood to be an economic boom, whereas growth below 2% is considered a global recession.

The fundamental strength of the economy remains intact, powered by vaccines and the U.S. consumer. The global growth slowdown is expected following the strong reopening trade in the wake of the global pandemic. Price remains a major speed bump for the economy, both in the labor markets and in the supply chain. Firms need workers; there are more jobs available than there are workers right now. Therefore, companies are paying more for employees, which will disrupt profits.

Shipping capacity remains too limited to satisfy the rebound in consumer demand, and cargo prices are through the roof (as seen below). Eventually, supply and demand will equalize, which will reduce costs, but until that time, shipping and other supply chain costs will soften corporate profits.

Throughout the year, we continue to see underlying movement between different sectors in the S&P 500. For example, Treasury rates rise, leading to investors selling technology stocks and buying financials and oil stocks — or instead, the 10-year Treasury falls, and the big-cap technology sector comes roaring back. Under the surface of the rally, many stocks in the S&P 500 already have reached correction territory this year, as seen in the chart below. Nearly 90% of the stocks in the S&P 500 have had at least a 10% correction at some point in 2021. The fact that so many stocks have had close to a 10% drawdown reflects what we have discussed recently: that there are some fundamental challenges in the economy, and now we have disagreements in Washington over the debt ceiling and potential government shutdown.

chart showing market drawdowns over time

As we reach the end of September, Congress is faced with a pileup of legislative issues that have stock market implications. The most immediate deadline facing Congress is a potential government shutdown on Oct. 1. A tentative deal is in the works to temporarily fund through early December, but it is not a done deal. The chart below projects the economic impact of any government shutdown. The longer a shutdown occurs, the larger the impact on the U.S. economy. Markets also are watching the standoff over raising the debt ceiling. To date, Congress has never failed to raise the debt ceiling before the country would technically go into default.

chart showing impact of government shutdowns

So, what can we learn from all this? The current TRIP of the economy may not be the smoothest road. Please remember: While we may hit some speed bumps along our TRIP, we have been down this road before. Whether it’s tax increases, inflation, interest rates, equity valuations or government shutdowns, history has always shown that markets tend to move past these bumps. It is important to focus on the long-term goal and not on one specific data point or indicator.

From a portfolio perspective, we continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, while not making investment decisions based on where we have been. Making market decisions based on what might happen may be detrimental to long-term performance. The key is to stay invested and stick with the financial plan. Markets go up and down over time and downturns present opportunities to purchase stocks at a lower value.

Sources: Blackstone, The Daily Shot, Schwab

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

The market’s moving: Keeping up with China, Washington and COVID

Global stocks started the week with the worst daily performance since May as investors digested the news over the weekend about the troubled Chinese property market. China Evergrande Group, the world’s most indebted property developer, is at risk of default this week on its debt payments. The potential long-term fallout from Evergrande’s liquidity crisis is unknown — as is any potential spillover to other financial markets. We also do not know how the Chinese government may act to bail out the real estate behemoth. Monday’s sell-off briefly pushed the S&P 500 to 5% below its last record on an intraday basis for the first time since October 2020 (see chart below).

Chart showing stock market performance since July 2020

Several other factors also are affecting the current market environment, and we will address each of them below:

1. Angst in Washington over the upcoming expiration of the borrowing limit (debt ceiling) and a potential government shutdown

2. New proposed tax increases

3. Lingering inflationary worries and when the Fed’s tapering may start

4. The effect of the Delta variant on the economy

Angst in Washington

If Congress fails to raise the borrowing limit, the U.S. government would default for the first time. “The U.S. has never defaulted. Not once,” Treasury Secretary Janet Yellen said. “Doing so would likely precipitate a historic financial crisis that would compound the damage of the continuing public health emergency.” The deadline to avoid both a government shutdown and the debt ceiling issue is a moving target. Raising or suspending the debt ceiling does not authorize additional spending, but it increases the spending limit, similar to a credit card.

Proposed Tax Increases

As we wrote about last week, the House Ways & Means committee proposed tax increases on the wealthy to help fund a $3.5 trillion economic package. Remember, these are just proposed tax increases and not law. The main tax increases in the proposal are:

* Raise the top individual tax rate from 37% to 39.6%.

* Apply a 3% surtax on incomes greater than $5 million.

* Raise the long-term capital gains tax rate to 25% for couples making more than $450,000.

Chart showing details of tax rate pproposals

Inflation

Inflation remains on the forefront of consumers’ minds as prices of many goods and services continue to rise due to lack of inventory and empty shelves caused by shipping delay and costs out of China. The Federal Reserve Chairman, Jerome Powell, has stated on numerous occasions that the Fed believes inflation to be transitory – meaning temporary. His reasoning is as follows:

* It’s not broad based. Inflation is concentrated in a few sectors that were hit hardest by the pandemic.

* The biggest price surges already are receding. Lumber and used car prices are now stabilizing or dropping after rocketing higher.

* Wages are rising, but not faster than productivity gains.

* Globally, price pressures are downward with an aging population and advancements in technology.

The Federal Reserve concludes its two-day meeting this week and the focus remains on when the Fed will begin to taper its purchases. As we wrote about recently, “tapering” is a term that describes the process of gradually stopping asset purchases. When the Fed begins to taper, it purchases fewer bonds, which reduces additional money flowing into the economy, in hopes of slowing economic growth. All of this is done with the focus on controlling inflation and the economy. The Federal Reserve Bank tries to signal its intentions and be transparent with the hope that the impact to the financial markets is minimized.

COVID

Due to the Delta variant, COVID cases remain near January levels. As colder weather approaches and flu season ramps up, the fear is that COVID variants could continue to slow economic growth. Future GDP forecast is expected to decline from recent highs — but it’s not expected to be derailed by COVID.

So, what can we learn from all this? The current stock market continues to digest a multitude of economic messages: a potential default by China Evergrande group, inflationary pressures, proposed tax hikes, the Federal Reserve’s plans to start tapering and increase rates, and the ongoing global pandemic. It is important to focus on the long-term goal — and not to focus on only one data point or indicator.

Sources: CNBC, Reuters, Schwab, BEA Conference Board

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

Here’s what we’re watching after the market’s stumble

The Dow Jones and S&P 500 suffered five straight days of losses, the worst weekly performance since June. Different factors may have caused the selling last week: the Delta variant and its impact on slowing economic growth, the Federal Reserve’s tapering and how it may handle inflationary pressures, current stock valuations and potential tax hikes proposed by the Biden administration. Typically, it is something investors don’t see coming — such as a pandemic or global financial crisis — that causes the larger market selloffs, not something that investors already expect.

Market pullbacks should be expected, especially since the largest drawdown year-to-date has been 4.2%. The “textbook correction,” in which stocks pull back at least 10%, is natural and healthy market functioning and behavior. As seen in the chart below, the S&P 500 has been in a recent trading lull, going many sessions without a 1% move — but the lull has been nowhere near what we have seen in the last few years.

Chart showing consecutive trading days without a 1% move since 1993

Contributing to the recent market jitters is the current state of inflation and concerns over how to pay for potential additional infrastructure spending. Prices for consumer goods rose less than expected in August, a sign that inflation may be starting to cool. The consumer price index (CPI), which measures a basket of common products as well as various energy goods, increased 5.3% from a year ago. That’s less than the expected increase of 5.4% and a smaller increase month over month. Energy prices accounted for much of the recent inflation increase; energy is up 25% from a year ago, and gasoline prices have surged 42% over the same period.

Chart showing percent change in CPI over a 12-month period

This week, the House Ways and Means Committee released a more detailed overview of potential tax changes to help pay for the proposed infrastructure and expansion of social programs. The highlights of the current plan are as follows:

* Top marginal tax rate increase from 37% to 39.6%; also, a 3% surtax on individuals with adjusted gross income greater than $5 million.

* Capital gains rate increase from 20% to 25% for “certain high-income individuals.”

* Changing the corporate tax rate from a flat tax to a tiered tax rate, with the proposed top rate at 26.5%.

* Estate and gift tax exemptions would drop back to $5 million (plus inflation adjustments), down from the current $11.7 million per person.

* Eliminating Roth conversions for IRAs and workplace plans for married couples earning more than $450,000 (and for individuals earning more than $400,000).

Chart showing current and proposed tax rates

Remember, these are proposed tax changes that still have a long way to go before becoming law. Changes can and will occur as negotiations continue over the infrastructure spending package. In our opinion, concern about changes in estate tax law is a good reason to consult with estate attorneys to discuss the current plan. Similarly, avoiding potential higher capital gains rates may be a good idea if it makes sense in the context of your overall financial plan. It is important to remember that the proposed tax changes are just that: proposals, not laws. We will be ready and proactive if tax law changes occur for capital gains and Roth IRA contributions.

So, what can we learn from all this? The stock market continues to digest mixed economic messages as well as the impact of the Delta variant, inflationary pressures, and the Federal Reserve’s response to tapering, rates and potential tax hikes. It is important not to focus on one data point or one indicator, but to look at the big picture.

Sources: CNBC, The New York Times, Forbes, House Ways and Means Committee, U.S. Bureau of Labor Statistics

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

Making sense of the economy’s mixed messages

The S&P 500 closed at new highs 54 times in the first eight months of the year, with almost one-third of the trading days in 2021 seeing records. That’s the highest annual rate of record highs. August was the seventh consecutive positive month, marking the longest winning streak since January 2018, and as we recently wrote, the maximum drawdown so far this year in the S&P 500 has been 4.2%.

Chart showing the number of trading days in which the S&P 500 closed at new highs in a number of years

Inflation continues to be top of mind for many investors. We continue to see different sectors of the economy having a spike in prices: First it was lumber, then wholesale used car prices. Now, it’s the cost of shipping goods; the shipping industry is the latest to suffer in the supply-and-demand war. The price of sending a 40-foot container from Shanghai to Los Angeles looks like the chart of a meme stock, shooting straight up (172%) in a very short period.

Why is this occurring? Supply and demand.

Ships are stuck in port because China closed certain ports due to COVID outbreaks, and U.S. companies are increasing orders to meet upcoming holiday demand. As we have discussed before, when demand outpaces supply, the price of goods rises. Prices eventually rise to an extent where demand then falls. Then the supply of goods finally catches up to the demand, and prices continue to fall as excess goods flood the market. On the positive side, the demand for new containers being ordered is strong. It takes time for these containers to be built — possibly more than a year — and once the supply of containers is more plentiful, prices can normalize.

Chart showing supply and demand for shipping orders

Inflation concerns are omnipresent. At last week’s Jackson Hole Summit, the Fed chair noted a “COVID-constrained supply side unable to keep up with demand,” leading to “elevated inflation in durable goods.” In other words: Yes, we’ve experienced higher prices, but the belief remains that these price increases will only be temporary. The Fed continues to reiterate that we are seeing inflation, especially in year-over-year comparisons, but as the world economy reopens, economists predict that inflation will fall to an acceptable level, as seen in the chart below.

Chart showing inflation forecasts through the fourth quarter of 2021

The jobs report last Friday delivered a big miss for August with only 235,000 new jobs. Leisure and hospitality added almost no new jobs after the last several months of more than 300,000 jobs. On a positive note, the unemployment rate dropped to 5.2%. This jobs report may influence when the Fed starts to taper and when it actually decides to raise rates; if job growth and the economy are slowing, the need to raise rates to slow down economic growth diminishes.

So, what can we learn from all this? There are many different economic indicators that can send mixed signals to the stock market. It is important not to focus only on one data point or one indicator, but to look at the big picture and follow economic trends. We continue to watch economic data closely and to monitor the COVID variants’ effect on the global economy and Federal Reserve policy, as well as China’s increased regulations and restrictions.

Sources: Arbor Data, Goldman Sachs, Horizon Asset Management, CNBC

Promo for article titled Strategies for Tax Savings, No Matter What Congress Does Next

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

Strategies for tax savings, no matter what Congress does next

As we near the end of the third quarter, Congress continues to debate infrastructure packages. Many investors are wondering if Congress will pass tax reforms that alter the tax landscape to pay for the new bill. The Biden administration has consistently said it is targeting individuals whose income is greater than $400,000. Our current tax system is considered a progressive system, one in which the average tax burden increases with income. High-income families pay a disproportionate share of the tax burden, as seen in the chart below, which is why the current administration remains focused on increasing taxes for those individuals.

chart showing federal tax rates by income

One of the proposals is to raise the long-term capital gains rates on those who make more than $1 million to pay for infrastructure. The current rate for those earners is 20%, and the new rate would be 39.6%, almost double the current rate. The chart below shows the proposed long-term capital gains rates if the new rates were to go into effect. We believe that the chance of any major tax changes passing is still remote, given the current makeup of Congress.

chart showing long-term capital gains tax rates

We continue to look for opportunities to bolster tax savings for our clients, regardless of whether the proposed tax changes pass in Congress, and we want to highlight three strategies below.

Strategy No. 1: Tax Loss Harvesting

Under current tax law, it’s possible to offset current capital gains with capital losses you’ve incurred during the year or carried over from a prior tax return. Capital gains are the profits you realize when you sell an investment for more than paid for it, while capital losses are the losses you realize when you sell an investment for less than you paid for it.

Short-term capital gains are taxed at ordinary income rates, whereas long-term capital gains are taxed at a lower capital gains rate. Being able to reduce the tax on both short- and long-term capital gains by harvesting losses can help offset the gains one incurs from taking profits. Harvesting the loss has no effect on the portfolio value, as one can use the proceeds from the sale to buy a similar investment.

This allows the investor to maintain a similar asset allocation and reduce federal income taxes, as seen in the example below. Throughout the year, we continue to look for opportunities to harvest losses and take profits, all while maintaining the current risk tolerance.

chart explaining the process for tax loss harvesting

Tax-loss harvesting and portfolio rebalancing can provide nice synergies as they play different roles in portfolio management. When we rebalance a portfolio, we are managing risk in the portfolio by selling holdings that have outsized their target holdings and adding those gains to positions that may have had losses or not grown as much. Often in rebalancing, the portfolio will experience sizeable capital gains. That’s where tax-loss harvesting helps reduce the gains and bring the risk of the portfolio back to its target allocation.

Strategy No. 2: Converting to a Roth IRA

A traditional IRA/401K is funded with pre-tax contributions. Future withdrawals from your IRA/401K are then taxed at ordinary income rates. A Roth IRA/401K is funded with after-tax dollars, and the withdrawals are tax-free, if the qualifications are satisfied. Individuals who have most of their retirement assets in a traditional IRA/401K might consider converting a portion of those assets to a Roth retirement account for tax diversification. With tax rates currently at historically favorable levels, now might be an opportune time to do a Roth conversion, since the IRS treats Roth IRA conversions as taxable income.

chart showing when roth iras are beneficial

Strategy No. 3: Increasing Charitable Contributions

The CARES Act, along with additional stimulus at the end of 2020, provided tax relief to those individuals with charitable intent. For 2021, taxpayers can elect on their income tax return to deduct up to 100% of adjusted gross income for cash gifts made to public charities. Also, under the CARES Act, taxpayers can gift long-term appreciated securities to public charities (including donor advised funds) up to 30% of their adjusted gross income while also making cash gifts to public charities totaling up to 60% of adjusted gross income.

chart explaining rules regarding charitable donations

For those who are charitably inclined and over the age of 70½, this year offers an opportunity to donate more to your favorite charity and potentially reduce your taxable income by donating directly from your IRA to a qualified 501(c)3 organization. The maximum dollar amount for any individual from an IRA is limited to $100,000 per year. A married couple can each donate up to $100,000 from their respective IRA.

So, what can we learn from all this? We will continue to monitor the financial plan and the portfolios to look for opportunities to tax-loss harvest, discuss Roth IRA conversions and potentially donate appreciated stock to your favorite charities. We continue to watch economic data closely and monitor the COVID variants’ effect on the global economy, Federal Reserve policy and China’s increased regulations and restrictions.

From a portfolio perspective, we continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, while not making investment decisions based on where we have been. Making market decisions based on what might happen may be detrimental to long-term performance. The key is to stay invested and stick with the financial plan. Markets go up and down over time and downturns present opportunities to purchase stocks at a lower value.

Sources: Fidelity, Cambridge Trust, Michael Kitces, Smart Asset, Tax Policy Center, https://www.taxpolicycenter.org/resources/income-measure-used-distributional-analyses-tax-policy-center

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.