Giving Thanks – 2020

Blog post #470

For many of us, the Thanksgiving holiday will be much different this year due to Covid -19.

We hope that you can celebrate with those you love, either in person or remotely. Most importantly, we hope that you and your families are healthy.

As a firm, we are truly thankful and remain optimistic, and hope you are as well.

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We are thankful for our clients, who have placed their trust in us. We do not take your loyalty for granted and it is greatly appreciated.

We are thankful for the referrals that our clients and others have made to people they care about, so we can assist them and help to improve their futures. We are grateful to those who became clients during the past year, some of whom we have yet to meet in person.

We are thankful that our clients understand the importance of focusing on the long-term and not on short term market swings. We are thankful that so many of our clients adhered to their investment plans and remained invested during this financially and emotionally difficult year. By focusing on your long-term goals and not on short-term market moves, you are more likely to be financially successful.

We are thankful for the clients who talked to us and requested our advice on matters beyond investing and financial planning, such as helping them with life transitions, estate planning, real estate transactions and other issues that were important to them.

We are thankful for our long-term business partners and relationships, which help us to be successful and operate our business effectively and efficiently. This was even more important this year, as we were able to seamlessly transition to working remotely.

We thank those of you and others in the community who are front line workers, who have helped our country to deal with the Covid crisis. We are especially thankful to the scientists and others at various pharmaceutical companies and research labs throughout the world working to create vaccines to fight Covid-19.

We hope that each of you can find reasons to be thankful during this challenging time in our lives. We wish each of you and your families a very happy Thanksgiving.

Note: As next week is Thanksgiving, there will not be a weekly blog post email next Friday, likely the only week of the year there will not be a post. The next email will be Friday, December 4th.

 

 

Post-Election Financial Outlook

Blog post #469

We plan for the long-term. We stress to focus on what you can control. We emphasize that your long-term goals are more important than short-term market moves.

But when major events occur, we want to provide you with our thoughts and analysis (without political opinions).

Stock market reaction:

US and global stock markets have risen significantly since the end of October, due to US election results and positive vaccine news from Pfizer’s phase 3 preliminary testing results. The S & P 500, consisting of US large companies, has increased almost 10% in November, through Wednesday November 11th. Even greater gains have occurred in US small company stocks, value stocks as well as International asset classes.

A major takeaway from the election outcome and the vaccine news is that the financial markets react immediately to new information, and generally much faster than you can take advantage of. 

Changes in stock market trends are difficult to predict in advance and can even be hard to explain why they occur. One trend that has occurred in the past month is that small and value stocks, both in the US and overseas, have significantly outperformed large and growth company stocks. This is a reversal of large and growth outperforming for a long period.

For all these reasons, we continually communicate the importance of staying invested according to your personal investment plan, as you don’t know when major market moves will occur. Likewise, we recommend very diversified portfolios, as no one knows which asset class or sector will perform best in the future.

How did US election results impact the stock market? US stock markets rose on the Monday and Tuesday of the election and additional gains came as the results of the elections became clearer. US and global stock markets rose as some of the uncertainty of the outcome dissipated. Financial markets rose on the anticipation of split government, with a likely Democratic President, a tighter Democratic majority in the House and the likelihood of a very slight Republican majority in the Senate. Control of the next Senate will not be determined until run-off elections in Georgia are determined in January 2021.

The split government, where no one party controls the Presidency and both parts of Congress, means moderation of many economic policies and an agenda that will require compromise or legislators working together to get measures enacted.

Personal and corporate income taxes:

If Democrats had won control of the White House and both chambers of Congress, expectations were for significant tax increases on both high-income taxpayers (income greater than $400,000) and corporations. Given the split election results, it is unclear what personal and corporate tax changes will be enacted and when. Some analysts now think the emphasis for 2021 will be more focused on dealing with Covid, economic stimulus and dealing with broader economic issues (industries and individuals impacted by Covid) than on tax law changes. This would be positive for the stock market.

There are no specific tax-related actions that we recommend as a result of the potential for split Congressional control. Individual and corporate tax rates are at multiple decade lows, so the trend would be for increases rather than for more cuts, but when and who they may impact cannot be determined now.

Capital gains taxes: Biden proposed changes in capital gains tax rates for those who earn more than $1 million. While that impacts very few people, it would have been a negative for the stock market. There is no way to know whether this proposal will gain legislative traction if Republicans control the Senate. If tax legislation is passed in a Biden administration, we would guess that changes in capital gain tax treatment would be less burdensome than predicted. However, one never knows how the legislative process will work and this may be part of many trade-offs that will be negotiated when tax laws are discussed. We will keep you informed. There is no reason to make any portfolio changes now related to potential capital gains tax changes.

Estate taxes and planning: Based on the Senate being controlled by Republicans, major changes in estate taxes are now much less likely. Currently, each person gets around $11 million of estate tax deductions. For a married couple, this means more than $22 million. If your estate is far below these amounts, you don’t need to worry about incurring any estate tax until 2026, when the Trump law changes revert to prior law. If no changes are made before January 2026, the exemption amounts will return to $5 million plus inflation adjustments, per person. If your assets are at or above $5-11 million per person of estate value, you may want to discuss your situation with us or your estate planning attorney.

Remember, good estate planning is not just about tax avoidance. The more important aspect of estate planning is making sure that your documents properly reflect your wishes of what happens to your assets when you die. This may not be easy to deal with, but it is vitally important and should be addressed properly, and reviewed every 5 years or so.

Economic stimulus package due to Covid:

There still may be a stimulus package due to Covid passed in the future, but if there is one or more passed, they will likely be smaller than if the Democrats had won more seats in the Senate. It is possible some type of stimulus or aid package for individuals, industries, non-profits and municipalities will be passed, but no one can predict when and what they may look like. Additional stimulus measures would be positive for the stock market (as well as for those impacted by Covid), as this government spending or other forms of aid would translate into economic benefits to consumers and certain industries. Aid to municipalities would also alleviate stresses on state and local governments, which are of some concern to the municipal bond market. We are closely monitoring municipal bonds held by clients and promptly acting if there are any changes in their rating or financial situations.

Retirement planning legislation: It is possible that changes related to retirement funding and distribution rules may be passed in 2020 or 2021 that would be advantageous to clients, as bipartisan support may enable retirement legislation. There is no way to know what these changes may be, but they may eventually delay required minimum distributions from IRAs and other retirement plans (continue to move back the initial start date for required minimum distributions) and expand the ability to add to retirement plans.

Interest rates:

The 10-year Treasury Bill increased from around 0.75% in late October to around 0.9%- 1% as of Thursday this week. This increase is based on greater expected economic activity, mostly due to medical progress on vaccines. On a relative basis, that is a pretty large increase in about 7-10 days. The rate is still near historic lows. These rates were around 3% during much of 2018 but have been below 1% since the onset of Covid. Prior to 2008, these rates were generally well above 4% between 1960 – 2008.

Short term interest rates are generally controlled by the Federal Reserve. Short term interest rates are still very likely to remain at very low rates for years into the future. This is not good news for fixed income investors, but for those who have other debts or mortgages, we would advise you to refinance or discuss these with us.

Summary: It is important to integrate and review your financial, investment and tax planning, as market conditions and laws change frequently. We view this as one of our key roles as your financial advisor.

We will continue to monitor all the items above, as well as monitor your investment accounts for rebalancing opportunities, as certain asset classes outperform others. This is the discipline of keeping your exposure to risk in line with your desired risk tolerance (not allowing your stock % to grow far above your target stock allocation). This puts in place the goal of buying low and selling high, on an asset class level.

Talk to us.  We want to listen.  We want to assist you, your family members and friends.

Positive outcome by sticking with your plan

Blog post #468

After Wednesday’s market close, November 4th, most US and developed International asset classes were up 4-5% for the month of November, after only 3 trading days. Emerging market were also positive, in the 3-4% range.

US markets are up an additional 2% on Thursday, November 5th midday, as I’m writing this.  If those gains hold, most US asset classes would be up 6-7% in only the first 4 trading days of November.  International markets have also been strong.

This is why we encourage you to remain invested in the market and adhere to your appropriate stock allocation plan. This is why we discourage attempts at market timing. You must be in the market to receive the benefits.

No one consistently knows in advance when the rewards will appear. And often, significant gains occur quickly and happen when investors don’t expect them. This is exactly what unexpectedly started in late March and April of this year, after the rapid declines of February and early March.

The market increases that have occurred this week alone represent a significant portion of the historical average annual gain for the broad US stock market.

Historically, the US stock market has averaged around a 10% annual (calendar) return since 1926 (defined by the S&P 500, which consists of varying US large company stocks). However, as I wrote in 2018, When Average is Not Average, the S&P 500 has never actually earned between 8-10% in any calendar year since 1926.

This post is not about the election or its outcome. We are not trying to analyze the reasons for the strong gains of this week. In fact, the gains of Monday and Tuesday were significant and occurred prior to any election results even being known.

We know that it can feel hard to remain invested during a time of political uncertainty, especially in the midst of a global pandemic.

The key takeaway is that while the volatility of investing can be difficult, having the patience to stay the course can be rewarding.

Talk to us.  We want to listen.  We want to assist you, your family members and friends.