A Sizzling Economy Fails to Impress May 3, 2021 Weekly Update Print Please note: This update was prepared on Friday, April 30, 2021, before the market’s close. It was a great week for the economy and corporate earnings. It was a so-so week for the stock market. Investors had no lack of data or current events to respond to as President Biden laid out an aggressive multi-trillion-dollar spending plan, the Federal Reserve committed to keeping interest rates lower for longer and reports showed the U.S. economy grew at a 6.4% annualized pace in the first quarter. Yet, despite the S&P 500 index hitting a record on Thursday, stocks ended the week flat or slightly depressed. Even across-the-board jumps in corporate earnings failed to elicit more than a shrug from traders. Why? In part because blockbuster business results were expected (thus priced in to the markets) and investors have been anticipating the gross domestic product (GDP) bump for months. That said, the majority of U.S. adults have now gotten their first COVID-19 shot, meaning we should see even greater GDP growth in the months to come as pent-up consumer demand is released. We expect that the U.S. economy will soon be expanding, rather than recovering. Whether that expansion will be enough to propel markets to even higher highs remains to be seen. On a total return basis, the Dow Jones Industrial Average is up 11.9% for the year through Thursday, while the broader S&P 500 has gained 12.6%. The MSCI EAFE index, a measure of developed international stock markets, has returned 7.7%. The Bloomberg Barclays U.S. Aggregate Bond index’s yield stood at 1.53%, up from 1.12% at the end of 2020. Overall, the U.S. bond market has declined 2.7% this year. Earnings Season Records and Surprises It’s been a record-setting earnings season so far. With more than half of the companies in the S&P 500 reporting, over 84% beat analysts’ estimates—the highest percentage in over a decade. Of course, any year-over-year comparison is bound to look boffo when one considers where we were one year ago…plunging into lockdown. But this week’s figures don’t look good merely because of the COVID-19 bounceback. A report from FactSet estimates that net profit margins for companies in the S&P 500 for Q1 2021 will be 11.6%, the third-highest since FactSet began tracking the metric in 2008. It sounds bullish, yet traders’ reactions to all this good news has been crickets and yawns. Even after beating analysts’ earnings expectations, the stocks of companies like Microsoft, Tesla, American Express and Honeywell declined. It may be that after piling up record upon record to start the year, investors have already priced a lot of good news in to stock prices. A Tax Upon Some Houses President Biden’s plans to double the capital gains tax for the wealthiest Americans wasn’t exactly met with cheers on Wall Street and his speech to Congress on Wednesday didn’t do much to calm traders’ fears. We’re a bit more sanguine for the moment. While the proposals are making headlines, it’s worth remembering that what the president wants and what the president gets are often two different things. This is just the first gambit in the negotiation and we expect there will be a lot more politicking to come. The same goes for how we’ll pay for all the infrastructure spending President Biden has proposed. While higher tax rates may be on the way for some of us, the devil is truly in the details. You and your clients should start thinking about how to tweak your financial plans if a tax increase does come, but we wouldn’t take any concrete steps yet. It’s better to wait to see how this all plays out. Can Global Stocks Bounce Back? This week’s reader question is about global stocks: What is your thinking on investing in international stocks? Will slower vaccine deployment abroad have an impact on valuations? Josh Jurbala, Quantitative Investments Manager, had this to say: We’ve been asked this a lot lately. The question is a smart one because you’re focusing on global stock valuations as opposed to recent performance; this suggests a long-term mindset—which is the key reason we think foreign stocks are worth investing in this year and beyond. It’s Diversification 101, yes, but it also recognizes that some global business leaders aren’t necessarily domiciled in the United States. Depending on one’s ability to accept higher risk for the potentially higher reward that comes with it, we generally recommend holding 20% to 30% of your portfolio’s equity allocation in foreign stocks, which is still considered an underweight to the global benchmark. The charts below illustrate three factors that underpin our current overseas outlook: Vaccinations, performance and valuations. Note that countries trailing the U.S. in vaccinations are not trailing far behind in performance this year. And foreign markets still offer better valuations, even if they look pricey compared to past levels. Note: YTD Returns are for each country’s MSCI index. Price/earnings (p/e) ratios are measured by each country’s MSCI index’s price divided by its 10-year average real earnings per share. Vaccination and returns data are through 4/27/21; p/e ratios are through 3/31/21.Sources: Bloomberg, Johns Hopkins. It is important to remember a lesson we learned last year: The stock market is not the economy. This applies to the stock market’s composition, of course, but it also implies that investors and traders are forward-looking. In other words, stock and bond investors will look past short-term weakness in the economy and will price assets in anticipation of an eventual recovery. Last fall’s battered cyclical stocks (small-caps, banks, leisure stocks) began to rally ahead of vaccine authorizations and rollouts. Emerging from the pandemic this spring, U.S. stocks seem to have priced in a full recovery and then some. To state it plainly, there are few underpriced opportunities in the U.S. market. Meanwhile, foreign stocks offer a chance to buy low. And, if reopenings stutter out of the gate, any volatility could provide more opportunity as prices dislocate from fundamentals. Dark times continue for countries struggling to vaccinate, but we believe the light at the end of the tunnel is bright. Plus, we aren’t simply buying markets. Our tactical strategies act as guides to where there are opportunities and risks. Second-Quarter Webinar—Inflation, Inoculation and Infrastructure: Defining the New Normal In our live, interactive webinar this week, we shared our views on the markets and the rebounding economy and what we expect for stocks as vaccinations rise and the country reopens. Chairman Dan Wiener and Director of Research Jeff DeMaso offered their thoughts on the influence of stimulus on the recovery, their inflation expectations amid pandemic-distorted data, the health care sector’s role in markets and portfolios, and the potentially wide-ranging impact of infrastructure spending. In our Q&A segment, Chief Investment Officer Jim Lowell, Vice President Charlie Toole and Research Analyst Liz Laprade answered viewer questions on a gamut of topics. They addressed the direction of interest rates, whether the stock market is overvalued, inflation’s effect on dividend stocks and muni bonds, and Bitcoin, among other topics. We’ve just experienced stocks’ best 12-month return in over 60 years—to hear our experts’ answers to your most pressing questions about where we go from here, click here to watch now! ***** Financial Planning Focus Smart Charitable Giving Strategies Last week, we talked about supporting causes you care about through charitable giving while reducing your tax bill at the same time. We also discussed “bunching” two or three years of charitable gifts to increase your tax savings. This week we’ll suggest four smart (and strategic) ways to give charitably. 1. Direct cash donation. It isn’t the most tax-efficient giving strategy but it is the simplest. Giving cash is often the easiest way to make a charitable contribution, both for you and the charitable organization you’re supporting. From a tax standpoint, cash donations can be deducted from your adjusted gross income (AGI)—up to a limit of 60% of your AGI each year. But in some cases, you may want to look beyond simply sending cash straight to a charity. 2. Stock donations. It’s rewarding (literally) to watch the stocks you own rise in price. Paying the capital gains tax (20% now, possibly heading to 43% or so for the highest earners if the Biden administration’s plans prevail)—not so great. And that’s before we talk about state and local taxes. One way to avoid those taxes is by gifting appreciated stock to a charity directly, rather than pledging the cash from the proceeds. The benefit is twofold: You avoid paying capital gains, and you can deduct the full value of the shares from your taxable income, up to 30% of your AGI in the current tax year. 3. Donor-advised funds (DAFs). This option is almost like having your own personal foundation, combining the ease and simplicity of cash and securities donations with the longevity and flexibility of more complex charitable vehicles. Instead of giving directly to a charity, you contribute cash or highly appreciated stocks to the DAF and receive an immediate tax deduction. Once the DAF is funded, you can direct those funds to charitable organizations immediately or defer making specific grants for a while. In the meantime, the funds can be invested in any of several investment options offered by the DAF and grow tax-free. DAFs are simple to set up and we can help you fund them according to your charitable goals. There are administrative costs, but they tend to be low and are often superseded by the ease and convenience of using a DAF instead of managing individual charitable contributions over the course of the year. 4. Qualified charitable distributions (QCDs). In lieu of taking required minimum distributions (RMDs) from your IRA account, QCDs allow you to trim your tax bill by directing some or all of that cash to a charity—reducing your AGI up to $100,000 ($200,000 if married filing jointly) per year. In addition to the tax-saving techniques above, charitable giving is a valuable tool for estate planning. Charitable trusts, in particular, are handy for families that anticipate leaving a taxable estate. But they’re complicated and come with substantial administrative costs—so check with your tax, investment and estate planning professionals before taking the leap. Contact your wealth management team and tax professional if you have questions about charitable giving and your specific situation. We’re happy to help. After all, we are The Planner You Can Talk To. ***** Strategy Activity Update Please see below for a summary of the trades we executed over the week through Thursday and our current tactical strategy allocations. Dividend Income No trades this week. AIQ Tactical Global Growth Sold VanEck Vectors Semiconductor ETF (SMH). Bought iShares Core S&P 500 ETF (IVV). AIQ Tactical Defensive Growth No trades this week. AIQ Tactical Multi-Asset Income Sold Vanguard High Dividend Yield ETF (VYM). Bought First Trust Value Line Dividend Index Fund (FVD) AIQ Tactical High Income No trades this week. Adviser Investments’ Market Takeaways In this week’s Market Takeaways, Research Analyst Liz Laprade mentioned the potential market impact of a capital gains tax hike, while Vice President Steve Johnson discussed the record earnings season and the wide impact of semiconductor shortages. Looking Ahead Next week, we’ll get manufacturing and service sector gauges, construction spending and car sales, factory orders and consumer credit, ADP private sector and non-farm payrolls jobs reports. As always, you can visit www.adviserinvestments.com for our timely and ongoing investment commentary. In the meantime, all of us at Adviser Investments wish you a safe, sound and prosperous investment future. About Adviser Investments Adviser Investments is a full-service wealth management firm, offering investment management, financial and tax planning, managed individual bond portfolios, and 401(k) advisory services. We’ve been helping individuals, trusts, institutions and foundations since 1994, and have more than 3,500 clients across the country and over $7 billion in assets under management. Our portfolios encompass actively managed funds, ETFs, socially responsible investments and tactical asset allocation strategies, and we’re experts on Fidelity and Vanguard mutual funds. We take pride in being The Adviser You Can Talk To. Our minimum account size is $350,000. To see a full list of our awards and recognitions, click here, and for more information, please visit www.adviserinvestments.com or call 800-492-6868. Please note: This update was prepared on Friday, April 30, 2021, before the market’s close. This material is distributed for informational purposes only. The investment ideas and opinions contained herein should not be viewed as recommendations or personal investment advice or considered an offer to buy or sell specific securities. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed. Purchases and sales of securities listed above represent all securities bought and sold in each strategy during the period stated. Each strategy’s portfolio generally includes more holdings in addition to the transactions listed above and in some cases the securities listed above may only represent a small portion of the particular strategy’s complete portfolio. 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