Please note: This update was prepared on Friday, June 4, 2021, before the market’s close.
Meme stocks are once again roiling markets, sending dramatically divergent signals about trading versus investing.
The country’s biggest movie theater owner, AMC Entertainment Holdings (AMC), is the meme stock scene-stealer of late—it’s up 2,322% so far this year (no, that’s not a typo). The stock surged 97% in just the first three trading days of June.
Even with movie theaters reopening and long-awaited films making their post-pandemic debuts, the rise in AMC’s price has had absolutely nothing to do with financial fundamentals. As you may recall, we saw a similar explosion of interest, and astronomical gains in price, for video game retailer GameStop’s shares earlier this year.
The broader market played a subdued supporting role this week, progressing at a languid pace as investors continued to consider how inflation and the hastening economic recovery could impact the Federal Reserve’s decision to raise interest rates in the future.
The latest data on jobs tells two tales. First, even with the reported scarcity of willing workers, employers added a respectable 559,000 jobs in May, and the headline unemployment rate fell to 5.8%. However, we are still 7.6 million jobs shy of where we stood pre-pandemic. So, there’s more growth needed before recovery can be written in the history books.
As fiscal stimulus courses through the economy and infrastructure remains the main event in Washington, stocks have stayed close to their 2021 high ground. On a total return basis, the Dow Jones Industrial Average is up 14.0% for the year through Thursday, while the broader S&P 500 has gained 12.4%. The MSCI EAFE index, a measure of developed international stock markets, has returned 10.5%. The Bloomberg Barclays U.S. Aggregate Bond index’s yield stood at 1.54%, up from 1.12% at the end of 2020. Overall, the U.S. bond market has declined 2.5% year-to-date.
Labor’s Labored Recovery
The service sector (which accounts for nearly 80% of all economic activity in the U.S.) has unfurled its petals with the late-spring lifting of many pandemic restrictions. One measure of the broad sector’s expansion hit an all-time high in May.
In-person businesses, including bars and restaurants, took the brunt of the pandemic’s unemployment gut punch last year, and that sub-sector’s labor market hasn’t been as quick to bounce back as many predicted. Despite the strong May data, service businesses hired fewer people than in the month prior.
Job openings are at record levels, outpacing hiring. You can hardly pass a retail store, sandwich shop or hair salon without seeing a “help wanted” sign hanging in the window. Overall, wages have surpassed their pre-pandemic levels, but so have workers’ expectations for what their time is worth. The so-called “reservation wage” (the salary threshold a jobseeker would like to surpass to take a certain type of job) is up significantly among adults without a college degree—from $48,000 in March 2020 to over $60,000 one year later.
Studies have shown that reservation wage levels can rise during periods when unemployment benefits improve, as we’ve seen this year with the pandemic stimulus checks and expanded weekly unemployment insurance. (That said, recent surveys show that a vast majority of unemployed jobseekers would rather have a job than stay on unemployment indefinitely.) This is one reason we’ve heard many companies bemoaning their inability to hire qualified workers—candidates expect more than companies are willing to pay (even as wages have risen)—though there are other factors keeping people out of the workforce, like the inability to secure childcare and lingering concerns about exposure to COVID-19.
The economic recovery from the pandemic is unlike any the U.S. has ever experienced. Economists predict inflation-adjusted GDP will overtake the pre-pandemic peak this quarter, erasing the nightmare scenarios floated last spring. Unlike the aftermath of other recent “jobless” recessions (1990–1991, 2001 and 2007–2009), where weak consumer demand led to persistently high unemployment, today’s job market is notably tight, with first-quarter 2021 employment costs up 0.9% from the previous quarter, the biggest increase since 2007.
Still, the labor market’s supply-demand imbalance may be temporary. When unemployment benefits expire in September and schools and daycare centers reopen in the fall, millions more people are likely to reenter the workforce and yet another “new normal” will emerge.
Bond Market Suggests Cooling Inflation
How acutely wage pressures and transitory supply shortages will trickle down and affect consumers in the form of prolonged price increases remains to be seen. So far, the bond market is calm and collected.
You’d think the 3.1% rise in year-over-year inflation in April, the largest increase since July 1992, would’ve sent Treasury bond prices plummeting and yields rising. That hasn’t been the case to date. Inflation is going up—but so are bond prices.
What do we make of this? The relationship between inflation and yields is a bit out of whack, and something has to give. We’d wager it’s inflation, not yields, that caves first.
To start, prices have not gone up across the board. Yes, we’re paying more in instances where pandemic pain was fully felt and now the constraints have been taken off; think travel and dining. We also have supply shortages, including computer chips, that have produced price spikes. But these should be fleeting increases and they have yet to spill over into the broader economy.
A recent study by the Federal Reserve Bank of San Francisco found that industries isolated from COVID-related pricing pressures haven’t experienced dramatic inflation.
Of course, inflation fears can lead to actual inflation. Workers anticipating a higher cost of living will demand higher wages, leading to higher prices for consumers as businesses’ labor costs rise.
The bottom line: We’re going to see more and more contradictory data as the economy continues to claw back from its 2020 pandemic wipeout. As we said last week—don’t get whiplash!
Podcast: Biden Tax Hikes—What We Know Now
Death and taxes may be certain, but the form each takes is a lot less so. And when it comes to taxes, some forms are worse than others. In this episode, some of our wealth management experts decode what we know about the Biden administration’s proposed tax hikes and how painful they’ll be, including how the changes may impact:
Capital gains taxes and adjusted basis calculations
Estate and gift taxes
Most importantly, the team also offers some thoughts about how strategic financial planning may help lessen the sting if these tax hikes come to pass.
Congress has yet to approve these proposals, and a lot may change before any become law. Still, it’s wise to be prepared. Click here to listen now!
Trusts can be a great tool to protect your assets and transfer wealth to family members and charitable causes. But the efficacy of a trust depends largely on how well it’s managed.
For a revocable or living trust (where assets remain in your control and terms can be altered), ensuring the funds are in the right hands is simple: Designate yourself as the trustee. Irrevocable trusts (or revocable trusts whose grantor has passed away) are a different story—you need to appoint an outside trustee.
Trust documents can cover most of the possibilities but aren’t meant to anticipate every scenario that trustees or beneficiaries might encounter. To ensure your intentions are honored, you’ll need to select someone trustworthy, prudent and agile enough to respond to your beneficiaries’ needs promptly over the course of their lives.
Here are four critical questions to consider to help you choose the right trustee.
1. What does the trustee do? Trustees have oversight over all property held by the trust and have the power to make investment decisions as well as the power to manage businesses or real estate held in the trust. They are also responsible for filing tax returns and distributing payments to beneficiaries. A trustee is legally liable for their actions—they’ve got skin in the game. In short, being a trustee can be a full-time job, so whomever you pick should understand the commitment involved.
2. Do you need a professional trustee? The answer to this question depends on your estate and your beneficiaries.
Professional trustees can include a financial institution, such as a bank, or advisers with significant trustee experience. These seasoned trustees have the resources and technical know-how to properly administer trusts and help provide continuity, objectivity and operational experience, especially when serving several generations of a family. The downside of hiring a professional trustee is that they may be less familiar with the needs of your family and less flexible when making distribution decisions.
The other option is to choose individual trustees—typically family members or friends whom the donor trusts to understand and carry out their intentions. Family trustees may need to engage outside investment advisers and other professionals to fulfill their fiduciary duties. If you have an individual trustee in mind, it may make sense to also appoint a professional co-trustee to lend a hand.
3. What is the trust’s timeframe? Trusts can be set up to last for decades. Or they may terminate upon the passing of a spouse or child. If you’re setting up a trust to benefit several generations, you may need to select a professional, institutional trustee to ensure continuity. But even if you intend the trust to dissolve in the short or medium term (say, when a minor child becomes an adult), it’s still wise to provide instructions on how the trust’s beneficiaries should select (or worst-case, remove) trustees in case your designated trustee resigns or becomes incapacitated.
4. Will the trustee be paid? Trustees are legally entitled to reasonable fees for their services—professional trustees will often have fee schedules. Generally, the more complex your trust is to administer, the higher the fees. If your trust is relatively simple, with few beneficiaries, an individual trustee might be a better option. Their fees may be lower or even limited to expenses that they incur for their work on the trust.
Naming a trustee who is knowledgeable, reliable and can navigate your family’s dynamics should ensure that your goals are achieved and your heirs are cared for as intended. Our estate, tax and financial planning specialists can help walk you through this process. Please don’t hesitate to contact your wealth management team. 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.
Next week brings a lighter slate of data; we’ll be looking closely at reads on consumer credit and sentiment, job openings and inflation. And our attention will remain on improving medical data in Europe, Asia and South America—so far, we’re liking what we see.
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.
Please note: This update was prepared on Friday, June 4, 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. Further, the securities listed above are not selected for listing based on their investment performance; thus it should not be assumed that any of the securities listed above were profitable or will be profitable, nor should it be assumed that future recommendations will be profitable. Clients and prospective clients should only make judgements about a strategy’s performance after reviewing the strategy’s composite performance information. There is no assurance that each security listed above will remain in the strategy’s portfolio by the time you have received or read this email. Securities are listed for informational purposes and are not intended as recommendations. Existing investor accounts may not participate in all transactions listed above due to each account’s particular circumstances.
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