China Dominates Headlines, But Not Our Portfolios September 27, 2021 Weekly Update Print Please note: This update was prepared on Friday, September 24, 2021, before the market’s close. The week got off to a shaky start as a looming default by Chinese property developer Evergrande had economists and talking heads debating whether it would turn out to be a “Lehman moment” that could imperil the entire Chinese economy. But unlike Lehman Brothers during the 2008 Great Financial Crisis, Evergrande’s chances of creating a global crisis are looking more and more unlikely. Stocks dropped precipitously on Monday but began to rebound on Tuesday. Chinese authorities swiftly announced a plan to handle the company’s massive domestic debt obligations late Wednesday while its central bank added liquidity to the market, largely calming fears. Here at home, the Federal Reserve was front and center as policymakers said they would begin tapering bond purchases in the coming weeks—a sign the central bank believes the U.S. economy is on a stable growth trajectory. Appeased, traders turned optimistic on Thursday, with the major stock indexes recovering all the ground lost earlier in the week and closing the day roughly 2% below their previous record highs. China remained in the headlines as the week came to an end. The country’s central bank abruptly announced Friday that it considers all cryptocurrency transactions to be illegal, sending bitcoin and its cybercurrency peers tumbling. While fortunes have been made and lost in the short time that traders have driven cryptocurrencies from the financial backwater to become a major market unto itself, it very much remains a buyer-beware asset class. The space is rife with fraud and scams. And, as China’s latest move makes clear, the rules are liable to change at any moment. No Taper Tantrums This Time Federal Reserve Chair Jerome Powell held back on bold declarations at Wednesday’s post-meeting press conference, but his hints seemed clear enough. Far from a tantrum, traders took in stride the news that the Fed is preparing to taper its bond purchases as soon as November. Stocks were up on the day. Maybe more importantly, they didn’t fall. This suggests that Wall Street embraces the view that the Fed’s removal of financial support means the U.S. economy is prepared to stand on its own two feet and continue its growth trajectory. We think it’s worth mentioning that a taper is not a halt. It just means the Fed will spend a little less than the $120 billion they’ve been allocating each month to Treasurys and mortgage bonds. There’ll still be plenty of support for the economy for some time. Bond traders had a delayed reaction to Powell’s announcement. While bond yields barely budged on Wednesday, they jumped Thursday as the yield on the 10-year Treasury increased 12 basis points (or 0.12%) from 1.31% to 1.43%— a big move for the bond market’s benchmark security. Whether this reflects a belief that an interest-rate hike is now baked in for late 2022 is unclear. Policymakers seem to be signaling confidence in the economic recovery. Yet expectations for future inflation are falling. Combine the two and it says that we may be headed back to pre-pandemic levels of slow but steady economic growth. China’s Evergrande: Not Too Big to Fail As mentioned above, the old phrase “bull in a china shop” arguably went topsy-turvy this past week: It’s China that briefly threatened to wreck Wall Street’s bull market. In our most recent podcast, we discussed the long-term implications of the broad Chinese crackdown on its corporate sector. But the story of China’s property development bubble is much older—and its implications much broader—than the fate of one developer, even one as large as Evergrande. China’s real estate sector accounts for nearly 30% of the country’s gross domestic product (GDP). (At the height of the U.S. real estate bubble, homebuying and building contributed 15%.) With China’s population certain to grow slowly and likely to shrink in the coming decades, the wildly overbuilt housing sector may become a drag on the Chinese economy rather than its driver. Harvard economist Ken Rogoff estimates that a slowdown in property development could shave 1%–2% off Chinese GDP all by itself. The fallout from Evergrande has caused some ripple effects in the global stock market, but it does not seem to indicate a coming collapse in the Chinese housing market. And Evergrande’s debt is largely held by local investors, so the impact of a default will mainly be contained to the Chinese market. Podcast: Are Crackdowns Fracturing the Chinese Economy? The Chinese government is trying to whip its corporations into shape—and markets around the world are feeling the sting. In this episode of The Adviser You Can Talk To Podcast, Research Analyst Liz Laprade and Chief Investment Officer Jim Lowell join Director of Research Jeff DeMaso to discuss the rapid changes in the Chinese economic landscape, and what they portend for global markets. They touch on: Which sectors are affected What’s motivating the government crackdown Why what happens in China doesn’t necessarily stay in China Despite our clients’ limited exposure to the world’s second-largest economy, we thought you’d benefit from Jim’s and Liz’s insights into the risks—and rewards—of investing in China. Please click here to listen! Financial Planning Focus 4 Ways to Maximize Your Equity Compensation Stock options have become a larger part of white-collar workers’ overall compensation in recent years—but how companies grant equity can have broad implications for their employees. And maximizing your profits can be tricky. We’ve touched on the basics of employment-based stock options in the past. There are several different types of options, including Incentive Stock Options (ISOs), Non-Qualified Stock Options (NSOs) and Restricted Stock Units (RSUs). Ensuring you get the most out of each may require different strategies. A tax professional can help you work out what’s best for your individual situation, but here are four tips to help you get started: Review your stock plan. Documentation on your company’s stock plan should be provided to you by your firm’s human resources or compliance department. Keep this handy. It will give you (and your adviser) vital information about what type of compensation you’re receiving, when it’s granted, when it starts vesting and how often. Know the potential tax traps. You generally do not owe taxes when you’re initially granted options (ISOs or NSOs). From there, things get a little more complex. ISOs that are granted, exercised and held for a specific period of time may qualify for favorable long-term capital gains treatment when sold. In most cases, you’ll pay the long-term capital gains rate for your ISOs on the difference between the fair market value (FMV)—the stock’s share price on an exchange if it’s publicly traded or its estimated value if it’s privately held—at the time of sale and the discounted price for the shares (if the employer grants employees stock options below market price). That long-term rate is capped at 23.8%. NSOs don’t enjoy the same tax benefits as ISOs. When you exercise an NSO after it vests, the spread between the option price and the FMV is subject to ordinary income and payroll taxes, even if you haven’t sold the shares. You’ll then also owe capital gains taxes when you do sell. RSUs are a little different from ISOs and NSOs. In this case, you don’t have to buy or exercise shares at all—they are given to you as part of your salary. So, when your RSUs vest, they show up on your Form W-2 as income. Often, your company will sell enough shares to cover the income tax owed at your normal withholding rates. If not, you’ll need to increase your withholding to account for the additional income. Spread the wealth to protect it. There’s an inherent risk in holding too much of one security, especially when your wages are also tied to the fortunes of the same company. In other words, remember to diversify. We advise clients to limit company shares to 5% of their overall portfolio assets while also keeping an eye on their tax liability. Know your deadlines. Timing matters when you decide to sell your equity compensation. A public company, or one hoping to go public, may restrict when you can sell vested shares to avoid the possibility of insider trading. These “blackout periods” may keep you locked in at a time when you were hoping to sell. Mark blackout dates on your calendar and set reminders to keep track of when your shares vest and when they can be sold. There is no crystal ball that can tell you exactly when to exercise, hold or sell your shares, but having a solid financial plan is the next best thing. For more on maximizing equity compensation, check out our podcast on the topic. As always, we’re here to help. Please loop in your team of investment, tax and planning professionals so we can help you build an options strategy that maximizes your net worth while minimizing your tax liability. 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 Buy Fidelity MSCI Consumer Discretionary Index ETF (FDIS). Sell iShares Core S&P 500 ETF (IVV). AIQ Tactical Defensive Growth Buy iShares 20+ year Treasuries Bond ETF (TLT). Buy Cash Reserves. Sell iShares Core S&P 500 ETF (IVV). AIQ Tactical Multi-Asset Income Buy SPDR Bloomberg Barclays Convertible Securities ETF (CWB). Sell Vanguard Dividend Appreciation ETF (VIG). AIQ Tactical High Income No trades this week. AI in the Media It was a busy week for Adviser Investments’ thought leaders, with Director of Research Jeff DeMaso speaking to Citywire about the implications of a State Street–Invesco merger, while Chairman Dan Wiener spoke to The Philadelphia Inquirer about recent additions to Vanguard’s fund lineup. Dan also shared his insights on China on both the CNBC broadcast and the ETF Edge podcast. Chief Investment Officer Jim Lowell spoke to Fox Business about whether this rocky week portends the end of a bull market and to TD Ameritrade about the Evergrande debacle. In this week’s Market Takeaways, Research Analyst Liz Laprade talked about the fallout from the troubled Chinese real estate market, while Vice President Steve Johnson gave his take on “buying the dip” and how that adage played out in real time this week. And remember, you can always visit the Adviser in the Media section of our website for the Adviser Investments team’s informative views on the market and the economy. Looking Ahead After a China-dominated week, we expect economic reports will give us some better insights into the state of the U.S. economy next week, with looks at durable and capital goods orders, home prices and pending home sales, a Q2 GDP revision, core inflation, consumer confidence and sentiment, as well as consumer income, spending and savings. And while the investment implications are minor, we’ll be keeping an eye on the debt ceiling negotiations and the potential for a U.S. government shutdown. As always, please 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, September 24, 2021, prior to the market’s close. This material is distributed for informational purposes only. The investment ideas and opinions contained herein—including but not limited to the Your Question Answered section—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. Information regarding purchase and sale of specific strategy trades is for selected investment strategies managed by Adviser Capital, a division of Adviser Investments, LLC. 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Always consult a licensed attorney, tax professional, or licensed insurance professional regarding your specific legal or tax situation, or insurance needs. Companies mentioned in this article are not necessarily held in client portfolios and our references to them should not be viewed as a recommendation to buy, sell or hold any of them. Third-party publications referenced in this article (e.g., Citywire, Barron’s, InvestmentNews, CNBC, etc.) are independent of Adviser Investments. Readers should note that to the extent any third-party publication linked to in this piece also contains reference to any of the newsletters written by Dan Wiener or Jim Lowell, such references only pertain to the respective newsletter(s) and are not reflective of Adviser Investments’ investment recommendations or portfolio performance. Newsletters are operated independently of Adviser Investments. 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