Fundamentals, Not Short Cuts, Propel Growth - Adviser Investments

Fundamentals, Not Short Cuts, Propel Growth

April 26, 2021

Please note: This update was prepared on Friday, April 23, 2021, before the market’s close.

From vaccines to variants, from inflation to infrastructure, and from SPACs to NFTs, investors have had no lack of issues to contend with as the year has progressed—and it’s only April!

While sports fans might think the momentous rise and calamitous fall of a nascent soccer Super League was the news of the week, we think Thursday’s revelation that President Biden was looking to double the capital gains tax rate on millionaires was the catalyst for the week’s most precipitous day of trading.

In little over an hour, the market dropped more than 1%, with all 11 sectors of the S&P 500 falling for the day as reactionary traders cashed out—seemingly heedless of the fact that they’d incur those heightened capital gains taxes on sales if the proposed hikes are indeed retroactive to 2021, as initial reports suggest.

Unlike the Super League, the potential tax hike should come as no surprise to anyone paying attention—it was, after all, a pledge central to Biden’s campaign platform. And while an increase from 23.8% to 43.4% (which includes the Obamacare health care levy) on high-earners is certainly attention-getting, it’s also just an opening gambit before negotiations get underway.

Yes, a tax increase in some form is likely coming. However, when capital gains hikes can be spotted from far away, they’re more manageable—and a knee-jerk sell-off doesn’t change a thing. In fact, studies suggest that changes in tax rates, whether up or down, have almost no discernible impact on stock prices or returns.

So, despite a wobbly week for stocks and sports, strong earnings and some positive economic news have led to another strong month in the equity markets. On a total return basis, the Dow is up 11.1% for the year through Thursday, while the broader S&P index has gained 10.6%. The MSCI EAFE index, a measure of developed international stock markets, has returned 7.4%. As of Thursday, the Bloomberg Barclays U.S. Aggregate Bond index’s yield stood at 1.49%, unchanged from this time last week, but up from 1.12% at the end of 2020. Overall, the U.S. bond market has declined 2.4% this year.

Economic Data Reflects Recovery

The job market continues to move in the right direction—the number of first-time filers for unemployment insurance fell to a new pandemic low—but there is a lot of healing yet to be done.

The Conference Board’s Leading Economic Index (LEI), which tracks 10 factors in an effort to project where the economy is headed, raced past expectations for March. All 10 components indicated expansion as the LEI grew 1.3%—further supporting our view that economic momentum is building.

We’re also seeing momentum among some of the most pandemic-beleaguered industries—including the airlines. In first-quarter earnings reports this week, CEOs of Southwest, American Airlines and United Airlines all echoed the sentiment that the worst is behind them and that pent-up demand is driving an upturn in bookings—leisure travel in the U.S. is clearly on the mend.

Infrastructure Spreads a Wide Market Net

Inflation and inoculations remain hot topics, as does infrastructure. Today, a look at the latter.

Months of horse-trading remain before a legislative package can emerge from Capitol Hill, yet our research team has been focusing on the question of which industry sectors will benefit from an infrastructure bill and whether there’s a means of gaining a first-investor advantage. Of course, waiting until the details are clear and the bill is passed, then trying to trade around it is exceedingly difficult—in no small part because by the time a bill of this magnitude is signed, sealed and delivered, the stock market has usually done a good job of pricing things in.

The conventional wisdom is that industrial stocks would benefit. Vanguard offers an Industrials Index fund, which gained 11.5% in the first quarter and 31.3% in the six months ending in March. By comparison, the S&P 500 index rose 7.0% and 17.1% over those periods—meaning traders were already putting a stake in the ground when it comes to industrial stocks.

Does the market always get it right? Hardly. Vanguard also offers a Technology Index fund which lagged in the first quarter, up a mere 1.5%. But wouldn’t tech stocks benefit from an infrastructure package, too? If broadband internet is improved and expanded, consider the knock-on impacts—more online shopping, more streaming-service subscribers, more people able to find jobs and create small businesses from home.

An infrastructure bill would create jobs, and, in turn, consumers—which is good for our economy. And once you’ve taken care of the municipal necessities (water, electricity, transportation, internet, etc.), you’ve freed up time, energy and capital for innovation. We’d argue that bodes well for the market at large, not just one narrow band of companies in a single market sector.

Podcast: Betting on Munis as America Rebuilds

Faster, cheaper internet, pothole-free roads—what’s not to love? Well, paying for it. That’s where municipal bonds come in. In this episode of The Adviser You Can Talk To Podcast, Director of Research Jeff DeMaso is joined by Senior Vice President, Fixed Income Chris Keith and Research Analyst Jennifer Zebniak to talk through the ins and outs of muni bonds and the promising prospects for the sector.

Topics include:

  • Why munis have outperformed the rest of the bond market so far in 2021
  • How the federal government’s infrastructure push could impact the sector
  • Whether new types of munis will soon be available to investors
  • Why inflation may be less of a threat to munis than to other fixed-income investments

Municipal bonds lower volatility and their tax advantages can make them a useful tool in an investor’s portfolio. Click to listen now!

Register for Our Quarterly Webinar Today!

Register now for Adviser Investments’ Second-Quarter Webinar, Inflation, Inoculation and Infrastructure: Defining the New Normal, to be held Wednesday, April 28 at 4:30 p.m. (EDT). Sign up here!

This interactive discussion will include our thinking on the markets and economy as they relate to the economic recovery and lingering impacts of the pandemic. You’ll hear from Chairman Dan Wiener and Director of Research Jeff DeMaso, and have your questions answered by Chief Investment Officer Jim Lowell, along with other members of our investment team.

As we look ahead to what the rest of 2021 may bring, we believe that untapped opportunities remain for investors with well-diversified portfolios—and we’re eager to share our thinking with you.

Click here to send your questions in advance.

If you’re unable to make it to the live event, sign up here to receive an email with a link to the on-demand replay.


Financial Planning Focus

Charitable Giving: Going Big and Paying Less

Charitable giving is one of the best ways to leave a legacy or support a worthy cause. Those are reasons enough to give, but as wealth managers, we also appreciate that donating to charities can reduce your tax bill—and you still have three weeks until the extended May 17 filing date.

When you contribute to an IRS-recognized charitable organization, the sum can be deducted from your adjusted gross income (AGI). However, the threshold for itemizing deductions was increased in 2017: It’s $12,550 for single filers and $25,100 if you are married and filing jointly.

So, from a tax perspective, if you plan to give, give big since you’ll get no added tax advantage for contributions below these thresholds. One way to benefit is by “bunching” your contributions into a single year. Let’s look at an example.

You and your spouse file jointly, and your marginal tax rate is 24%—your AGI is between $172,751 and $329,850. You pay state and local taxes, and you make monthly payments on a mortgage for your home. Between your mortgage interest and state and local income taxes (SALT), you have $10,000 of deductions. If you use the standard deduction, you lose the taxable benefit of your mortgage interest and SALT payments.

Now let’s say you’ve decided to make a five-year pledge of $15,000 annually to your alma mater. With your charitable contribution of $15,000 this year, your total deductions rise to $25,000, which is under the standard deduction.

However, if you can bunch higher contributions into fewer years, you can start to save on taxes. By bunching two annual donations into a single year, you double your deductible contributions from $15,000 to $30,000, and your savings jump to $3,576. Bunching three years of contributions to $45,000 (in one year) brings you to $7,176 of tax savings. And in years when you don’t donate, you’d simply revert back to the standard deduction—resulting in an overall tax savings.

If you want to bunch your charitable giving into a single year but don’t know where you want the money to go initially, a donor-advised fund can be a viable solution. We will explain that in more detail next week, when we discuss four effective strategies for charitable contributions.

If you can’t wait for next week for more information on how to make your charitable giving impactful, check out our special report, Making the Most of Your Charitable Giving.

As always, your situation is unique, and bear in mind that our example is one of several ways you can offset income with charitable giving. Feel free to speak with a tax professional with specific questions on how to give charitably and tax-efficiently.


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 SPDR S&P Transportation ETF (XTN). Bought iShares U.S. Home Construction ETF (ITB)

AIQ Tactical Defensive Growth

No trades this week.

AIQ Tactical Multi-Asset Income

Sold iShares Mortgage Real Estate ETF (REM). Bought Real Estate Select Sector SPDR Fund (XLRE).

AIQ Tactical High Income

No trades this week.

Adviser Investments’ Market Takeaways

You can find two new Market Takeaways videos on our website. Research Analyst Liz Laprade looked at the market impact of Bitcoin’s recent precipitous drop, while Vice President Steve Johnson discussed yesterday’s reaction to the tax hike news.

Looking Ahead

We’ll have plenty of economic data to consider next week, with reports on durable goods, home prices and homeownership rates, and a number of reads on consumers, with data on personal income, spending, savings and sentiment. The much-awaited initial estimate of first-quarter GDP arrives. Earnings season forges on. And the Federal Reserve will convene two days of meetings culminating in Chair Jerome Powell’s press conference Wednesday afternoon.

As always, you can visit 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 managementfinancial and tax planningmanaged individual bond portfolios, and 401(k) advisory services. We’ve been helping individuals, trusts, institutions and foundations since 1994, and have nearly 4,000 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 or call 800-492-6868.

Please note: This update was prepared on Friday, April 9, 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.

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