The Economy: It’s Back - Adviser Investments

The Economy: It’s Back

August 2, 2021

Please note: This update was prepared on Friday, July 30, 2021, before the market’s close.

With expanding corporate earnings, low interest rates and an economy hitting records, maybe we shouldn’t be surprised that the S&P 500 index is on pace for its sixth straight monthly gain in July.

What has been unexpected is just how smooth the stock market’s path has been this year. The quick takeaway: While we expect a bumpier ride ahead, that doesn’t mean the market can’t continue to gain ground.

And speaking of gaining ground, around half of the companies in the S&P 500 have reported results for the second quarter, and overall earnings are up 94%. As far as we’re concerned, we’re in the silly season for data. That near-doubling of earnings is made possible only by comparing today’s numbers against the depressed levels from the pandemic recession.

So far, earnings have outweighed the rise of the delta variant and reimposed mask mandates. And that doesn’t surprise us. It’s often the risks we aren’t aware of that disrupt the markets—and the risks posed by the coronavirus are firmly in focus. Therefore, as it stands today, COVID-19 doesn’t appear to threaten the market in the same way it did last spring.

That goes some of the way toward explaining why the stock market has gained ground in 2021 even as, tragically, COVID-19 remains a stubborn epidemiological menace. On a total return basis, the Dow Jones Industrial Average is up 15.8% for the year through Thursday, while the broader S&P 500 has gained 18.6%. The MSCI EAFE index, a measure of developed international stock markets, has returned 10.6% through Thursday. The Bloomberg Barclays U.S. Aggregate Bond index’s yield stood at 1.38%, up from 1.12% at the end of 2020. Overall, the U.S. bond market has declined 0.7% year-to-date.

Is the U.S. Economy Soaring…or Merely Humming Along?

As we told you last week, the National Bureau of Economic Research (NBER)—the official arbiter of recessions and expansions—declared that the COVID-19 recession lasted just two months, March and April of last year.

And now, with the first estimate on second-quarter GDP growth in the books, we are officially in economic expansion territory. Whether you look at the size of the economy before or after inflation, it is now larger than it was before the pandemic.

Recovering from the pandemic recession is certainly something to celebrate, but perspective is warranted.

First, the economy today isn’t as big as it would be if the pandemic hadn’t happened. Although the economy has recovered in size, we’ve missed a lot in production and paychecks.

Second, the pace of growth we’ve seen over the past year or even quarter simply isn’t sustainable for our nearly $23 trillion economy.

The government’s initial estimate is that the U.S. economy grew at a 6.5% annualized rate in the second quarter, after accounting for inflation. That means the economy grew 1.6% in April, May and June—the second-fastest quarterly increase since 2003.

If you look over the past 12 months, the economy has increased 12% after inflation, the best year-over-year increase in GDP since the 1950s!

It bears repeating: We are in the silly season for economic data—and GDP is no exception. That outsized 12% increase is made possible by the “base effect,” which means the growth rate is inflated due to comparing today’s numbers against those from the depths of the pandemic recession a year ago.

We’re unlikely to see such a strong growth pace continue, but for now, we’ll take it.

Fed Says No Rate Hike Just Yet

Federal Reserve officials said in a statement Wednesday, following their two-day meeting, that “the economy has made progress” toward their goals of maximum employment and stable inflation.

Despite that, policymakers elected to maintain the current fed funds rate of 0.00% to 0.25%. And they will continue to buy at least $120 billion of Treasury and mortgage-backed bonds each month.

It seems tapering those purchases won’t happen just yet, even though there were hints in this week’s meeting that they might reduce that spending later this year. With the 10-year Treasury yielding just 1.25%—its lowest level in the past six decades, excluding the depths of the pandemic—it’s clear that traders don’t anticipate tapering (or higher interest rates) around the corner.

In our view, Fed policy that was necessary in a crisis is no longer essential when the economy has recovered and is expanding. But it’s not our job to say what the Fed should do. Rather, we build portfolios based on what the Fed is doing and what it’s likely to do in the future. For now, interest rates remain low and central bankers are only talking about taking their foot off the pedal—not letting up on the gas just yet.

Webinar: Rocket or Rollercoaster—Where Will the Markets Go From Here?

In our live, interactive webinar Wednesday, we shared our views on the markets and what we expect for stocks in the coming months.

Chairman Dan Wiener and Director of Research Jeff DeMaso offered their thoughts on strong corporate earnings, their inflation expectations amid pandemic-distorted data, the role of bonds in a diversified portfolio, and the potential impact of investor complacency.

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 potential opportunity in health care stocks, the implications of higher interest rates on the economy, our thoughts on cryptocurrency and more.

Can stocks continue to rise or is a bear market just around the corner? To hear our experts’ answers to your most pressing questions about where we go from here, click to watch our Third-Quarter Webinar now!

Podcast: Meme Stocks and the Rise of Retail Investors

Traditionally, it’s the companies that make lots of profits that see their stock prices surge. But some of the most remarkable run-ups of the past year have been made by money-losing firms like GameStop and AMC whose “meme stocks” have won young investors’ affection.

Are we witnessing the start of an avalanche that will change the investment landscape forever? Or will these meme stock rallies disappear with barely a ripple, like a Pet Rock tossed in a pond? Portfolio Managers Steve Johnson and Charlie Toole discuss the new fashion for trading among young investors and what it means for the rest of us, including:

  • Why the race to zero commissions set the stage for today’s retail investment landscape
  • How the pandemic helped drive interest in the stock market among younger investors
  • The surprising power of social media to swing stock prices
  • What this speculative boom can tell us about overall market sentiment

This faddish phenomenon may not alter Wall Street forever—but there are lessons to learn from the topsy-turvy trend. Click now to listen today!

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Financial Planning Focus

Advanced Estate-Planning Strategies

Passing on wealth to heirs is one of the primary objectives of most financial plans, and there has never been a more favorable time to do so.

Under current law, you can leave up to $11.7 million ($23.4 million for couples) in cash, securities or other assets to your heirs without incurring any gift tax. You can also give $15,000 annually ($30,000 if you’re married) to anyone you wish during your life. (However, these exemptions expire at the end of 2025, and they could change even sooner as part of a budget deal or infrastructure package passed by Congress.)

Here are four ways trusts can help you maximize the amount your loved ones receive under current law.

  1. Roth IRA Conversions. The SECURE Act eliminated the “stretch IRA” provision that allowed non-spouse IRA beneficiaries and trusts to stretch required minimum distributions (RMDs) out over the life of the heir. Now, those assets must be distributed to beneficiaries at ordinary income rates within 10 years of the original owner’s death. And when trusts are the beneficiaries, the tax rate is even higher than that of ordinary income. One simple solution is to keep the trust as beneficiary but convert the IRA to a Roth IRA—thus making future distributions tax-free.
  2. Irrevocable Life Insurance Trusts. An irrevocable life insurance trust (ILIT) is another tax-efficient way to pass significant assets down to your heirs. The ILIT owns a life insurance policy on the grantor’s life. When they pass, the proceeds fund the trust and are distributed to beneficiaries according to the ILIT’s terms. Life insurance proceeds not held in an ILIT are taxed as part of the insured’s estate. With an ILIT, those proceeds are excluded from the insured’s estate, reducing the estate tax burden.
  3. Intentional Grantor Trusts. These irrevocable trusts are funded with your assets during your lifetime. Normally, such a trust would utilize estate, gift and generation-skipping tax (GST) exemptions but still owe income taxes on the growth of the assets. However, if structured properly, a so-called intentional grantor trust can maintain the gift and GST exclusion while enabling the grantor to pay income taxes on the growth of the assets while they are living. This allows the trust to grow without triggering high taxes when you pass, leaving a larger pool of assets for your heirs.
  4. Grantor Retained Annuity Trusts. Historically low interest rates make this an excellent time to set up a grantor retained annuity trust (GRAT). Basically, GRATs are funded by the grantor in exchange for a stream of annuity payments, including the original deposit, over a specified period and at a predetermined interest rate. After the final annuity payment occurs, whatever remains in the trust is transferred to the beneficiary. With interest rates remaining low, many asset types and classes should appreciate faster than the distribution rate. That growth is then passed on to the trust’s beneficiaries free from gift and estate taxes. However, there’s a catch: If the grantor dies before the term of the trust ends, the beneficiary gets nothing and the trust is included in their estate.

These smart estate-planning tools are not for everyone—they can be complex and expensive to set up. Consult a tax expert before pursuing any of these options. We are happy to help!

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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

Sell iShares Core S&P 500 ETF (IVV). Buy Fidelity MSCI Communication Services Index ETF (FCOM).

AIQ Tactical Defensive Growth

No trades this week.

AIQ Tactical Multi-Asset Income

No trades this week.

AIQ Tactical High Income

No trades this week.

Adviser Investments’ Market Takeaways

In this week’s Market Takeaways, Research Analyst Liz Laprade discussed whether it’s time for investors to think about pulling out of China, while Vice President Steve Johnson looked at whether the FANG stocks have lost their bite.

Looking Ahead

A wave of data breaks next week, with reports on construction spending, factory orders, wholesale inventories, manufacturing and service sector indicators, several jobs market reads, and, last but not least, an update on the trade deficit.

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, July 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. 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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