Whiplash Economy, Travel Lane Stock Market - Adviser Investments

Whiplash Economy, Travel Lane Stock Market

June 1, 2021

Please note: This update was prepared on Friday, May 28, 2021, before the market’s close.

Wall Street prepared to end the sunny month of May in the black, despite mixed data this week revealing a fair-to-middling economic recovery experiencing pandemic-related whiplash.

While inflation spiked, personal incomes dropped double digits, durable goods orders unexpectedly dipped, revised first-quarter GDP estimates held steady and first-time claims for unemployment benefits fell to a new pandemic-era low. Consumer spending rose 0.5% in April—a solid increase, though a far cry from the stimulus-juiced spike of 4.7% in March—as Americans continued to shed masks and head back to bars and restaurants.

Perhaps most importantly heading into the holiday weekend, new COVID-19 cases sank to the lowest level in over a year.

On a total return basis, the Dow Jones Industrial Average is up 13.5% for the year through Thursday, while the broader S&P 500 has gained 12.5%. The MSCI EAFE index, a measure of developed international stock markets, has returned 9.6%. The Bloomberg Barclays U.S. Aggregate Bond index’s yield stood at 1.51%, up from 1.12% at the end of 2020. Overall, the U.S. bond market has declined 2.4% year-to-date.

Inflation Updraft or Just More Hot Air?

After reports earlier this month that the Consumer Price Index surged higher in April, rising 4.2% (its biggest monthly move up since 2008), it wasn’t too surprising that the Federal Reserve’s preferred inflation gauge, the Personal Consumption Expenditure Index, rose a greater-than-expected 3.6%, according to figures released Friday morning—though when you eliminate the volatile food and energy categories the inflation trend was a bit more subdued at 3.1%.

Meanwhile, personal incomes are falling, but it’s not what you think. The labor market remains strong. It isn’t the demand-supply matrix that’s at play here; rather, it’s the government’s stimulus payments. Salaries and wages were up 12.3% in April after a 4.1% rise in March.

But total income dropped year-over-year in April by a whopping 13.7% on an inflation-adjusted basis, the largest monthly decrease since 1959. Is it time to batten down the hatches?

We don’t believe a storm is on the way. Our barometer? The bond market. The yield on the 10-year Treasury sits well below where it was at the end of March, before any inkling of inflation could be found in the economic data. Friday’s personal income numbers also failed to rattle bond traders, barely nudging yields lower after the report’s release. (It may be that they are taking comfort in the fact that March’s 20.2% year-over-year increase in income was the largest gain on record.)

The stock market, too, seems to be taking inflation in stride. Perhaps traders finally believe the message the Fed has been repeating for over a year now—it won’t raise rates for the foreseeable future because it doesn’t think it will have to.

Yet, traders might be a little too sanguine about inflation. Despite intermittent rallies, “growth” stocks (which tend to prosper when inflation is high) continue to lag “value” stocks.

We’ve said before just how murky the distinction can be between growth and value. And these days, with the rise of funds that chase factors like momentum—and rush to buy equities whose prices are quickly rising—the line between growth and value is getting even blurrier. With value stocks having their day in the sun, they may be, in aggregate, becoming the growth stocks of the current market, if momentum is any measure.

In other words, as value stocks’ prices rise, they look less and less like, well, value buys.

Growth and value aside, we’ll continue to watch for inflation storm clouds while we also look to our exceptional managers to uncover quality companies, with solid fundamentals and battleship balance sheets, that have the ballast to sail in any climate.

In the meantime, be prepared to continue to be whiplashed by the month-to-month data as the impacts of stimulus, and pandemic shutdowns and reopenings work their way through the system.

Big Oil Feels the Squeeze

In an otherwise languid week for the markets, a gritty undercurrent surged to the surface: Oil companies are facing a watershed moment.

On Wednesday, a climate friendly, activist hedge fund unexpectedly won seats on ExxonMobil’s board despite vociferous objections from the company’s CEO. Meanwhile, a court in the Netherlands ordered Royal Dutch Shell to reduce its total carbon emissions 45% by 2030, and Chevron’s shareholders backed a call for the company to reduce its emissions.

These moves come on the heels of a landmark report released last week by the International Energy Agency—a longtime industry advocate—warning that oil companies must cease investing in new fossil-fuel projects if the world hopes to avert the most catastrophic effects of climate change.

Big oil’s biggest customers haven’t stood silent either: Automaker Ford premiered its electric F-150 pickup truck and announced plans to invest $30 billion in electric vehicles (EVs) in the coming years, hoping EVs will make up 40% of its sales by 2030.

Oil company stocks were down slightly on the week, though the move points less to any immediate threat to their bottom lines than to long-term pressure on the industry as a whole.

Getting Ready for Higher Taxes

This week’s reader question is about future tax hikes: What does the Biden tax plan mean for investors? Should I be making changes to my financial plan or portfolio at this point?

Vice President of Wealth Services Patrick Carlson had this to say:

The first thing to remember is that all the tax hikes you’ve been hearing about—except those already passed in the American Rescue Plan—need to be approved by Congress. That means any tax code updates may look very different by the time they are fully baked and written into law.

That said, President Biden’s proposed American Families Plan would raise $1.5 trillion over a decade by taxing high earners. For instance, the top individual federal income tax bracket would revert back to the pre-Trump rate of 39.6% (from the current 37%) for individuals earning more than $400,000 a year.

The ceiling on long-term capital gains would rise even more, from 20% to 39.6% for the wealthiest Americans. That bump, which essentially taxes capital gains like ordinary income, would apply to individuals reporting over $1 million in W-2 income, plus gains from selling stocks, bonds and other assets held in taxable accounts.

If that change is enacted—and at present it’s still in question—there would be instances where we would suggest avoiding taking some of the largest capital gains. In many cases, however, it would not impact how we advise clients. An added wrinkle emerged this week, however. The Biden Administration is considering making any capital gains tax hike retroactive to 2021 earnings. If that happens, a whole new calculus will enter the equation. We’ll keep you apprised.

That’s not all. The administration has also floated the notion of raising estate taxes. An individual today can leave up to $11.7 million to heirs, including lifetime gifts, before the 40% estate tax kicks in. While the rumored change would lower that exemption significantly, the proposal faces major opposition, and more recent scuttlebutt indicates that this idea has been set aside for the time being.

The last potential tax hike I’ll mention is viewed as the cornerstone of the plan: The corporate tax rate, which would increase from 21% to 28%. While that wouldn’t impact individual or estate taxes, higher corporate taxes can eat into corporate profits and weigh on economic growth.

If that’s the case, you’d think higher corporate taxes would depress stock prices. Yet, that’s not proven true historically. In fact, going back to 1945, the S&P 500 has averaged a 10% gain during years in which the U.S. corporate tax rate was below 35%—compare that to the average annual 10.3% gain when the tax rate was 50% or higher.

The bottom line is that tax hikes haven’t correlated with poor performance from stocks. Before you make any changes in your financial plan, keep in mind that while death and taxes are certain, the proposed tax hikes are far from assured; many won’t happen in this tax year. As always, please reach out to us with questions about your specific situation—we’re eager to help.

Financial Planning Focus

All About 529 Accounts

May 29 is here and we thought we’d take the opportunity to discuss some of the benefits of the other 5/29—529 educational savings accounts.

529 plans are tax-advantaged investment accounts designed to help you save for tuition and expenses related to private K–12 and higher education. Anyone can open a 529 account for a designated beneficiary or contribute to the plan once it’s open. Plans are state-sponsored, generally in partnership with a mutual fund company or institute of higher learning. However, you aren’t limited to selecting a school in the state that sponsors your 529.

The Basics: First, evaluate the investment options available, as they are not uniform from state to state. Second, check to see if you’d receive a tax deduction on your contributions if you elect to use your home state’s plan. (Several states allow you to deduct contributions regardless of which state’s plan you invest in—click here for more details.) Finally, consider the costs associated with each plan—like other investment choices, fees vary.

Tax-Benefits: The main appeal of 529s is their tax friendliness; think of them like a Roth IRA, only for education savings rather than retirement. Contributions to the account are made with after-tax dollars, and growth of investments therein are tax-free. Plus, any withdrawals you make to pay for qualified education expenses are also untaxed. Withdrawals used to pay for expenses that aren’t qualified are subject to a stiff penalty, however—you will need to pay ordinary income tax plus a 10% penalty on any non-qualified plan withdrawal.

Special Considerations: 529s can work well as wealth-transfer and estate-planning vehicles. You can make a one-time contribution of up to $75,000 ($150,000 if married, filing jointly) for as many beneficiaries as you like and choose to treat the deposits as if they were made over a five-year period for gift-tax purposes. The benefit to those who can afford to do so is two-fold. It moves a big chunk of money out of your estate in one fell swoop and it front-loads the 529 plan with a large sum that can immediately begin compounding upon itself as its investments grow. And if a beneficiary decides they don’t want to go to college, the account owner can change the beneficiary to another qualified member penalty-free.

It’s easy to see why 529 accounts are such a popular way to save for education expenses. If you are interested in learning more, click here to read our special report on 529s or listen to our podcast on saving and investing for education. As always, if you have any further questions, please contact your wealth management team. We are happy to help—after all, we’re 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 iShares U.S Home Construction ETF (ITB). Bought Fidelity MSCI Materials Index ETF (FMAT).

AIQ Tactical Defensive Growth

Bought iShares Core S&P 500 ETF (IVV) from cash.

AIQ Tactical Multi-Asset Income

Sold Invesco DB Commodity Index Tracking Fund (DBC). Bought iShares Gold Trust (IAU).

AIQ Tactical High Income

No trades this week.

Adviser Investments’ Market Takeaways

In this week’s Market Takeaways, Research Analyst Liz Laprade discussed Bitcoin’s recent gyrations, while Vice President Steve Johnson covered “The Little Engine That Could”: Engine No. 1’s newly won spots on Exxon’s board and the ramifications for the oil industry.

Looking Ahead

Next week is holiday-shortened but still jam-packed with meaningful data: Manufacturing and service sector activity gauges, construction spending, car sales, the Fed’s “Beige Book” of anecdotal reports from around the country, factory orders and the unemployment rate for May will be released.

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 managementfinancial and tax planningmanaged individual bond portfolios, and 401(k) advisory services. We’ve been helping individuals, trusts, institutions and foundations since 1994. Adviser Investments and its subsidiaries have over 5,000 clients across the country and over $8 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. 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, May 28, 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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