Client Newsletter 3Q21
Dear Ambassador Family,
A lot has changed since my last newsletter. Vaccine rollouts have allowed most businesses to resume life as normal. June and July brought scorching temperatures and inflation. Summer is only halfway done.
Let’s jump into an investment update, an economic bubble, and some talk about taxes.
Investment Update
Since our last newsletter, we have turned slightly more defensive. Risk management over chasing returns is the priority.
We have pared back somewhat investments with strong gains as well as those with higher risk and rotated your money into higher quality and liquidity names. We also maintain positions in strategies that can benefit from higher commodity inflation.
Positives that cause us not to go totally bearish:
- Persistence in low-interest rates
- Banks have money to lend, yet consumers are not borrowing (yet)
- Earnings fundamentals near term should be decent
What has us worried (and leaning slightly defensive):
- Inflation – market thinks it “transitory”, but more supply bottlenecks crop up
- Asset bubbles – fixed income, stocks, residential real estate,
- Supply bottlenecks – commodities (food, energy, copper), computer chips, shipping containers
- Investor sentiment – retail is bullish, but corporate insiders are selling stock
We do not know the exact timing of when the market might take a pause or even have a significant pullback. However, data and precedent suggest a possible correction might come in the second half of 2021. Regardless, we expect more volatility through the end of the year. Some of you might see more realized capital gains in 2021.
Regrettably, several of our clients have lost loved ones in the last year. Here is how we have helped them survive and thrive in this difficult season.
- We urge you not to make rushed decisions. Take a deep breath. Prioritize.
- Our past preparation with you to keep paperwork (especially beneficiaries) up-to-date can save you financial headaches.
- Our work with your other professionals (attorneys and/or CPAs) also frees you.
- We also simplify and adjust your accounts to reflect your new situation in life. Also, you have access to your money with minimal friction.
- We want you to focus on mourning and taking practical steps for the next chapter in your life.
- Maybe most importantly, we are here for you with whatever questions you might have – or if you simply need a friendly ear to listen.
“A Bubble Is in the Eye of the Beholder”
Speaking of bubbles, many people can sense one. But can you actually describe it?
Picture a business opportunity in the entertainment business that has been slammed by the pandemic. Something that had been under pressure even in the past because more people could simply watch movies at home or on their phone or tablet. Even with reopening, many people still hesitate to go to the movies for different reasons (including the high expense of tickets and food).
That business has financial challenges: debt to pay, a heavy expense base, struggling sales, rising cost of goods, and a higher cost of employment.
Now on top of it all, this business opportunity constantly asks for money from its stakeholders. If they fail to give them money, they find other people willing to give it to them. Plus, their existing stakeholders’ shares are diluted (in other words, their ownership is reduced/diluted). And the business continues to struggle.
Does this sound like an alluring investment?
This describes one of the most popular stocks in the market today! Retail investors have pushed it to become one of the best-performing stocks in 2021. Other examples exist in today’s environment as well.
Now, do you see why this is a bubble? It looks nice and shiny until it pops…
This is a small example of what we mean by the need for risk management. (You do not own this stock in accounts we manage.) However, some people get excited by what they hear in the popular press and want to own it.
2020 ended up being a strong year in the markets.
However, we cannot forget that the first 3 months were brutal, especially for those on the cusp of retirement all their eggs in one basket.
While the S&P 500 fell nearly -40% in less than 2 months last winter, some stocks did much worse.
Those of you in the airline, restaurant, or hospitality industry know what I mean. The Covid pandemic and lockdowns sparked major turmoil in these industries. And the stocks reflected it.
Now consider if you put most (or all?) of your investment in one of these stocks. Would you still have wanted to retire?
In some cases, people were forced to retire at the worst possible time because of corporate downsizing.
Our clients benefit from the diversification of many different investments. They have the prospect of planning for the future with more confidence because one bad investment won’t derail their retirement.
Update on Taxes
As previously mentioned in our last newsletter, taxes tend to be one of your biggest expenses. We pay a lot of attention to taxes (and how to manage around them). Here are some updates from last quarter:
- Federal – nothing concrete has passed in DC in 2021. However, indications suggest capital gains taxes might still be moving up. One definite change: temporary provisions related to the Covid lockdowns of 2020 (suspension of RMD’s, stimulus checks, bonus weekly unemployment) are gone or fading away.
- Return of RMDs – speaking of covid-related relief, RMDs are back. We will make sure all required distributions are taken before the end of the year.
- Child Tax Credits in 2021 – Taxpayers eligible for child tax credits might receive a boost in 2021. Expanded child tax credit from $2,000 to $3,000 for children between the ages of 6 and 17 (and $3,600 for children under age 6). You could receive part of the credit monthly in advance starting in July ($250 per month for children 6-17 and $300 for children under 6).The Child Tax Credit starts to be reduced for joint returns with AGI over $150,000 or $112,500 if filing as head of household.For more details, see https://www.irs.gov/credits-deductions/2021-child-tax-credit-and-advance-child-tax-credit-payments-topic-c-calculation-of-the-2021-child-tax-credit.
- State taxes – Washington has already passed a de facto capital gains tax on long-term capital gains over $250k (excluding real estate and retirement assets). Wage and salary earners will begin paying into a state-administered Long Term Care fund in 2022.
- Oregon has also seen a variety of new state and local tax increases for higher wage earners and businesses.
- Bucking the national trend, Arizona has passed an effective reduction on income taxes, including a flat 2.5% tax and wider tax exemptions and deductions.
We are carefully watching and analyzing the changing trends in the economy and market.
Stay posted and keep an eye out for updates from me. Enjoy the rest of your summer.
Sincerely,
Petr Burunov, CFP®
President / Wealth Strategist