Emotions Past and Future – Scary, Thankful, Hopeful
Jeff Gott, October, 15 2021
Hello, clients and friends, and happy fall to you. Our entire team at Integrity Wealth Advisors wishes you good health as we enter the final quarter of 2021.
The fourth quarter of the year is a time of much celebration. Each month has a unique holiday which a subset of the population would claim as their favorite of the year (however, keeping with the contention in our present day, I am sure others would question why one or more is still a holiday). Although we are reviewing the third quarter (Q3) in this communication, the newsletter’s sections are according to the emotions that come to mind with the upcoming festivities.
- Scary (Halloween)
- Thankful (Thanksgiving)
- Hopeful (Christmas/New Year’s Eve)
What is it about September?
While the first three quarters of 2021 were generally solid for the financial markets, September was a reality check. According to St. Louis Federal Reserve data measuring monthly S&P 500 performance, September has been the worst month for stocks over the past 50 years. This September followed historical precedent by being the worst month for stocks in 2021, handing the S&P 500 its worst monthly loss (-4.8%) since March 2020 when the Covid lockdowns began. Still, the quarter ended slightly positive (.6%) for the index.
Expectedly, GDP slowed down after Q2’s 6.7% annualized growth rate (U.S. BEA), but the slowdown has been more pronounced than expected. According to a 10/8/21 Wall Street Journal article, the Atlanta Fed’s GDP model for Q3 was downgraded from 6.1% in late July to 1.3% in early October. There are still approximately 5 million jobs that remain unfilled since Covid; 3 million workers have stopped looking.
Beyond severe labor shortages, supply chain problems are crimping profitability, limiting sales, raising prices and hampering economic growth. According to Brian Westbury of First Trust, the cost of the pandemic lockdowns is not just the $5 trillion in government borrowing from future generations, but the clear damage done to small business and supply chains. “A massive spike in consumer spending by people who weren’t producing is a recipe for unbalanced markets,” per Westbury. Bottlenecks and shortages of key raw materials are “not getting better” noted Fed Chief Jerome Powell in September.
China had a big impact on Emerging Markets as the government clamped down on multiple industries, seemingly a new one every week. Among these crackdowns in no particular order, China:
- derailed ride-hailing company Didi days after it went public in the US
- banned crypto-related services at financial institutions and payment companies
- limited the time kids can play video games and blocked tutoring companies from taking profits.
In late September, one of China’s largest real estate developers, Evergrande, neared default with debts of more than $300 billion. While the fallout is concerning to global markets, the US exposure to Evergrande’s debt is considered minimal. Continuing China’s impact on the world stage, tensions over Taiwan picked up, with China flying military warplanes near Taiwan airspace as Q4 began.
Nevertheless, we still have much to be thankful for. Despite supply-chain constraints and concerns over China, the overall picture of financial performance for the 3rd quarter and year was milder than many would have guessed.
Market Performance Recap
|Asset Class||Index||3rd Quarter 2021||Year-to-Date 2021||Last 12 Months||Three Years (Ann.)|
|US Stocks||Russell 3000||-0.1%||15.0%||31.9%||16.0%|
|Foreign Stocks – Developed World||MSCI EAFE||-0.4%||8.8%||25.7%||7.6%|
|Foreign Stocks – Emerging Markets||MSCI EM||-8.0%||-1.0%||18.2%||8.6%|
|US High Quality Bonds||Bloomberg US Agg. Bond||-.01%||-1.7%||-0.9%||5.4%|
|US High Yield Bonds||iBoxx Liquid High Yield||0.3%||3.0%||9.7%||6.0%|
Source: Y-Charts, FTSERussell.com, Eaton Vance, CapitalSpectator..com (All performance returns thru 9/30/21)
Inflation continued to be a headline discussion throughout the quarter, yet the 10-year Treasury rates remained below 1.50% (1.482%) as the Q3 came to an end. Home values in the US saw blistering appreciation continue in Q3, spurred in part by low interest rates. Q3 ended with US mortgage rates topping 3% for the first time since early July.
Politics is alive and well, and this isn’t even an election year. Washington continues to be at a standstill as Democrats try to push into law two large spending packages: a $1 Trillion infrastructure package that has some Republican support and a $3.5 Trillion dollar package that the Democrats are championing without any bipartisan support. The latter bill has progressive and moderate Democrats in a stand-off. Thankfully, a concurrent debate over the debt ceiling was temporarily averted in early October, though only delayed until December. We have seen this drama play out before and hopefully lawmakers will resolve to avoid sailing into uncharted water.
Q3 saw the U.S. 20-year involvement in Afghanistan come to an end. It is a hard topic. While the images of the withdrawal were tragic to experience and the geopolitical ramifications are unknown, simply put, investors determined the U.S. withdrawal will have a limited impact on U.S. economic growth over the near term. Recognizing that is a harsh way of viewing an unsettling situation, the fact is investors have a very narrow lens – focused on future economic growth, profits, Federal Reserve policy and interest rates. We can be thankful the loss of U.S. life in Afghanistan is over, hopefully for good.
Despite our challenges, the United States of America is still the greatest country in the world. Furthermore, some legislators are trying to get helpful things accomplished, despite the gridlock.
In late 2019, then-President Trump signed the SECURE (Setting Every Community Up for Retirement Enhancement) Act into law. Although the changes are recent, Congress is already considering what many are calling SECURE Act 2.0. While there is no guarantee of passage, the bill enjoys widespread bipartisan support, and both the Senate and the House have drafted similar details. A high-level overview of some of the bill’s provisions is in order.
- Easing the Required Minimum Distribution (RMD) bite, again – The SECURE Act raised the age for RMDs to 72. SECURE Act 2.0 would raise the RMD to age 73 beginning in 2022 and 75 in 2032. Although distributions can be taken as early as age 59½ if needed, it may be a good idea to defer withdrawals from a tax-deferred retirement account until required.
- A more favorable catch-up provision – If SECURE Act 2.0 is passed into law, employees age 50+ can make extra “catch-up” contributions to a 401K. The 401K catch-up limit in 2021 is $6,500 for those age 50+. As proposed, the annual catch-up provision would increase to $10,000 for those aged 60+. The new limit would begin in 2023.
- Student loan matching – SECURE Act 2.0 would permit employers to make matching contributions to their 401K plans tied to the employee’s student loan payments. The goal: enable younger employees to grow retirement savings while paying their student loans.
Secure Act 2.0 may pass as proposed, changes could be made, or the bill could run into unforeseen obstacles.
At the risk of discussing taxes in a section titled “Hopeful,” a few thoughts about the potential changes to the tax code. First, as currently proposed, most impacts will be limited to those individuals who earn more than $400,000 or couples earning over $450,000. One proposal being floated is to reduce the estate and gift tax exemption to one-half ($5 million per person) of what it was raised to in 2017. While we recognize that these proposals may ensnare many of our clients who are small business owners, many other readers will be spared as a result. Also hopeful, there are some major tax considerations not appearing in the drafted tax legislation. Lawmakers in the House have NOT proposed taxing unrealized capital gains at death, as had initially been proposed by President Biden. Also, the elimination of step-up in basis for inherited assets is NOT in the current House proposal.
Your financial plan, not tax laws, should ultimately drive investment decisions. At Integrity Wealth Advisors, we believe financial independence begins with a financial plan. Are you clear what you are aiming for or what legacy you desire to leave? We would be delighted to have a conversation about your financial plan, including how to navigate the potential impacts of tax law changes or SECURE Act 2.0.
Although not every Integrity client is a financial planning client, virtually every Integrity client is an Investment Management client, which brings us back to where we started. The September 2021 market pullback discussed earlier was a reminder that the capital markets are volatile. However, the 4.8% drop the S&P 500 index experienced last month is modest by market standards. In fact, the S&P index has yet to shed 10% since the bull market began in late March 2020, which would be considered a “correction” by analysts. We believe such a correction will occur again, we just don’t know when.
Nevertheless, even a pullback gives us a reason to be hopeful. Integrity Wealth Advisors are not market timers. Instead, we contend that bonds and cash should be part of a well-diversified portfolio for almost any investor. Using cash and appreciated bond proceeds to purchase stocks at discounted prices during pullbacks is something we do routinely. We are confident this practice will continue to be beneficial whenever the next correction occurs.
Thank you for taking the time to read through our thoughts on the topics above. The team at Integrity Wealth Advisors is fortunate to be part of a great company serving such excellent clients. For those of you who are not clients but are curious about who we are and what we do, please reach out. We would welcome a chance to engage with you.
Regardless of which holiday in this fourth quarter of 2021 is your favorite, we trust you will confront your fears, live thankfully and cling to the hope that sustains you. All of us are in this together!
Jeff Gott, Senior Wealth Advisor
Integrity Wealth Advisors