Markets Gained On Optimism – Equity Overview

Optimism deriving from continuing fiscal and monetary stimulus efforts in addition to vaccination progress, drove equites higher in the first quarter. Major equity indices moved higher with the energy, financial and industrial sectors leading in the first quarter.

International developed market indices were mostly positive for the first quarter, with emerging market indices primarily flat to negative amid growing debt concerns. Rising inflation is stoking some hesitation among debt heavy global companies as costs to operate and borrow increase.

As the cost of production materials has increased over the past few months, so has the concern as to how company earnings will be affected. The PPI Index, which measures wholesale production prices for companies has been rising steadily for the past year. (Sources: BEA, Bloomberg, Federal Reserve)

Yields Continue To Move Upward – Fixed Income Update

Rising rates in February affected mortgage and various consumer loans as the yield on the 10- year Treasury bond surpassed 1.5%, nearly three times the yield from its low of 0.52% in August 2020. The 10-year Treasury bond yield is closely followed by markets as a gauge for inflation and the possible presence of any economic expansion.

Yields rose across all fixed income sectors, with the 10-year Treasury yield reaching 1.74% as of March 31st, the highest level since January 2020. The onslaught of rising yields has been in conjunction with heightened inflationary pressures.

Some analysts and economists believe that interest rates will rise more slowly in response to inflation, allowing for gradually elevating bond yields. Higher bond yields have historically led to higher loan rates from mortgages to credit cards. (Sources: U.S. Treasury, Bloomberg)

How Government Inflation Gauges Differ – Macro Economic Dynamics

The traditional gauge for inflation, known as the Consumer Price Index (CPI), is being challenged by yet another government produced measure known as Consumer Expectations. The most recent data released shows an inflation rate of 1.7%, as noted by the CPI compiled by the Bureau of Economic Analysis for February 2021. The Federal Reserve maintains its own inflation gauge, yet is based on consumer expectations of where inflation is headed. That inflation gauge ended February at 3.09%.

Many economists believe the Fed’s inflation gauge to be a more accurate indicator of actual inflation since it is directly based on consumer expectations. The traditional CPI extracts food and energy, ironically two of the most inflationary areas for consumers this past year.

Some of the items included in the CPI basket are housing, clothing, transportation, medical care, and education. The challenge of the CPI is that it takes a look-back approach rather than a look-forward approach which takes consumer expectations into account. Expectations also vary among age groups, where seniors are more concerned about medical care and transportation, while younger adults worry about apparel and housing. (Sources: BEA, Federal Reserve)

Stimulus Bill Provisions For Individuals – American Rescue Plan Act of 2021

Economic Impact Payment (EIP) of $1400 per individual with an Adjusted Gross Income (AGI) of up to $75,000 based on 2019 tax returns or 2020 returns if already filed.

EIPs for qualifying dependents over 16 years of age based on parent’s income.

Up to $10,200 of unemployment compensation exempted from federal income taxes for tax year 2020 for taxpayers earning less than $150,000 AGI. Married couples can exclude up to $20,400 of unemployment benefits if both spouses received unemployment in 2020.

Federal unemployment benefit payments of $300 per week have been extended through September 6, 2021.

Child Tax Credit of $3000 per qualifying child under 18 years of age, subject to phaseout thresholds starting at $75,000 AGI for singles and $150,000 for married couples.

Recovery Rebate Credit available to taxpayers that didn’t receive a stimulus payment even though they were eligible. Eligibility for the tax credit is the same as eligibility for the stimulus payments.

Credits for Paid Sick & Family Leave provides eligible self-employed individuals with a credit equal to 100% of the qualified family leave equivalent amount. (Sources: IRS; IRS Coronavirus Tax Relief, Treasury.gov)

Loans May Be Easier To Qualify For As Mortgage Rates Rise – Housing Market Review

30 Year Fixed Mortgage Rate (April 1971 – March 2021)

Rising mortgage rates since the beginning of the year have slowed mortgage applications down. Should employment conditions improve allowing more to qualify for loans, then there could be a resurgence in refis and purchases for those that didn’t qualify last year. In addition, some lenders are expected to relax standards as volume declines, easing the loan qualification process. Optimistically, rates are still historically low relative to the 50-year average for 30-year fixed mortgage loans of 7.88%.

Fannie Mae is forecasting that mortgage companies are projected to originate 13% fewer home loans than last years’ record of $4.5 trillion in loans. Both refi and purchase volume are forecast to drop this year.

Even though rates have been rising, many homeowners may still benefit from a refinanced loan since rates are still well below their 50-year average. In addition, limited housing inventory has brought about demand for new construction in various parts of the country, creating new home purchase loans. New home construction, as measured by Housing Starts data tracked by the Federal Reserve, show that new home construction has started to rebound from the lows of the pandemic, ensuing in new home loans. (Sources: Mortgage Bankers Association, Fannie Mae)

Where Anticipated Tax Hikes May Hit – Tax Planning

While the three stimulus programs amount to over $4.5 trillion were mostly funded by government debt, the recently introduced $2.25 trillion infrastructure plan will be primarily funded by tax increases. Preliminary indications are that the anticipated tax hikes will target both corporations and high earning individuals. The tax increases may be the largest since 1993. The following are among the proposals currently being considered:

Raising the corporate tax rate to 28% from 21%;

Reducing tax preferences for pass-through entities, such as LLCs, S-Corps & Partnerships;

Tax increases for individuals earning more than $400,000;

Expanding estate taxes;

Higher capital gains tax rate for individuals earning $1 million or more.

The lingering concern is that individual tax payers that are small business owners may end up paying higher taxes even if their incomes are below $400,000. This could occur if the existing 20% pass-through tax deduction is eliminated or altered, essentially affecting about 95% of all businesses in the United States. (Sources: Taxpolicycenter.org)

What The Top 1% Really Owns – Demographics

Wealth, as measured by assets owned by individuals among all income brackets, surprisingly is not as perceived by most. Federal Reserve data show that the top 1% hold just over 11% in real estate related assets, while the bottom 50% hold over 50% in real estate. Data also reveal that the top 1% own nearly half of all equity and mutual fund assets, while the bottom 1% own only 2.5%.The vast disparity helps explain how the top 1% did so well during the pandemic, primarily due to rising equity valuations over the past year.

Fluctuations in asset values vary among asset types and the economic environment. Inflation has historically helped lift real estate values yet has hindered stock and bond values when too much was present. Income and wealth disparity has become a trending topic lately as the top 1% has garnered enormous gains during one of the most tumultuous periods in history.

As of the end of 2020, over $38.6 trillion of wealth was held by the top 1%, while the bottom 50% held just under $2.5 trillion in wealth. Federal Reserve data qualify the top 1% as those with a net worth valued above $11 million. (Sources: Federal Reserve)

Yields Approach An Inflection Point – Equity Overview

Despite a sell off in equity markets towards the end of February, equity indices managed to post a gain for the month, with energy and commodities leading.

A rapid rise in interest rates over the past few weeks elevated the yield on the 10-year U.S. Treasury bond to 1.60% in February, eclipsing the yield on the S&P 500 Index of 1.53%. When the yield on the 10-year Treasury surpasses that of the S&P 500 Index, it is known as an inflection point affecting further demand for stocks. (Sources: Treasury, Federal Reserve, Bloomberg)

Fed Continues To Stabilize Interest Rates By Buying Bonds – Fixed Income Overview 

The Federal Reserve signaled that it would continue its ambitious program of buying $120 billion of treasury and mortgage bonds each month. The bond buying is meant to provide economic stimulus and stabilize interest rates.

Bond analysts believe that the Fed is distorting bond yields and prices by its ambitious buying of Treausry and mortgage bonds in the markets. Some argue that bond yields as well as inflationary expectations may actually be higher without any of the Federal Reserve’s supportive purchase of bonds. This is why markets are carefully monitoring Fed comments regarding continued bond purchases.

Mortgage rates and consumer loan rates rose in February as the yield on the 10-year Treasury bond reached 1.6% in trading during February. The rapid rise in yields has also affected other sectors of the bond market including municipals, corporate and mortgage backed securities. (Sources: Federal Reserve, U.S. Treasury)

How Stimulus Payments Are Treated For Tax Purposes & What To Do If You Didn’t Get One – Tax Planning

With over 160 million stimulus payments sent with the first round of pandemic relief efforts, many in receipt of the payments are asking whether the payments are taxable or not. The IRS has clearly stated that stimulus payments, regardless of income or status, are not taxable.

For those that did not receive a stimulus payment in 2020 but believe that they were due one, a filing for the Recovery Rebate Credit can be done. In essence, anyone who didn’t get a check can request a tax credit for the amount owed. A tax credit is considered better than a tax deduction since a tax credit directly credits, or reduces, taxes owed. For example, if someone was due a $600 stimulus payment and never received it, then they can claim that $600 as a credit against any taxes owed. In order to calculate and determine eligibility for the credit, the IRS has created a Recovery Rebate Credit page available at https://www.irs.gov/newsroom/recovery-rebate-credit. (Source: IRS.gov)

Food Prices On The Rise – Consumer Inflation

The price of food, from oranges to eggs to meat, increased at an annual rate of 3.9% in 2020 according to the Bureau of Labor Statistics. Prices are projected to increase 2-3% in 2021 as forecasted by the U.S. Department of Agriculture. The 20-year historical average increase has been a 2.4% increase per year.

Of the various food items seeing higher prices, meat has been exhibiting the greatest increase. Causes behind the jump in meat prices have been packing plant disruptions due to the pandemic.

The pandemic has also upended global food supply chains with delayed transportation and a lack of workers that have fallen ill to COVID-19. Rising commodity prices such as corn and wheat have added to higher feed costs for cattle, chickens and hogs worldwide, three of the largest meat products. Severe weather in various continents has devastated feed crops and created shortages in addition to pandemic related challenges.
(Sources: UN Food & Agriculture Organization, U.S.D.A., BLS, U.S. department of Agriculture)

Where Has The Flu Gone This Season – Health Awareness

With the focus on COVID-19 and the daily updates surrounding the case count for the coronavirus, many have forgotten about the decades old flu, also known as the influenza virus. Surprisingly enough, the flu has nearly vanished this flu season, with reports of flu cases the lowest in decades. February saw one of the lowest case counts of flu cases ever, even though the Centers for Disease Control and Prevention (CDC) says that February has historically been the peak of almost all prior flu seasons.

Medical experts believe that measures put in place to fend off the coronavirus may have also fended off the flu virus. Mask wearing, social distancing, working from home, and virtual schooling have all helped prevent the spread of both COVID-19 and the flu. Flu cases have also been at record low levels globally, including in China, Europe, South Africa and Australia.

The CDC estimates that of the 190 million flu vaccines distributed this season, the infection rates are so low that it makes it very difficult to determine which flu strains are actually circulating and infecting people. Data for the 2020-2021 flu season haven’t been compiled yet by the CDC due to the lack of flu related cases.
(Source: Centers for Disease Control and Prevention)

Taxpayer Scam During Tax Time – Consumer Tax Awareness

The IRS has issued an alert regarding scam phone calls directly to taxpayers nationwide. The calls may be in person or via ‘robocalls’. Scammers claim that delinquent taxes are owed and that payment must be made or the taxpayer’s social security number will be suspended or canceled. The IRS advises that when in doubt, immediately hang up and ignore the call.

Taxpayers should not disclose any sensitive information to unknown callers, including social security numbers, bank accounts, age, birthdate or formal name. The IRS and its authorized private collection agencies will never:

-Call to demand immediate payment via debit card, gift card, or wire transfer, as the IRS does not use these collection methods;

-Ask for payments to be made to an entity other than the U.S. Treasury;

-Threaten to inform local police or law enforcement to have taxpayers arrested for not paying;

-Demand taxes paid with no opportunity to question or appeal the amount owed;

The IRS suggests that any scam related call be reported to the Treasury Inspector General and the Federal Trade Commission (FTC) including any caller id for the number that appeared. For information regarding any taxes owed as well as the authenticity of an unknown call, the IRS recommends you call them directly at 800.829.1040.
(Source: www.irs.gov/newsroom/tax-scams-consumer-alerts)

COLA Not Keeping Up With Medicare Premium Increases – Retirement Planning

Even before the onset of the COVID-19 pandemic, seniors were foregoing retirement until later as well as taking part-time jobs even after retiring. Living longer for millions of Americans has translated into a financial challenge resulting in dealing with the threat of dwindling assets during an extensive retirement.

The single greatest menace to retirees has historically been inflation. Over the past year, inflation expectations by consumers place inflation at nearly a 3% rate, nearing the 50-year average rate of 4%. With that in mind, housing, food, energy and healthcare expenses are all projected to gradually rise over the next few years. Since the majority of retirees live on a fixed income, the ability to keep ahead of inflation becomes more difficult as time goes on. So if the annual inflation rate is 3%, then the cost of living would essentially be 30% more over ten years.

At the center of controversy, which has been for decades, is Social Security. Even with COLA applied to Social Security payments, medical expenses not covered by Medicare are expected to rise more than the COLA increases as reported by the Senior Citizens League. The COLA increase for 2021 Social Security payments is 1.3%, while the increase in Medicare Part B premium for 2021 is 6%, a significant difference. (Sources: Social Security Administration, Senior Citizens League)