Stephen A. Jordan, CFP ®

Christina J. Pitcher

2405 W. Cornerstone Ct.

Peoria, IL 61614

309.691.1616

www.cyrwoertz.com

Market Update
(all values as of 09.30.2021)

Stock Indices:

Dow Jones 33,843
S&P 500 4,307
Nasdaq 14,448

Bond Sector Yields:

2 Yr Treasury 0.28%
10 Yr Treasury 1.52%
10 Yr Municipal 1.13%
High Yield 4.21%

YTD Market Returns:

Dow Jones 10.58%
S&P 500 14.68%
Nasdaq 12.11%
MSCI-EAFE 6.23%
MSCI-Europe 7.97%
MSCI-Pacific 3.32%
MSCI-Emg Mkt -2.96%
 
US Agg Bond -1.55%
US Corp Bond -1.27%
US Gov’t Bond -1.93%

Commodity Prices:

Gold 1,756
Silver 22.15
Oil (WTI) 75.19

Currencies:

Dollar / Euro 1.16
Dollar / Pound 1.34
Yen / Dollar 111.65
Dollar / Canadian 0.78

Over the last 18 months the U.S. has conducted unprecedented fiscal stimulus which has been a tremendous support for economic recovery. When asked, “how do we pay for this”, The Biden administration has answered with a proposal for raising taxes on corporations and the wealthiest American families. In September, Democrats pushed through President Biden’s Build Back Better plan which proposed numerous tax increases that will impact individual households as well as corporations. This legislation would affect individual taxpayers’ income, capital gains and estate taxes, as well as eliminate numerous retirement planning strategies.

At the center of the new bill is a hike on individual tax rates for households earning more than $400,000. The top tax rate would be restored to its pre-2017 rate of 39.6%, up from the current 37%, as well as an expansion of the 3.8% net investment income tax (NIIT) for some small business owners. These proposals would be effective starting in 2022 if passed.

The bill would also increase the top capital gains rate to 25%, up from the current 20%. This would be the highest capital gains rate the U.S. has experienced since the late 90’s. Unlike the proposed changes to individual ordinary tax rates, these new capital gain rates are proposed to be effective September 14, 2021, making year end capital gains potentially more expensive than gains captured in the beginning of 2021. Surprisingly, absent from the bill was the removal of the step up in basis for investments at death.

Several changes to the rules surrounding retirement accounts are also being proposed. The first significant change would be the elimination of the “Backdoor Roth IRA strategy”. Currently, for high earners that aren’t eligible to make a contribution to a Roth IRA, one could make a non-deductible contribution to a traditional IRA, then convert the amount to their Roth IRA. Once in the Roth IRA, the earnings are tax free for life. This loophole has long been debated and looks like it could be eliminated for 2022. The proposal also eliminates ongoing Roth conversions from 401(k) plans and traditional IRAs for high earning families, starting in 2032. Additionally, for high income individuals with IRA or 401(k) balances, required minimum distributions (RMDs) would be required regardless of age, unlike the current law which requires them starting at age 72. The bill also restricts the ability to contribute to some retirement vehicles for these high income, high asset households.

Lastly, we could experience a 50% or more reduction to the lifetime federal estate and gift tax exemption amounts from the current $11.7 million. This amount was doubled in the 2017 Tax Cuts and Jobs Act, the highest it has ever been. In addition, a number of proposed changes to certain types of Grantor Trusts and Family Limited Partnerships could diminish some estate planning strategies.

While these potential changes may require a financial planning pivot, it is worth noting that this bill is not finalized and negotiations are still happening. As history has shown, tax law is written in pencil and could change as administrations come and go.

 

Entering the fourth quarter, the economy continues to rebound despite some bumps along the way. The Delta variant has slowed the recovery, especially in travel and entertainment industries and supply chains remain logjammed. These pressures caused bouts of volatility in the stock market late in the third quarter, each time quickly reversing. It appears the summer Delta spike has slowed and consumer demand is picking up again, which should further strengthen the economy into 2022 as we potentially move to a mid-cycle economic environment.

The stock market experienced a 5% pullback in the third quarter, its first since October of last year. Stocks still look appealing despite higher-than-average valuations, especially when considering the alternatives. Relatively low interest rates may continue to support current stock market valuations and earning should be strong into 2022.

A Congressional standoff surrounding raising the debt limit has added to seasonal volatility as politicians debate the path forward. The debt limit has been raised 79 times since its creation in 1917, with 17 of these occurring over the past 20 years. The United States has never reached the point of defaulting, or being unable to pay its debts. In 2011, the U.S. approached default, but Congress raised the debt limit with the Budget Control Act of 2011. It is very unlikely that the politicians do not come together to avoid a default and resulting downgrade on U.S. debt.

LPL’s investment committee believes the economy is approaching mid cycle which on average generates higher than average stock market returns. The unique recession and recovery we experienced with Covid is uncharted territory for the economy and markets, and it is likely we could see pockets of volatility in the markets, especially those sectors that far outperformed in 2020. We have already experienced some of this in 2021 with many of the technology darlings of 2020 such as Zoom, Teladoc, Fastly experiencing drops of more than 50% in the last 12 months. If we are indeed approaching mid cycle, we may continue to see outperformance in value stocks compared to growth.

With such little volatility in stocks over the last year, it is critical to remember what “normal” is. Since 1980, the average annual market drop is over 14%, with larger bear markets occurring every 5 years or so. Stock market corrections are an uncomfortable, but normal side effect of long-term investing success.

Please do not hesitate to reach out with questions!