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April 2021
Market Update
(all values as of 06.28.2024)

Stock Indices:

Dow Jones 39,118
S&P 500 5,460
Nasdaq 17,732

Bond Sector Yields:

2 Yr Treasury 4.71%
10 Yr Treasury 4.36%
10 Yr Municipal 2.86%
High Yield 7.58%

YTD Market Returns:

Dow Jones 3.79%
S&P 500 14.48%
Nasdaq 18.13%
MSCI-EAFE 3.51%
MSCI-Europe 3.72%
MSCI-Pacific 3.05%
MSCI-Emg Mkt 6.11%
 
US Agg Bond -0.71%
US Corp Bond -0.49%
US Gov’t Bond -0.68%

Commodity Prices:

Gold 2,336
Silver 29.43
Oil (WTI) 81.46

Currencies:

Dollar / Euro 1.06
Dollar / Pound 1.26
Yen / Dollar 160.56
Canadian /Dollar 0.73

Macro Overview

The prospect of resurgent inflation is a growing concern for global markets. Some economists project that current inflationary pressures may be transitory, while others contend that higher prices may be long-lasting and have a significant impact on global economic outlook.

A rising fiscal deficit, along with increasing levels of federal debt, are prompting the current administration to explore the most significant tax hikes since 1993. Tax increases are being discussed for corporations, businesses structured as pass-through entities, estate taxes, and capital gains.

Optimism regarding a third round of stimulus payments and rising vaccination rates fueled equity markets in March as a nascent economic revitalization took hold. Major equity indices ended the quarter positively as companies experienced a resurgence in consumer activity and sales.

The pandemic brought modifications to business models throughout numerous industries, many of which are passing along higher costs to consumers. Some of the higher cost trends are not necessarily being recognized by government inflation gauges and not accounted for in economic forecasts. The suggestion that inflationary pressures are only temporary is under intense scrutiny as a growing number of businesses are expected to make pricing changes permanent.

The IRS announced that it is extending the tax filing deadline to May 17th, allowing tax payers more time to assess the effects of COVID-related changes for individual and small business filers. With the IRS extending the deadline, nearly all states will likely follow suit and extend the tax deadline to May 17th as well, although most states are maintaining the due date of April 15th for estimated tax payments. In addition to stimulus payments, the $1.9 trillion bill passed in March, called the American Rescue Plan Act of 2021, will provide an exemption on taxes owed on unemployment benefits up to $10,200. The IRS communicated that automatic refunds would be issued to those who have already filed their 2020 taxes and paid taxes on unemployment received last year.

A $2.25 trillion infrastructure plan introduced by the administration is expected to focus on transportation, clean water, high-speed broadband, and manufacturing. An increase in corporate taxes is the primary source of funding for the proposed plan.

A rapid rise in mortgage rates since the beginning of the year led to a slowdown on refinances nationwide. The average 30-year fixed rate mortgage reached its highest level in over nine months at 3.17% as of March 25th, yet remains near historical lows relative to the 50-year average of 7.88% for a 30-year fixed mortgage.

Identified mutations of the COVID-19 virus raised concerns about the spread of a variant known to be more transmissible than the initial virus, prompting the CDC to caution the public about relaxing preventive measures.

Sources: IRS, Federal Reserve, CDC, Congress.gov

 
actual consumer expectations for inflation are above 3%

Markets Gain On Optimism – Equity Overview

Optimism regarding the growth benefits of fiscal and monetary stimulus efforts, in addition to vaccine distribution, drove equites higher in the first quarter. Major equity indices moved higher, with the energy, financial and industrial sectors leading the market.

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 concern among debt-heavy global companies as the costs to operate and borrow tend to increase along with inflation.

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 Producer Price Index (PPI), which measures wholesale production prices for companies, rose steadily for the past year. (Sources: BEA, Bloomberg, Federal Reserve)

Yields Continue To Move Higher – Fixed Income Update

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 occurred in conjunction with heightened inflationary pressures.

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

How The Government Gauges Inflation – Macro Economic Dynamics

The traditional gauge for inflation, known as the Consumer Price Index (CPI), is being challenged by another government-produced inflation gauge called Consumer Expectations. The most recent data released shows an inflation rate of 1.7%, as measured by the CPI compiled by the Bureau of Economic Analysis for February 2021. The Federal Reserve maintains its own inflation gauge, which is based on consumer expectations for future inflation. That inflation gauge indicated a rate of 3.09% at the end of February.

Many economists assess 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 does not account for food and energy prices, which were notably two of the most inflationary areas for consumers over the 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 that takes consumer expectations into account. Expectations vary among age groups, as seniors are concerned about medical care and transportation, while younger adults often tend to focus on prices for housing and apparel.

Sources: BEA, Federal Reserve

 
the 50-year average for a 30-year fixed mortgage loan is 7.88%

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

The following items are some of the major provisions included in the Federal Government’s most recent stimulus bill:

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 parents’ 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.

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)

Loan Qualification May Become Easier As Mortgage Rates Rise – Housing Market Review

Rising mortgage rates since the beginning of the year slowed the volume of mortgage applications. Should employment conditions improve, allowing more individuals and families to qualify for loans, the result could be a resurgence in refinances and purchases for those who didn’t qualify last year. In addition, some lenders are expected to relax standards as volume declines, easing the loan qualification process. Rates are still historically low relative to the 50-year average of 7.88% for 30-year fixed mortgage loans, providing an incentive for potential home buyers to lock in fixed rates now.

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

Although 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 spurred new construction in various parts of the country, creating demand for new home purchase loans.

Sources: Mortgage Bankers Association, Fannie Mae

 

 
The new $2.5 trillion infrastructure bill will likely be funded by tax increases

Where Anticipated Tax Hikes May Hit – Tax Planning

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

A concern noted by some policymakers is that individual tax payers who 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, which would affect around 95% of all businesses in the United States. (Sources: Taxpolicycenter.org)

Wealth as Invested by Asset Class – Demographics

The Federal Reserve recently provided a breakout of individual wealth, as measured by assets owned by individuals among all income brackets. Federal Reserve data show that the top 1% hold just over 11% of their wealth in real estate assets, while the bottom 50% hold over 50% of their wealth in real estate. Data also reveal that the top 1% have nearly half of their wealth invested in equity and mutual fund assets, while the bottom 1% only have 2.5% of their wealth invested in those assets. The gap in the accompanying chart between wealth invested and 100% of total wealth accounts for percentage of wealth held in consumer durables. Rising equity valuations over the past year significantly benefited those who invested in equity and fund assets and stayed invested through market volatility.

Returns on invested wealth can vary greatly between asset types and depending on the economic environment. For example, inflation has historically helped lift real estate values but has hindered stock and bond values when inflation was too high. Over the long term, the stock market has provided value by giving ordinary investors the opportunity to own a portion of profits from companies around the world. Investors should ensure that they invest enough to have sufficient investment exposure, in the context of a well-diversified and appropriately allocated portfolio, to meet their objectives. (Source: Federal Reserve)

*Market Returns: All data is indicative of total return which includes capital gain/loss and reinvested dividends for noted period. Index data sources; MSCI, DJ-UBSCI, WTI, IDC, S&P. The information provided is believed to be reliable, but its accuracy or completeness is not warranted. This material is not intended as an offer or solicitation for the purchase or sale of any stock, bond, mutual fund, or any other financial instrument. The views and strategies discussed herein may not be appropriate and/or suitable for all investors. This material is meant solely for informational purposes, and is not intended to suffice as any type of accounting, legal, tax, or estate planning advice. Any and all forecasts mentioned are for illustrative purposes only and should not be interpreted as investment recommendations.