March 12, 2021
The tug of war between economic growth and rising rates continued this week, but ultimately the sheer volume of positive news was just too hard for markets to ignore. Tame inflation figures, rising consumer sentiment, an easing in jobless claims and a massive stimulus plan had bulls focused on the near-term lift in earnings more so than the longer term, potential impact on rates. In addition to the positive economic news, there were also technical factors at play in markets once the tech-heavy NASDAQ touched its correction level on Monday. After declining 10% from recent highs, dip buyers decided to jump back into the rally. While the 10-year treasury yield still managed to rise to 1.63% this week, the equity markets handled this in a more measured manner – seemingly convinced that the rate increase is a response by the bond market to real growth and not simply inflation expectations. Adding to the positive investor sentiment, Biden signed the $1.9 trillion coronavirus relief package on Thursday. This will allow $1,400 stimulus checks to hit bank accounts as soon as this weekend. This infusion is expected to stoke spending at a time when hiring is also accelerating, making a compelling argument for equities. In overseas news, the Eurozone surprised markets with industrial production numbers beating expectations. It was a strong week for markets with the S&P 500 index jumping 2.64% to a new all-time high of 3,943.34.
Consumer Inflation Remains Modest
Inflation has been a topic of debate for markets over the last several weeks, but the latest figures from the Labor Department show inflation still remains tame. For the 12 months ending in February, consumer prices rose 1.70%, well below the Fed’s 2.00% target rate of inflation. Inflation held steady even as gasoline prices rose 6.40% in February. This comes on the heels of a 7.40% increase in January. Gasoline prices have jumped this year on a resurgence of demand as people have begun moving more freely once again. On the supply side, OPEC and North American shale drillers have also supported prices as they have held back on boosting production after having cut last spring in response to the pandemic. The combination of greater demand and lower supply has resulted in an imbalance which should correct once producers feel confident that demand is sustainable. Excluding volatile food and energy prices, core prices were higher by a mere 1.30% from year ago levels. That is down slightly from January’s 1.40% yoy rise. The latest CPI reading helped soothe the market’s nerves over the recent rise in rates and dispelled inflationary concerns – at least in the very near term.
Rising Energy Prices Also Hit Producer Prices
Producer prices told a similar story to CPI this month, rising 2.80% yoy in February. Just like CPI, the jump was driven by higher energy prices, which rose 6.00% and accounted for more than two-thirds of the increase overall. Stripping out the volatile food, energy and trade services, producer prices were higher by a much more modest 1.20% from year ago levels. The increase in the headline figure can be assigned to transitory disruptions to the supply-chain and limited energy production, but there is plenty of capacity and the expectation is that supply will ramp up to meet demand soon to alleviate the pricing pressure.
The Eurozone Notches a Win as Industrial Production Beats Expectations
It’s been a tough year for the Eurozone as the bloc has struggled to contain Covid-19 while the rest of the world is on the mend. The region did manage to score a win this week, however, as industrial output rose 0.80% in January. That beat market expectations of a 0.20% rise. Even more positive was the fact that the gain was broad-based. Durable consumer goods led the gains, up 0.80%, while non-durable goods and energy and capital goods also rose, up 0.60% and 0.40%, respectively. The eurozone has suffered from a dearth of good economic news for a while now, so while this report was a welcomed sign, it doesn’t signal the all clear for Europe just yet.
The flurry of positive headlines simply overwhelmed naysayers this week. Short of waking up tomorrow and discovering that Covid had all just been a bad dream, it would be hard to script any better news than Biden announcing vaccines for all by May, declining infection rates, accelerating hiring and another $1.9 trillion being thrown on the fire. The spending from Washington may very well have no limits now that the debate will turn to an infrastructure bill, but in the very near term there does not appear to be any major events that could influence markets the way the anticipation over the Covid bill has. Given the amount of money we’re talking about and how the law is structured, the bill’s effect will have a long tail. Directionally, we all know that the more money people have, the more people will spend. What remains to be seen is just how much people will spend. According to a recent survey from Bank of America, 55% of respondents indicated they will simply sock they money away rather than spend it. The ratio of spending to savings will be critical in whether we see a strong boost in corporate earnings or whether the money simply sits in bank accounts and loaned out to inflate financial assets further. As the survey suggests, it will probably be a little of both but with checks set to drop this weekend, the fuel has been loaded into the economic rocket.
The Week Ahead
Fed Chairman Jerome Powell will once again seek to reassure markets that rates will remain low for an extended period of time as it holds its Federal Open Market Committee meeting. We’ll also see if consumers have turned to spending their stimulus checks with the release of February retail sales results. Lastly, we will check in on the manufacturing sector with the latest industrial production numbers.
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Wealth Transfer in the Current Environment
The Tax Cuts and Jobs Act (TCJA) created higher exemption levels for federal estate and gift taxes that will change in a few years, if not sooner. The TCJA raised the amount that individuals may gift and be exempt from gift or estate tax to $11.7 million. As long as your estate is valued at under the exemption amount, it will not pay any federal estate taxes, and the vast majority of estates do not owe any tax. However, the increased exemption is set to expire at the end of 2025. Depending on what Congress decides, it could be lowered to $5 million or down to $3.5 million. The IRS has communicated that there will be no “claw back” of amounts gifted prior to the higher exemption sunsetting. Given the current tax environment, individuals may wish to speak with their advisor about estate planning strategies and whether it makes sense to make gifts now since the ability to gift at these levels may not exist much longer. Below are some things to keep in mind as you contemplate your plans.
Review estate planning documents and strategies
Many people review their estate plan at a regular frequency. The general recommendation is at least every three to five years or when there is a significant life event or change in financial situation. Individuals should discuss their estate plan with their advisor to ensure it includes proper beneficiary designations on retirement accounts and insurance policies, wills, powers of attorney, health-care directives, and revocable trusts. Additionally, any existing trusts should be reviewed to determine if changes are needed.
Develop a strategy for low cost-basis assets
With a new administration in the White House, there has been discussion of the possibility of an end to the “step up” in basis. Typically, when an asset is inherited, it receives a step up in basis to the current market value at the time of death of the original owner, avoiding taxes on the appreciation of the asset from its original cost. The elimination of the step up in basis could be highly detrimental from a capital gains perspective for people inheriting property that has risen significantly in value. There are estate planning strategies that individuals and families with appreciated assets may wish to explore. Some vehicles for tax-efficient wealth transfer include utilizing trusts in an estate plan or establishing a Family Limited Partnership or Family Limited Liability Company. A qualified estate planning advisor can help you determine optimal strategies for your goals.
Plan for potential state estate taxes
While much attention is focused on the federal estate tax, there are a number of states that apply different tax rates or exemption amounts. A taxpayer may have net worth that is well below the federal exemption level, but that also may be above the exemption amount for his or her particular state. An advisor or attorney with expertise in specific state law can help implement estate planning strategies to mitigate state estate or inheritance taxes. Fortunately, for those of us who live in Texas, there is no state inheritance or estate tax; however, a resident of Texas who has property in another state needs to be aware of that states’ inheritance tax rules.
Estate planning in 2021
Proper estate planning is critical for families at all levels of wealth. It is not only about mitigating taxes; it is necessary for individuals to ensure an orderly transition of wealth to heirs or to charitable causes. It can also be used to avoid a costly and lengthy probate process. The current tax environment creates a bit more urgency for individuals with appreciating assets, those with a family business, and others with more complex or advanced planning requirements. Our advisors look forward to helping you and your loved ones implement tools and strategies to protect and preserve your wealth for current and future generations.