Markets Shrug off Tax Hike Concerns

April 23, 2021

After a brief selloff on Thursday following news that the Biden administration will seek to nearly double the capital gains tax on the “wealthy”, stocks rebounded strongly on Friday on the belief that getting unanimous support from Democrats in the Senate to do so could be difficult. The move higher came as earnings for companies in the S&P 500 that having reported thus far have posted earnings 33.90% higher than a year ago. Material economic news was very light this week in advance of next week’s marquee events. New home sales hit a 15-year high, surging 20.70%, while existing home sales posted back-to-back monthly declines due to tight inventory. In overseas news, the Eurozone notched a much-needed win with their manufacturing sector posting a record level of activity in March while their services industry also showed nascent growth during the period. The volatility, both up and down, resulted in the S&P 500 finishing essentially flat by week’s end.  

Builders Rush to Build Homes as Homebuyer Demand Soars

It was another good month to be a homebuilder as demand for new homes rose 20.70% to a seasonally adjusted annual rate of 1.021 million in March. February sales were also revised up to 846,000 from the previously reported 775,000. The rise in sales was broad-based with the South leading the gains, up 40% to an annual rate of 694,000. The report did manage to provide some good news for new homebuyers as the median sales price of a home fell -4.40% to $330,800. Despite homebuilders rushing to meet demand, supply fell to 3.6 months in March. That was down from the previous month’s 4.4-month supply. Inventories for new homes are expected to remain tight as homebuyers rush to secure contracts due to limited supply in the existing homes market.

Tight Inventories Push Existing Home Sales Down for Second Straight Month

Existing homes are hard to come by these days, resulting in sales volumes declining -3.70% in March. That’s the slowest pace since August and the second straight monthly decline. The monthly decline masks the fact that sales are up 12.34% from a year ago and March’s 6.01 million annual unit equivalent is still higher than the 5.5 million averaged over the past five years. The primary factor is not demand related but a supply issue. In fact, demand is so hot that homes are selling on an average of just 18 days and the inventory of homes is extremely tight at 2.1 months. That’s far below the typical six to seven months of supply considered to be a healthy balance between supply and demand. Well-healed homebuyers seem to be faring best in the market, helping to push the median price of an existing home sold in March up 17.2% from the year ago period to $329,000. It is hard to tell when the mad rush in the housing market could end given that mortgage rates are low, the labor market continues to gather momentum, consumer confidence remains on a post-Covid high, household balance sheets are strong, and the equity markets are setting new highs daily. Given these factors, prices are likely to continuing rising and inventory is expected to remain tight.

Eurozone Scores a Much-Needed Win on Record Manufacturing High

Despite struggling to combat Covid-19 amid a slow vaccine rollout, the Eurozone scored a much-needed win with the IHS Markit eurozone composite purchasing managers index hitting a nine-month high of 53.7 in April. That was up from the previous month’s reading of 53.2. Numbers above 50 indicate expansion in the manufacturing sector, while numbers below 50 indicate contraction. Manufacturing PMI hit a record high of 63.3 on pent-up spending, restocking, investment in new machinery, and growing optimism. The pandemic-battered service industry also expanded in March, climbing to 50.3 from 49.6 in February. With the Covid vaccine rollout expected to gather steam in the region in the weeks ahead, the economy looks set to begin its long-awaited recovery.
It was set to be a ho-hum week had it not been for leaks that the Biden capital gains tax proposal was set to be released soon. The news spooked markets, but once the probable Senate votes were counted, the market settled on the perspective that any initial bill proposal is likely to be negotiated down in the same manner that the initial corporate tax proposal has been. By Friday, the focus returned to fundamentals, which by all accounts continue to impress. Jobless claims have reached pandemic lows and virtually all economic activity measures are running high. Growth in the economy also bodes well for growth stocks which investors have rotated back into in recent weeks and accounts for the S&P 500 continuing to hover near all-time highs. Next week’s FOMC meeting is the big news item, but with no hints of policy changes expected, it appears that cheap rates are here to stay for the time being, helping to keep the “Roaring 20’s” roaring on.       
The Week Ahead

It will be a big week for the markets as the Federal Reserve holds its FOMC meeting.  Personal income and spending figures are also on the calendar next week. In overseas news, China releases manufacturing and non-manufacturing numbers.

Changing Jobs? Here are Four Options to Consider

According to the Bureau of Labor Statistics (BLS), the average number of jobs that someone holds in a lifetime is 12.3. The data is based on a BLS survey of baby boomers released in 2019. The survey respondents were born in the years 1957 to 1964, and we would argue that the data would look dramatically different for subsequent generations with the average worker changing jobs much more frequently. The pandemic alone disrupted the U.S. workforce with unemployment climbing to 14.7% in April 2020 due mostly to furloughs and layoffs. In the months since, unemployment has declined to 6% as of March 2021. It still hasn’t returned to its pre-pandemic rate of 4.4%, but pandemic-induced joblessness aside, the days of workers spending their entire career with one company and then retiring with a gold watch and a pension are long gone.  
Many workers will collect 401(k) accounts along with new paychecks throughout their careers, and since workplace savings plans can represent a big piece of retirement savings, there are options that should be discussed with an advisor when changing jobs. Essentially, a worker may choose to (A) keep their 401(k) with their former employer, (B) roll the money over into an IRA, (C) roll over their 401(k) into a new employer’s plan, and (D) cash out.  If you choose to keep your 401(k) with your former employer — option A, confirm that your employer will allow it and be aware that withdrawal, loan, and plan options may be limited. Furthermore, if your former employer changes their plan, you could face some red tape trying to get access to your funds. If your account balance is less than $5,000, your old employer may require you to move the money and could cash you out if you don’t take action. 
Choosing option B and moving the money into an IRA may provide a wider range of investment choices. Individuals who are under the age of 59 ½ may be able to take penalty-free distributions from an IRA for a qualifying first-time home purchase or higher education expenses. Option C — rolling the money into a new employer’s plan — may make it easier to manage retirement savings by having only one account. Advisors recommend checking the investment options available with a new employer’s plan along with the cost and the new plan’s rules. Individuals who choose options B or C should request a direct rollover from their old account to their new IRA, 401(k), or 403(b). The term “rolling” is important because it is a non-taxable event sanctioned by the IRS. Having a check made out to or sent to you could be deemed taking possession of the funds in the eyes of the IRS, which could make it a taxable event. That would cause you to owe taxes on the funds plus a possible early withdrawal penalty, so it’s critical that the funds go directly to your new workplace savings plan and not to you personally. 
The last option — option D — should be a last resort. Advisors recommend avoiding cashing out unless you have a critical, immediate need for cash. If you withdraw before age 59 ½, the money will generally be subject to both federal and state taxes and a 10% early withdrawal penalty. If you must access the money and if your former employer allows partial withdrawals, you may want to consider withdrawing only what you need until you can find other sources of cash — or roll the account into an IRA where you could do a partial withdrawal.





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