October 1st, 2021
September lived up to its reputation of being a historically challenging month for markets. The S&P 500 slipped -4.80% for its worst monthly performance since March 2020. Despite the month’s performance, the index managed to eke out a small gain for the quarter. The monthly decline was driven by investors’ growing wariness over a laundry list of concerns heading into the final quarter of 2021. Rising rates, inflation, supply chain constraints, the Chinese property market, and Congressional gridlock have all weighted down investor optimism. This week, rising rates took center stage as the yield on the 10-year treasury surged above 1.50%. That’s a remarkable jump considering the yield on the 10-year traded as low as 1.13% as recently as August. The rise was driven by markets finally waking up to the fact the Federal Reserve remains on course to begin unwinding its stimulus measures later this year. The prospect for higher rates hit not only bonds, but also pricey growth stocks which have been on a tear throughout much of the year. Markets were also unsettled by gridlock on Capitol Hill as Congress narrowly avoided a government shutdown, passing a short-term funding bill on Thursday to provide funding through December 3rd. With rising rates and Congressional gridlock stealing headlines, not a lot of attention was paid to another round of healthy reports on personal income, spending, and manufacturing. By the time markets closed on Friday, the S&P 500 had shed -2.21% on the week.
Consumer Spending Rebounds as Personal Income Remains Flat
Consumers were back to opening up their wallets in August, pushing personal spending up 0.80% month-to-month. That more than offset July’s -0.10% slide when consumers pulled back on service-oriented activities following a rise in Covid delta variant cases. August consumer spending was fueled by increases in spending for food and beverages, household supplies, personal care and clothing services, and healthcare. The rise in spending comes despite a relatively flat month for wage gains as personal income rose 0.20% in August. The rise was aided in part by the federal government’s distribution of child tax credits. With little to show in wage gains, consumers were willing to tap their savings accounts to fuel their spending. The personal savings rate fell to 9.40% in August, down from the previous month’s 10.10% rate. Even though prices are rising, consumers remain confident enough to spend even if it means tapping their savings to do so.
Factory Floors Continue to Sweep Up
Manufacturers continued to defy supply chain constraints and labor shortages to sweep up another strong month of gains. The ISM Manufacturing Index rose to 61.1 in September from 59.90 the previous month. Numbers above 50 indicate expansion, while numbers below 50 indicate contraction. Readings above 60 signify exceptionally strong activity. Demand remained strong industrywide with 17 of 18 industries reporting growth. Manufacturers are having to navigate a number of supply chain constraints and labor shortages, but they report that their outlook remains strong. A backlog of orders, inventory restocking, and strong overseas demand should keep the sector growing into 2022.
Markets had cruised for the better part of the year, managing to rise 14.68% through Q3, but September did serve as a wake-up call to the numerous challenges ahead. A near-term crisis was averted this week with a last-minute deal being struck in Congress to avoid a government shutdown. Still, this only buys some time with the next deadline a mere two months away. Markets will continue to follow Capitol Hill closely with attention now turning to the October 18th debt ceiling deadline and the on-going debate over the two government spending packages. The real fundamental impact for markets comes from the Federal Reserve, who will soon begin tapering its bond purchases in Q4. Two more Fed meetings are on the calendar, November 2-3 and December 14-15, and one of those will likely contain the details on how exactly they plan to step back on their purchases. It remains to be seen just how comfortable markets will be with what they hear. Finally, Q3 2021 earnings season will begin in earnest in the coming weeks. The reports are still going to be strong, but the question is whether they are strong enough for investors. Furthermore, many companies were already citing rising costs during their previous conference calls. This has historically foretold margin compression and lower growth rates. Investors are already jittery over supply chain disruptions and inflation and as these factors now begin to impact company bottom lines, there is likely to be some nervousness ahead.
The Week Ahead
It will be a big week for economic data with September payrolls and ISM Services on deck.
In My Experience
We’ve previously announced that Probity’s founder, Buddy Ozanne, is celebrating his 50th work anniversary this year. In honor of this exciting milestone, we wanted to share some of the wisdom and insight that Buddy has accrued over the past five decades helping families achieve their financial goals. Below we are sharing one of Buddy’s personal experiences with a real-life planning scenario. Anyone who has spent time with Buddy knows that he is a keen storyteller and that he uses his gift of storytelling to illustrate various planning strategies and reinforce the importance of well-constructed estate plans. Our hope is that by sharing some of Buddy’s stories, others might be able to benefit from his insight when contemplating similar planning circumstances.
Written by Buddy Ozanne
One summer, I was asked to teach an adult continuing education course in estate planning at a small college in the Midwest. It was a great experience. Most of the attendees were past retirement age and had traveled to attend the two-week course. One day, one of my “students” walked into my office to request a review of his estate documents that had been drafted about a year prior by an attorney in his home city. Since my newfound friend and his wife had lived in a common law state on the west coast, meaning that any income and any real or personal property acquired by either spouse during a marriage belongs solely to that person unless the property is specifically put in the names of both spouses, the attorney had meticulously drafted separate trusts which elaborated upon how each marital partner’s separate property was to be distributed when each respective spouse died.
Looking at life expectancy rates for the U.S., in general, women outlive men. Thus, in most estate planning scenarios for couples, the planner (in this case the attorney) assumes for illustration purposes that the husband will be the first of the couple to pass away. That makes sense when you’re illustrating what will happen if the husband dies first, but it can lead to disaster if the documents are drafted under that assumption. Sure enough, after I had spent a few hours reading the wills and trusts, it was clear that each was prepared assuming that my student friend would die first. Living in a common law state, the husband in this case had a will, which left his estate in trust to provide for his wife’s lifestyle for the rest of her life, then passed on equally to their three adult children following her death. Her will, however, (assuming that her husband would be the first to go) left her entire estate directly to the three kids outright. Furthermore, in order to take advantage of the available estate tax exemption at the time, the attorney had also split their marital asset ownership equally. It so happened that division included ownership in a very successful business that the husband had founded decades prior.
In our follow up meeting, I pointed out that if his wife happened to die first, he would be in business with his three children who would own 50% of his company, and if one of their kids was recalcitrant, he could suffer a very uncomfortable future. His facial expression fell like an avalanche. He got choked up when he said, “My dear wife of more than 40 years died about six months ago. I thought that I had read these documents the way you have just explained them. I was hoping against hope that you could shed a different light on how this works.”
Turns out, he and his late wife, indeed had one of their three children who seemed to be a challenge. The will that they had signed for his (now deceased) wife was defective. It left everything that she owned, including her 50% interest in his lucrative business, directly to the three children, shared equally. My new friend, in his grief, confusion, and concern had postponed beginning the estate settlement process, knowing that he was going to take my estate planning course.
After expressing my condolences, I suggested that the individual contact his attorney to review the provisions of his wife’s will and seek clarification on what would happen if his wife were to pass away first. I suggested that he ask this question prior to disclosing that his wife had already passed. This resulted in the attorney acknowledging that an error had been made in drafting the documents. The estate plan should have been structured to include a trust set up by the wife for the husband that mirrored the husband’s trust for his wife. The trust was to be available for the husband for his lifetime, and only after the husband passed away, would the assets pass on to their kids. The husband shared with the attorney that his wife had passed away, and the attorney agreed to settle the wife’s estate by treating the incorrectly drafted document as a ‘scrivener’s error’ and follow the language that was drafted for the husband’s will and trust.
The husband contacted me to share that the attorney acknowledged the mistake and resolved to fix it by attributing the mistake to a scrivener’s error. However, I asked him if he could see anything that may go wrong using that approach. The husband responded that he thought it could be possible that his son could find a lawyer that would challenge it, and he and his son or other adult children could wind up in a messy and expensive court fight. At my suggestion, the husband requested his attorney provide a letter of explanation which would put any future negative impact of the drafting mistake on the attorney’s errors and omissions insurance. A few weeks later, the husband called and said that the attorney did the honorable thing, taking responsibility for the mistake and agreeing to correct it by writing a three page “mea culpa” letter and calling a family meeting with my friend and his three adult kids. The attorney explained what their mother had intended and laid out a plan of action going forward. The son, about whom we had concerns, raised objections, but the father and his other two children rallied to lovingly answer those objections. This process not only avoided a disastrous financial outcome for the father, but helped avoid an even greater, divisive conflict and brought the family closer together.
Before you sign your estate planning documents, have your attorney take the time to explain the salient points of each document, and how those provisions will impact your and your heirs’ lives. Take notes and/or have one of your advisors create a diagram or flow chart that gives a pictorial of what the document(s) are intended to accomplish. This simple process will save a “Wait, what?!!??” moment when you least need it.