Overview
- Delta variant of COVID-19 impacted services activities during Q3 2021. As a result, economic production is expected to have slowed resulting in the extension of recovery to pre-pandemic levels into 2022 calendar year.
- Capital gains for taxable accounts are trending higher than average for 2021.
- Tax policy uncertainties and year-end planning.
As we enter the final stretch of 2021, we reflect on how quickly the year has advanced as well as the dynamic changes that are shaping our everyday lives. As many of us can attest, the blurring of time over the last couple of years is real. Frequent conversations include a comment similar to ‘I can’t remember if that was last year or the year before…’ As we have been discussing since the beginning of the pandemic, the economic recovery would likely not be a straight line. While the overall economic recovery has been robust, fueled by the stimulus from federal governments across the globe, constraints to both supply and demand of goods and services remain. With the wave of the Delta variant taking hold during the summer months, we have experienced a speed bump in the road to recovery to pre-pandemic economic levels. Financial markets have begun to show signs of uncertainty in the recent weeks with the month of September down nearly 5% for the US-based S&P 500 stock index, reversing the trend of 7 consecutive months of positive increases.
As we enter the third-quarter earnings period for corporations, economic growth projections and corporate earnings estimates have been gradually revised down in anticipation of a slowdown during the quarter. Positive COVID cases as a result of the Delta variant appear to be declining, with the economic expansion that was anticipated to reach pre-pandemic levels by the end of this year now expected to continue into 2022. The good news is the growth phase of the economy remains in tact and we continue to favor an overweight in stocks over bonds.
Year-to-date index performance through September 30, 2021:
| Asset Class | Index Name1 | YTD %2 |
|---|---|---|
| US Equity – Large Cap | S&P 500 | 15.9 |
| US Equity – Small/Mid Cap | Russell 2500 | 13.8 |
| International Equity – Large Cap | MSCI All Country World Ex-US | 5.9 |
| US Fixed Income | Bloomberg Barclays US Aggregate Bond | (1.6) |
| Alternatives – Real Estate | MSCI US REIT | 23.0 |
Throughout the year, we have given significant attention to managing the balance of stocks versus bonds along with individual position weights in accounts. Within a diversified portfolio, positions perform differently based on their risk and reward characteristics. For 2021, several individual securities have experienced above average performance relative to the overall stock market. Our investment team continually evaluates the prospect of each individual position and adjusts when necessary. Year-to-date, we have facilitated several trades which have resulted in capital gains for taxable investors.
While we aim to minimize the overall tax burden, realizing gains is part of the process in the active management of an account. 2021 has been an exceptional year in many ways and we wanted to provide notice that capital gains in taxable accounts has been higher than average in most accounts. The primary reason for elevated gains is the direct result of strong stock performance and proactively capturing gains during periods of growth. In many instances, the proceeds of sales have allowed for repositioning into areas of the financial markets that have greater long-term prospects or to reduce the overall level of risk within an account.
As we end the year, we have had several conversations with accountants and clients regarding the future of tax policy. While it remains uncertain, our general opinion is that tax rates will be higher in the future for both individuals and corporations. There is a meaningful probability that tax rates increase as soon as next year. In the event you are considering any significant personal decisions including relocation, career changes or charitable gifting, please contact your financial advisor as soon as possible to discuss possible options to consider before year-end. Wishing you a safe and healthy conclusion to the year.
Investments may fluctuate in value. Investing involves risk including the possible loss of principal. Past performance does not guarantee future results.
(1) Index returns are for illustrative purposes only and do not represent actual performance of any investment. Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index.
(2) Index returns provided through Envestnet Tamarac, underlying data providers: Thomson Reuters except for Russell 2500 which is provided by Russell.