The first quarter was a continuation of late 2023, characterized by stronger-than-anticipated growth paired with tamer inflation and restrictive monetary policy.
Markets and risk assets welcomed this environment, evidenced by a strong start for equities and tighter credit spreads.
Rising rates, however, offset the decline in spreads, resulting in a moderate rise in yields that acted as a headwind for higher-quality fixed income.
The U.S. Manufacturing Purchasing Managers Index (PMI) returned to expansionary territory while the services (non- manufacturing) PMI remained above 50, both supportive indicators for growth.
The last mile of inflation fighting is proving to be the hardest to combat with stickier (housing, wages, auto insurance) and more volatile (commodities, food) elements contributing to higher for longer levels.
The labor market continues to be on solid footing with a sub-4% unemployment rate. Wage growth remains positive but the rate of change has fallen from peak, supporting lower inflation.
U.S. large-cap stocks again led markets higher, although market breadth shows some signs of broadening. The magnificent seven has turned into the fab four and ~40% of constituents have outperformed the index YTD.
The S&P 500 Index is historically concentrated with ~one-third contained within the top 10 holdings. Notably, top names have been disproportionate positive contributors to EPS growth.
International equity markets were positive but lagged U.S. counterparts. Although more compelling valuations offered some support, disappointing growth, and renewed USD strength weighed on relative results.
There was a modestly negative start to the year for investment grade fixed income as yields rose. Despite frustrating recent results, higher quality yields and duration are important elements to maintain in diversified portfolios.
Private real estate activity is thawing contributing to renewed price discovery. An uptick in activity could lead to volatility in the short run but bring back the potential for price appreciation, in addition to yield, in the future.
Private credit strategies maintain elevated yields reflective of higher base rates and still attractive spreads. Increased competition for loans paired with the potential for credit stress could serve as headwinds in 2024 and beyond.
Equity market valuations leave little room for error while fixed income valuations are more supportive. Paired with expectations for a benign economic environment, risk assets appear vulnerable to negative surprises.
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Initial 2021 Tax Considerations
With the swearing-in of a new President and Vice President, plus convening of the next Congress, affluent Americans are weighing how changes in federal government may financially impact them.
Given that Democrats hold the Presidency and control both Houses of Congress by a slim margin, it now seems likely that tax reform could be passed as a budget reconciliation bill and then signed into law. While there is a remote chance that expected tax changes will be retroactive, it is more probable that they would take effect immediately upon becoming law or even at the start of 2022.
Since 2021 may be a last opportunity to capitalize on current income, capital gains, and transfer tax laws, families are considering key financial & estate planning adjustments, where appropriate.
Income & Capital Gains Tax Proposals
With the swearing-in of a new President and Vice President, plus convening of the next Congress, affluent Americans are weighing how changes in federal government may financially impact them.
Given that Democrats hold the Presidency and control both Houses of Congress by a slim margin, it now seems likely that tax reform could be passed as a budget reconciliation bill and then signed into law. While there is a remote chance that expected tax changes will be retroactive, it is more probable that they would take effect immediately upon becoming law or even at the start of 2022.
Since 2021 may be a last opportunity to capitalize on current income, capital gains, and transfer tax laws, families are considering key financial & estate planning adjustments, where appropriate.
“Be fearful when others are greedy and greedy when others are fearful.”
Responsive Planning
Given the above proposals, there is great uncertainty surrounding future tax policy. Even if some of the more benign tax provisions now in effect are not repealed, many of them are scheduled to sunset at the end of 2025 already.
Phase out the 20% pass-through deduction on qualified business income for people with annual income exceeding $400,000
Eliminate capital gain deferral through like-kind exchanges of business & investment real estate for people whose yearly income exceeds $400,000
Increase the highest corporate income tax rate from 21% to 28% and subject corporate book income of $100,000,000 or more to a 15% alternative minimum tax
Double the tax rate on global intangible low tax income (GILTI) earned by foreign subsidiaries of American businesses from 10.5% to 21%
Impose a 10% surtax for U.S. companies that move manufacturing & service jobs to another country and then provide services or products for sale back to the American market
Create an advanceable 10% “Made in America” credit for manufacturers’ revitalizing, re-tooling and hiring costs
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