Trever Christian and John Schwalbach, Partners
December 16, 2021
Recently, there has been an abundance of news circulating, which may be having an impact on financial markets and you. To reduce the number of email we send, we compiled a comprehensive update and will monitor these situations moving forward. Should there be any large financial planning or market impacts, we will provide you with updated communication. In the meantime, we hope everyone is enjoying this winter season as we wind down 2021. In January, we plan on sending an all-inclusive outlook of what the upcoming year holds from both a financial planning and markets perspective. Please see our notes on the following news and financial topics that could be impacting you. If you have questions or concerns please reach out, as we are always happy to talk things through and hear from you!
News regarding the Omicron variant started to emerge during the Thanksgiving holiday. While potential variants were not unexpected, we know this news was hard to process for many people who were hoping that the pandemic was in its final days. The variant has led to increased travel and other restrictions throughout the world. Fortunately, the impact on financial markets has been somewhat muted. While we saw an initial sell-off, markets have mostly recovered, and the impact has looked similar to that of the Delta variant. With both US and global economies now being well adapted to the impact that the Coronavirus has had, Omicron and other future variants should have outcomes that are continually less severe. Despite this belief, there is always the potential of change, especially as more news emerges. Being that there are still many unknows about the virus variant, we would expect the market to react in the volatile fashion that it has. We are continuing to monitor this.
Washington DC Legislation Updates
We sent out a brief email update titled, “Nine Moves to Consider Before Year-End” last Friday, December 10th that included updates on the Build Back Better Act. If the Build Back Better Act was passed before year end and negative tax implications resulted, we have listed 9 moves that you can take to mitigate these effects. Number 4 on the list, Tax Loss Harvesting, is something we already do for you and is covered in the latter half of this newsletter.
In these types of situations, we tend to advocate letting the process play out in order to see what the impact may be. Currently, the Senate will be reviewing the bill over the next couple weeks, with a result expected around the Christmas holiday. However, there could be more twists and turns before a potential finish line. Our plan is to send a comprehensive update of the impact to all our clients and communicate with individual clients that could be facing any time sensitive impacts.
Transitory Inflation Concerns
A couple weeks ago, Fed Chairman Jerome Powell told Congress that “We tend to use [the word transitory] to mean that it won’t leave a mark in the form of higher inflation. I think it’s a good time to retire that word and try to explain more clearly what we mean.” The statement signaled a shift in the mindset of the Fed that had previously indicated that the accelerating inflation, including a 6.8% rise in year-over year prices in November, would start to abate towards the end of 2021. Now, it appears that elevated inflation numbers may be with us at least through the first part of 2022. The hope is that inflation numbers will start to fade later in the year as supply chain bottlenecks are undone. However, given the news, there were many investors who sold a large portion of their equity positions and flocked to fixed income as a safe-haven. Consequently, these actions, as a well as other news, have led to some recent market volatility.
At Freedom Financial, we have been meeting with our Investment Consultant, Fiducient, and other parties throughout the year to continue analyzing the elevated inflation numbers and the impact on our portfolios. We will leave the predictions to others regarding how long elevated inflation will persist, as inflation is notoriously difficult to project and time. However, we have been subtly tweaking our portfolios to be able to react to elevated inflation. Examples of these subtle tweaks include the introduction of ‘real assets’, such as real estate and infrastructure, which tend to perform better during periods of higher inflation. This is due to their nature of correlating with the increased cost of living caused by inflationary factors. We will continue to study the macro environment closely, which includes potential Fed tapering or interest rate changes, to understand the potential impact on our portfolios and ensure our clients are optimally positioned to weather all environments.
Tax Loss Harvesting
One particular area of focus for us the rest of the year is tax-loss harvesting. A simplified explanation of tax-loss harvesting is that investors may be accruing gains in their taxable accounts (e.g. individual and joint — not retirement accounts) that may require them to pay taxes on when they realize gains (e.g. sell their positions). These gains are typically detailed on the tax forms sent out early in the following year. Tax-loss harvesting involves analyzing accounts for any losses on individual positions that may be realized to offset gains accrued throughout the year and reduce tax bills. In a market that has risen like the one we had this year, those opportunities are not as abundant as they are in some other years. Still, we will be systematically analyzing those opportunities on behalf of our clients in an attempt to reduce the amount of taxes due.
As always, we would love to hear from you if you have questions or concerns.