ECONOMIC OUTLOOK & MARKET UPDATE
Fed Announces it intends to keep interest rates near zero
In an attempt to continue supporting economic recovery, the Fed Reserve concluded at its Federal Reserve Open Markets Committee (FOMC) April 2021 policy meeting, which ended on April 28th, to keep its benchmark interest rate at zero to 0.25%. The Fed has indicated it is unlikely to change its monetary policy this year, and projects these low interest rate levels to remain through at least 2023.[1]
Biden Tax Legislation Proposals’ initial details have been announced
The recently released details of the Biden administration tax proposals encompass two primary legislative initiatives:.
American Families Plan[2] –
- Will look to raise approximately $1.5 trillion in taxes on higher-income individuals to fund $1.8 trillion worth of spending programs designed to benefit education and support middle and lower income groups, over a 10 year period.
- Tax incentives will look to expand the child tax credit, earned income tax credit, child and dependent care credit, as well as increase the insurance premium subsidies offered by the Affordable Care Act (ACA)
- Tax increases to individuals will primarily impact those that earn $400,000 to $1,000,000. Initial proposals include:
- Increase in the top individual tax bracket from 37% to 39.6%
- Capital Gains and Dividends taxed at the 39.6% rate for households earning over $1 million
- Unrealized Gains in excess of $1 million (or $2.5 million per couple) ineligible for tax free step up in basis at death, unless donated to charity.
- Elimination of Section 1031 tax deferred exchanges for gains in excess of $500,000
American Jobs Plan & Made in America Tax Plan[3]–
- Will impose approximately $2.3 trillion in taxes on corporations and multinational businesses over 15 years to fund infrastructure investments that will be implemented over 8 years.
- Infrastructure spending will include substantial investment in the following areas:
- Transportation
- Water, Electric and internet
- Various Facilities including affordable housing, commercial buildings, schools, colleges and childcare
- Increased support for workforce in essential home care as well as research & development
- Tax increases to corporations included in the proposals include:
- Increase the corporate tax rate from 21% to 28%
- Increase the Global Intangible Low-tax Income (GILTI)
- Eliminate the Foreign Derived Intangible Income deduction (FDII)
- Changes to the Foreign tax credit to be country-by-country determination
- Replacing the Base-Erosion Anti-Abuse Tax (BEAT) with the Stopping Harmful Inversions and Low-taxed Development (SHIELD) regime to eliminate deductions for payments made to related entities in low tax jurisdictions
Full details of the proposed tax legislation changes can be found at the resources cited below.
[1] https://www.federalreserve.gov/monetarypolicy/fomcpresconf20210428.htm
[2] https://www.whitehouse.gov/briefing-room/statements-releases/2021/04/28/fact-sheet-the-american-families-plan/
[3] https://www.whitehouse.gov/briefing-room/statements-releases/2021/03/31/fact-sheet-the-american-jobs-plan/
SMARTER WAY MONEY SCHOOL
Public Non-traded REITs
Real Estate Investment Trusts provide investors a way to get exposure to real estate investments in their portfolio in a passive and less capital intensive way. What you may not know is that in addition to the traditional publicly traded REITs, there are Public Non-Traded REITs (including “Net Asset Value” (NAV) REITs). These companies have the same registration and reporting requirements with the SEC that their publicly traded counterparts have, however they are not listed and actively traded on a public exchange. Because of this, these NAV REITs do bring into play additional liquidity risks compared to publicly traded REITs. Additionally, there are typically investment minimums which can range from $2,500 to $100,000. However, there are a number of benefits that the NAV REITs can offer to satisfy the needs of certain investors:
- Passive exposure to institutional grade, professionally managed real estate with less capital
- Less Volatility due to less active trading – share prices are not influenced by supply and demand trading volume
- Can be a useful investment tool to get non-market correlated returns
- Strong dividend distributions, as REITs must distribute a minimum of 90% of their taxable income to shareholders
- Dividend yields are on average substantially higher than dividend yields of equities or publicly traded REITs
- Tax efficiency as a result of depreciation and rental expenses as well as the Qualified Business Income Deduction (QBID) – meaning only a portion of the distributions are considered taxable dividends
Public non-traded REITs carry their own set of investment risks, such as liquidity concerns, impact of interest rates on REIT debt, and other Real Estate specific considerations, which you should carefully consider with your Advisor. For investors looking to supplement their portfolio with passive real estate exposure, tax efficient yield with upside appreciation potential, and non-market correlated returns with less volatility and fluctuation as compared to equities or publicly traded REITs, NAV REITs may be a useful satellite position to incorporate into investor asset allocation strategies.
SMARTER WAY TAKEAWAYS
- Short-term bond and U.S. Treasury Yields are likely to remain low and stable in the near and intermediate terms based on the Fed’s recent rate policy decision.
- Substantial changes in tax legislation for both businesses and individuals may be on the horizon. Proper tax planning and ensuring your investment portfolio is properly addressing and considering tax efficiency is of utmost importance.
- Inflation is on the rise, which could in turn begin to pull intermediate to long-term interest rates higher if inflation continues to rise. If inflation rises enough, we could see a shift in the Fed’s stance on short-term rate policy.
- As we shift into an environment with higher inflation, low short-term yields, as well as continued economic growth and recovery efforts, satellite positions and asset allocation into investment vehicles such as Public Non-traded REITs can provide enhanced yield and growth potential while shielding from volatility and price fluctuation
OUR MARKET SIGNALS
CIGNX (Economic Strength Indicator)
CIGNX is our indicator for determining the health of the United States economy and the chance of an upcoming recession. A recession is two consecutive quarters of negative GDP growth; thus, it is impossible to know with 100% certainty that we are in a recession until 6 months after it has started. CIGNX aims to circumvent this 6-month delay. CIGNX gives us a measure of the strength and trend of the U.S. economy on a scale of 0% to 100%. Anything above 50% is a positive trend; anything below is a negative trend. When the reading dips below 40%, a recession may be nearing and our models would be adjusted accordingly. It is used as an input for managing our Dynamic and 401(k) Allocations.
CIGNX is currently positive at the beginning of May, with a reading of 76.6%, an increase of 13% from last month’s revised reading.
Alpha/Omega (Equity Market Indicators)
Alpha and Omega are a pair of equity market trend indicator algorithms managed by our Team. Alpha is a short-term indicator that tends to be more active, while Omega indicates longer-term trends and is less active. We use these trend indicators to provide input for our Dividend Growth, Large, Mid and Small Cap models; as well as our Dynamic and 401(k) Allocations.
Both Alpha and Omega are positive, resulting in 100% exposure in our Dividend Growth, Large, Mid and Small Cap models.
Gamma (Equity Market Growth vs. Value Indicator) NEW INDICATOR
Gamma is our third equity market trend indicator algorithm managed by our Team and will be applied going forward. Gamma is a trend indicator that identifies key market metrics, which indicate the likelihood Growth versus Value sectors may outperform the other in the future. We use this trend indicator to provide input for our Large, Mid and Small Cap models.
Gamma currently indicates Value is more favorable, resulting in a heavier weighting in Value Equities in our Large, Mid and Small Cap models.
