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[Ep #17] Market Update Podcast

[Ep #17] Market Update and the Coronavirus (Transcription)


Welcome, Happy New Year. We have a full, full agenda today. I hope you like our new system for signing up to listen to this. We have the highest number of people listening today. So, we’re very excited about that. We have a lot to cover, so let’s get with it. I’m going to go through the agenda. This is Laila Pence, by the way, if you don’t recognize my voice.

The agenda, we’re going to start out by doing a virus update and then I’m going to go into details about the potential of tax law changes, I know we’ve got a lot of questions on that. Then, Dryden, will do a 2021 market outlook, which again, we got lots of questions on. And I’ll talk about the upcoming stimulus package and we’ve gotten lots of questions, so we are going to answer one that we have not answered through the presentation and then we’ll cover some of the PW actions that were taken and then, of course, we end up with some client actions that we would recommend for you. So, with that, let’s get with it. Dryden, can you please give us an update on the virus and the different vaccines and what’s going on with this pandemic?


Certainly. Good afternoon, everybody. This is Dryden Pence. Today is January 21, 2021. This is episode 17 of our podcast that we’ve been doing. So, I wanted to update very quickly on the virus and then the vaccines and how all of those things are working.

What’s interesting is it’s been a lot of headline news about what’s going on with the virus, how it’s affecting everybody. We’re in what one would consider the 3rd or 4th wave here and there’s a very clear correlation between events and the virus data. Now, by the way, for those of you that get really excited about seeing charts and graphs. I’ll be doing a video next week and it will be released on Wednesday, the 27th most likely. So you will get sent a copy of it, but it will be a video where I give you the slides and things that support what I’m talking about.

If  we look at the united states and we look at cases that have gone on, we peaked again at about 256,000 cases a day. We’ve almost become a little numb to these huge numbers and we peaked at that right around earlier in the month and now we’ve fallen down to 194,000 cases a day. Again, this comes in waves, and here’s the way it works: we had thanksgiving— that created a big wave of cases, and then about two weeks later we had an increase in hospitalizations. Then you had Christmas and that creates a big wave of cases right? Then you, have a big increase in hospitalizations and that’s where we are and now we’ve had new years and so the hospitalization number follows after the peak then it kind of peaks in a relative way.

The important thing for us to realize is that nothing miraculously has changed about the virus itself. The virus is the virus is the virus. But, what we do, how we handle it, changes and when we forget to social distance, and we forget to wear our masks, guess what? Cases go up and then a couple of weeks later, hospitalizations go up, and hospitalizations peak at about 132,000 about a couple of weeks ago and now they’re at 122,000. But, that doesn’t show the peak that will probably roll up again post new years.

What does all this mean? It means that either you’re going to get the vaccine or you’re going to get the virus. One of the two. There’s not a lot of variants there. Here are the next big questions. If through the rest of this year you either get the vaccine or you get the virus.. do we have enough vaccines for everyone? The answer to that is, yes. You have Pfizer has about 200 million doses, which covers about 100 million people. Moderna has about 200 million doses which cover 100 million people. Then, now you have Johnson & Johnson that’s coming on with a much simpler version— one shot. That means, if you add all that up, we have 300 million doses of the vaccine available for a population of about 330 million people.

The bottom line here is between now and march April may, anybody who wants to take a vaccination for the virus will be able to. The challenge is no longer “do we have enough vaccine?” It’s the ability to execute on the delivery of the vaccine. That’s going a little slower than everybody wants it to.

We’re at about 1 million/day. That means it’s too darn slow. But, hopefully, that can get wrapped up. Here is what I need you to know most importantly about the virus. It is that we know so much more now than we did almost a year ago. Today, it’s very interesting that today is the 21st of January because it was exactly one year again when our research associate said “guess what…we need to be tracking this every day.” Since that time he has been tracking and researching this every day. That’s the value of this firm, we have in-house research. So we’ve been tracking this long before everybody else did.

So, the important issue is that we are one year into this. We know a lot more about it, we know who gets it and who has a mild case and we know who gets it and is heavily affected. So, if you’re over the age of 85, you have a high likelihood of mortality. Therefore, we have to make sure that all of us, and all of us who love someone over the age of 85, protect them most diligently. That’s important. If you look at the data, you’ll recognize out of these cases that we’re getting now, are people who are much younger and so younger people are getting it, testing positive, they have it, they move on. Older people are getting it actually at a less rate because they’re staying more protected and they’re managing the mortality. These are, any of this is tragic. But this is a less tragic scenario than before. The short answer on the virus. Summer didn’t kill it. It’s not going away.

It’s a binomial outcome: you’re either going to get the virus or get the vaccine. There’s enough vaccine. It’s a matter of time.

I want to give that back to Laila so she can talk about it, I’ve updated you on this. I’m going to come back and talk about how all of this mends to into the market here in a few minutes. I want to turn it back to Laila while all of this vaccine and all of this has been going on, there’s a whole lot of conversation about the new administration, and tax changes. Laila, can you talk to us about some of the potential tax changes that come. The virus has taxed our health, now let’s talk about the government taxing our wealth.


Okay, Dryden. The most important thing that everyone here needs to understand, there is something called budget reconciliation. Budget reconciliation means that basically, once a year, the president can pass a bill about taxes without needing 60 votes. This is exactly how Clinton passed his tax hikes in ’93, Bush passed his in 2001 and 2003. Obama passed the affordable act and Pres. Trump passed tax cuts in 2017. So, we are going to have some tax law changes.

We believe Biden will use the budget reconciliation method to pass some tax law changes. What I’m going to try to do is kind of go over the possible tax law changes, what he actually ran on, what’s possible that will actually pass based on our research, and a lot of data we’ve been looking at. One of the things that we’re pretty sure is going to pass is, the marginal tax rate will go up to 39.6 percent from 37%. That will be for incomes over $400,000. So, that is one of the most likely scenarios.

One likely scenario is some sort of capital gains tax increase. Not only capital gains but taxes on dividends. We do, in his plan, he had said that AGI, adjusted gross income, for an individual earning over a million dollars..that million dollars could be salary, wages, capital gains, dividends. If your adjusted gross income exceeds one million dollars, then in his original plan, he said it would be taxed as ordinary income which in this case means that it could go up from 20% to 39.6% over a million. We don’t think that will pass necessarily, we do think the most likely scenario is they might go ahead and have a higher capital gains rate from 20% to possibly 24-25% and that would probably start from incomes over $400,000. That’s kind of the indication right now, but this is something that we are going to have to live with.

We used to always have capital gains rate of 28% before Trump for many, many, years. So, even if it goes up to 25%, it will not be the end of the world. The reason we think it’s going to be 25% or so is, remember there’s Obamacare tax on top of that , which is 3.8, so for most people, that would be around 28%. All indications, all research was done that that would be the most likely scenario. Now, that limit may be over $400,000 or over 1 million— we don’t know for sure. But it is definitely if you are going to sell something, a business, or capital gains, we do think that because of COVID and because of unemployment, that most likely tax bill is not going to be taken on until later in the year and most likely it would not be effective until next year.

That’s the indication right now. So, we may have this year here to do some planning or at least, a lot of times, when the bill is released, they could make it effective on that day. We don’t think any bill will be introduced till later in the year, just because right now COVID is the number one on their minds.

The other major change we think will happen is the estate tax exemption. The estate tax exemption right now is at 11.8 million for 2021. In the plan, it said it would go down to 3.5 million. We don’t think it will go that low, indications right now maybe 5 to 6 million.

There’s also a provision in there that he wanted to not have a basis for assets. I think that would be worse than the estate tax exemption because of capital gains. Again, indications are that this is very, very hard to implement. And, there’s a lot of resistance in congress about not having some sort of step-up basis. So, most likely, we don’t think that will pass, but we do, the very high likelihood that the exemption will go down, maybe in half. If you know under Trump, it was due to expire anyway in 2026 back to 5 million and that may be a place where they might be. Another one, of course, is the corporate tax rate.

For years, corporate tax rates were at 35% and then Trump reduced them to 21%, right now, in the Biden plan that he ran on, it would go up to 28 percent. So, we think somewhere between 28 and 21 percent, the rate will be going up to, it’s still’s still substantially less than it used to be under Obama and it’s something that corporations certainly plan for and it would not, it’s not a huge tax increase versus what it is now, even if it goes to the full 28 percent.

One thing that we feel will not pass is the social security tax increase. He has planned to have social security taxes apply for salaries based on your total wages. So if you make 1 million dollars, you pay social security on total wages. We don’t think that is going to pass because that cannot be passed through the budget reconciliation. That will need 60 votes in the Senate to pass the social security tax increase, so we don’t think that will pass in this budget reconciliation.

We do think, on the positive side, at least for California that the soft tax deduction, the state income tax, and property tax is limited currently to $10,000. This is something that blue states have certainly lobbied for. We think it may go up to at least $20,000, maybe more depending on what are the changes he’s gonna do.

\There’s a high likelihood that $10,000 will go up to $20,000 which would be a welcome change if all this passes. The other thing back in the estate tax rate, they are talking about raising their rate from 40% to 45% and that would probably pass as they lower the exemption from 11.8 to 5 or 6 million. There’s a lot of other things in there, but this is pretty much what we think right now.

Obviously, we are gonna be reporting on that as we, every month as we do these podcasts. Any changes, we definitely keep track of and it does affect quite a bit of you out there listening. I will talk about some actions you may want to do in anticipation of high tax rates later on.

With that, I’m going to turn it back to Dryden because he’s going to tell us what is the market outlook for this year. What to expect with all those changes, especially under the Biden plan.


Thank you, Laila. There’s a couple of things to pay attention to. I talked about the virus and I talked about how that’s affecting things. It does affect the big movement in the market.

First of all, what is our outlook for 2021? Our outlook is positive. We think the market will have a pretty decent year. I want to talk to you about why and what matters and when. So, first of all, I talk to you about virus and cases. So what’s going on in the first half of the year? I can’t break this down into quarter by quarter like we normally do, I gotta break it down into the first half of the year and the second half of the year. In the first half of the year, we think it is a question of virus vs. stimulus.

Remember, last year we had the same battle. It was virus vs. stimulus and we had more stimulus than a virus and that’s how we got through last year. Then as we go to the end of this year, we ended up with more virus than stimulus. Well now, the first half of 2021, we’re now in a situation based on what’s going forward in congress. We will return to that area where we’ve got a lot of viruses.

We’re also going to have a lot of stimulus. So, you’re going to get this big dose of stimulus that’s going to help the economy move over and move through and get people through it with more targeted so you’re going to see this big roll of stimulus which is going to overcome or ameliorate the virus in the first half of the year.

So, the first half of the year the battle is virus vs stimulus and it looks like stimulus will be able to continue to come over that. As we get to the second half of the year, things will change. By the time we get to the second half of the year, a tremendous amount of our population will have either gotten the virus and recovered, so they have some immunity, or they got a vaccine so they have immunity.

We’re going to find a moment during the first half of the year where there are no excuses for these crazy lockdowns. The reason for the lockdowns will go away. The economy has been affected by the lockdown, by the political response to the virus. The virus kills a lot of people but it doesn’t stop the economy so, it’s the political response to the virus and the lockdowns that have been responsible for the slowdown of the economy. Once you have a lot of people have had it and vaccinated there is no reason for the lockdowns.

We think, by the time we get into the second half of the year, we’re going to be moving dramatically back to a different kind of normal. Life will be different, it’s not going to back exactly the way it was. But, we will adapt. If you go back and look at humans and our adaptive behavior, think of 9/11 and 9/11 everybody stopped flying.

But by about 2 years later, everybody got back to flying on airplanes We figured out that we would live through the discomfort of going through metal detectors. So, we’ll figure out how to negotiate the economy around masks and things like that. The other thing that’s very important to recognize when we think of the economy is that young people, 18-29, is 21% of everyone getting the virus. There’s a large group of people that are young getting the virus. It really doesn’t affect them that much. Its also the largest group of people that are unemployed in leisure and hospitality.

So as they get through this and they have it, they have short term immunity then they’re able to, so the leisure and hospitality segment of the economy, which is by far the disproportionate moment of the negative effect our economy, going to begin to go away.

So, we think, our general outlook is positive on the market, the general outlook is positive on the economy. The first half of the year we’re going to have some market volatility probably that’s going to be headline driven. We probably will see more stimulus than the virus that will carry us through like it did last year.

Then, as we get to the second half of the year, we’re going to have a fairly robust economic growth and most of the federal reserve growth rate GDP is expected to be 4.2 % and the unemployment is expected to run down to probably 4.2% as well in 2021, or 5% rather.

So, when you think about all of this, you have this huge pent-up demand generated by A very high savings rate that are two dynamics that are going to come into the back half of the year.

So from a market standpoint, we can see a little volatility in the front half of the year, from an economic, but a positive move forward through earnings from an economic standpoint. We have virus vs. stimulus in the first half of the year, and then it’s going to turn into basically the market and growth and stimulus vs. whatever happens in the tax code. In general, we see this pent up demand that’s coming there, a trillion dollars worth of excess savings in bank accounts now.

That whole group of people are going to be able to drive the economy through the 2nd half of the year. The government is the stimulus in the first half of the year. The people are the stimulus because of all the savings they have, in the second half of the year. it’s a generally positive outlook again, some volatility but nothing we’re not used to handling. Laila, back to you.


Very good. Dryden talked about the stimulus package. The stimulus is really, really important. One thing you need to know, although Biden is proposing 1.9 trillion, he plans to use normal legislation to pass this bill which means, he needs to have 60 votes, he’s not going to use the budget reconciliation that I talked about what he’s gonna do for taxes.

He’s not gonna get that many people, republicans voting on a lot of tax increases but he can get them to vote on the stimulus package. Because of that though, we don’t think the full 1.9 trillion will be passed, more like 1.1 trillion, which is still a lot of money in the economy.

The one thing that senators agree on is the fact that the $2,000 check, which is basically, they already gave the $600, we do think that they’ll be another $1,400 per person and that is huge just to give you an idea, a couple married with two children, they were getting $3,400. Under the new plan they will get $5,600..under the age of 6 an extra $600. A lot of money. A lot of checks going into people’s pockets. Even trump wanted that. We do think this is very important.

When most of our clients, when we get money, we save it or invest it. But, when middle America gets money, they go out and spend. That’s where the market will do quite well this year and people are asking “why is the market doing so well?” It’s because there’s gonna be a lot of spending— part of it is the stimulus package and there’s also the unemployment benefits are going to be $400 and that right now it’s expected to last under the current bill they passed in December until march but under the new plan it will last until September, which is what Dryden was saying, how the second half of the year, the actual spending. That’s a lot of money for unemployment that will bring dollars into the economy.

The one we don’t think will pass is the increase of wages to $15/hour because that is something they need 60 votes they can’t pass it through this and we don’t think that will be voted on in this bill that’s why we think it’s going to be more like $1.1 trillion versus 1.9. there’s definitely money in there for state and local taxes. They want 350 billion, it will probably be half of that and then there’s quite a bit of money for testing and vaccines and schools and we think some portion of that.

So, a lot of money going on. We think that will be very positive for the stock market. So, we’ve had a lot of questions in this new system we have which I hope you guys like our new system to sign up for these podcasts. Some big questions that are coming in, is bitcoin. What’s going on with bitcoin? So, Dryden please tell us what’s going on with Bitcoin?


So, first of all, we don’t use bitcoin in our portfolios and I don’t think we will be. Bitcoin is very speculative and while you can hear stories of people making tremendous amounts of money on it, it’s not the type of vehicle that we use at Pence Wealth Management in portfolios— for some important reasons. One, it’s very volatile, two it’s very speculative and three if you understand bitcoin at its core, it’s not so much a currency as it is a trading mechanism.

Because of that, it has a fundamental weakness, now that weakness hasn’t shown up yet because everybody is jumping into it, and is it a bubble? It possibly could be. But the important thing is bitcoin is not a currency. It really doesn’t have anything to back it up.

If you look at your USD, open it up and look it says “this is legal tender for all debts, public and private.” You don’t see that with bitcoin. There is not a law that requires you to accept bitcoin nor is there a law that requires someone else to accept bitcoin. What that means is you can have a large transaction and the counterparty could say” yeah we did this in bitcoin but I don’t like it anymore.” You really don’t have a good way of having regress.

So, in our currency, the final analysis is, in any country, your currency is only as good as your army, so I asked the fundamental question “how many armored divisions does bitcoin have? The answer to that is zero. So, I’m really concerned long term that while it’s a great trading mechanism, people who are thinking of it as a currency may find themselves disappointed, and that creates the volatility and the speculative nature and the fact that the governments are now saying this is widely used enough that we need to start regulating it.

If they start regulating it, a lot of the people that were using it, the attractiveness was that it was unregulated because you’ve got a lot of illicit transactions, they’re all going to go find the next thing that’s unregulated. We have to be careful you won’t be seeing bitcoin used in our portfolios for the purposes it’s just too speculative for the trust that you give us in managing your affairs.

We had a few more questions that I’m going to take on here because I know we’re running out of time. “Is there going to be RNDs this year because there wasn’t last year?” They are required this year and if you want to know how much is yours, certainly let us know. I do want to recommend if you give money to charity and you’re over 70.5, you should use some of your RND money for charity, which will help you tax-wise. There’s a question here, why did the stock market rise so much on inauguration day? That was something we were worried about. What sectors will grow under the Biden administration? We you want to cover that a little bit?


I’ll do it quickly. So I think when you look at the actions we’ve already taken in portfolios, infrastructure is a big thing, you’ve probably seen the builders go into portfolios if you didn’t already have it. Infrastructure is certainly a big thing and also as we begin to see sectors that have to do with consumer discretionary and consumer staples those tend to continue to recover in this sector and we do have the recovery portfolio as I’ve talked about things getting back, you’ll begin to see those activities occur and then you also have ESG and I think we’ll talk about that more next time but I think the big thing to know if you’re thinking what is a Biden portfolio look like? We have tended across the board to increase some of the infrastructure type holdings that one has.

We do think that is something that both parties want to get done and he will probably use the budget reconciliation to get that passed which only needs 50 votes we do think we might finally have some better roads and so forth.

So, some of the actions we think you as a client should be considering this year, gift your RNDS, I do think that if as we rebalance our portfolios, capital gains are going to be going up higher and so we will be taking more capital gains and if you’re selling a business you might want to do it the first half of the year, versus the second half of the year. Then, we also want, I think, believe it or not, we’re gonna have a pretty good market. Clients are saying “the market is so high already.” We were saying that all along last year as the market continues, we do have very good fundamentals right now, technology has been doing very well lately because earnings are coming in next week and they will be quite good as well.

Let me address this just a little bit. One of the things is you’ll hear a lot of people talk about high PE ratios, a high price to earnings ratios. So two things are going: when you have a very low-interest rate and it looks like the fed is going to keep interest rates low for a while and low inflation, then you typically have a higher price to earning ratios and those are sustainable. we’ve seen that in the past, we see that now, that’s part of what’s supporting this higher market. Now, what’s gonna happen is earnings are tending to come in better than expected. We watch the earnings very carefully, who would’ve thought, if we were in March of last year, that we’d be where we are today? Unemployment is coming down, even though there’s some sectoral issues so I think we’re seeing the solidity in the portfolios, and within the markets, so the big thing to pay attention to is although we have elevated PE ratios, those are supported by the low-interest rates and then the E of that earnings are being built through the stimulus throughout the year, that’s the math behind our outlook and again, I’ll be posting in a briefing around the 27th, slides that support those, things you can take a look at there.

So if you’re thinking about adding to your accounts or you have retirement contributions and so forth, get them in now, contact us about your portfolio. We’ve been doing amazing returns, so if you have friends and relatives that want to know about us, contact them and let us know. I do, there’s one change on the luncheon most likely we won’t be able to have it in April because it will be a little too soon for everyone to be vaccinated. So, we have moved our client luncheon to September 18th at the Westin. Please mark that in your calendar. We are offering it virtual and in-person. Our next podcast is on February 25th.

Let me come in to summarize real quick, our outlook is positive for the economy and the markets, it’s driven by a variety of things. The important thing to recognize is there are policy derivatives around this that make certain sectors attractive. If you’ve got additional funds laying around, it’s a way to put those things to work. We do that gingerly as we pay attention to it. Laila has covered the tax implications and how we need to move forward. But, in general, I want everyone to know we are here every day, we take a look at what’s happening in the markets, the economy, and policy and we navigate these things all the way through. Just as we did last year, we look forward to a good year this year. But one thing I want to say about the beginning of this year is I just want to make sure that everybody understands how much we appreciate the faith and trust that everybody put into us last year. Last year was tough for everybody, parts of this year are tough for everybody. We’ve all stuck through this together and we’re all coming out on the other side of it. I know it’s been an emotional rollercoaster. The biggest thing we want is to let you relax about your wealth. We’ve got our eye on it so you can move on to the other things you need to be doing in your life. Thank you very much for all your trust. Happy new year.

The opinions expressed are for general information purposes only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investments may be suitable for you, consult the appropriate qualified professional prior to making any decision.

All performance referenced is historical and is no guarantee of future results. All indices referenced, if any, are unmanaged and may not be invested into directly.

The opinions expressed in this material are those of Pence Capital Management and do not necessarily reflect the views of LPL Financial.

Third party comments made within this communication do not reflect the views of LPL Financial and have not been reviewed by LPL Financial as to accuracy or completeness.

Securities and Advisory Services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC. TD Ameritrade Network, Pence Capital Management and LPL Financial are separate entities.

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