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[Season 2 Ep.2] Market Update Podcast

Laila Pence: (00:00)

Good afternoon, everyone. This is Laila Pence. Welcome to season two, episode two of our podcast. We have a full agenda to cover today. We’re going to start by covering the economy and do a little virus update. Then I’m going to go into significant details about some of the tax law changes. Then we’re going to have a market update and talk about inflation interest rates, and then some tax deadlines, and then we have quite a few client questions. We’ll cover as much as we can with the time allotted. Then I’m going to do a little reminder about tax forms and R and D and some action items and investments. So I want to start by actually making the announcement about the virus; we just heard from Governor Newsom just two hours ago that on April 1, everyone who is age 50 and over will be eligible to get vaccinated, which is good news. Then on April 15, ages 16 and over will be able to get vaccinated. So things are moving quite quickly, and that is good news for the economy. So with that, I’m going to turn it over to Dryden to tell us a bit about the economy and a bit about the virus as well as where we go from here.

Dryden Pence: (01:20)

Thank you, Laila, and welcome to everybody. Today is Thursday, March 25, 2021. It’s about three o’clock in the afternoon. I want first to try to update you a bit about the economy and the virus. The two seem to be tied together. As we’ve talked about this before, it’s been a case of stimulus versus virus now for well over a year. We’re roughly one year from the market lows of the economic constriction that occurred and the shutdown as government policy and the shutdown of the economy and all those things that have happened. Now, the good news is, we’re beyond that. We are in a situation where we saw, at one point, a peak of 282,000 cases a day in the country.

Dryden Pence: (02:21)

Now we’re down to 53,000 cases a day. At one point, we had a peak of 3,500 deaths per day. Now we’re down to a little less than a thousand. The point is, when you think of the population as we move into the second half of the year, two big things will have occurred. A significant amount of the population will have gotten the virus and recovered or have gotten vaccinated and thus have antibodies. Those two things are fundamental drivers of our economy’s return back to a much different kind of normal, but certainly a more open kind of normal. When you add people’s capacity to get out and do what consumers do, which is consume, then the next question that you have as well, do they have any money? The answer to that is a resounding yes, they do.

Dryden Pence: (03:25)

There are a couple of reasons for this. First of all, the stimulus. There is a massive amount of stimulus. We’ve already put into the economy in waves of direct payments. If you think about it, the government has put in about $5.4 trillion worth of money into the system with the newest stimulus bill. That’s more than the inflation-adjusted cost of World War II. I’ll say that again: we put in more money and stimulus into the economy than the nominal amount of money that we used to spend for World War II. The important thing to recognize is that we’ve added 20 to 25% of our GDP at that point. Now, in World War II, that same number was roughly 50% of our GDP.

Dryden Pence: (04:20)

My point here is that a tremendous amount of stimulus is in the economy. You can throw $2 trillion at an economy, and something’s going to happen. So the first half of this year will get driven by government spending and stimulus, where the second half of the year will be driven by pent-up demand. People have saved more money than they ever have had before. Consumers will spend that, too. When you talk about GDP… again, we’re kind of in this silly season on numbers here because it was such a constriction one year ago. If you look at 2021 GDP, we’re looking at roughly a 6.5% GDP. Then in 2022, it’s 3.3, but both are very strong numbers in gross domestic product growth regardless of how they come. It is an underpinning for the fundamentals of the economy for the rest of this year and next year to be fairly good. We get the stimulus versus the virus. Medical professionals and the people of this country are defeating the virus, and the government and the citizenry are providing a tremendous stimulus. So, we’re positive about those things moving forward through the year. So, Laila, more about the stimulus package that just passed. Can you cover that? There are tax law changes there, and there are other essential items in the bill that don’t make all the headlines.

Laila Pence: (05:58)

I’m going to cover both the tax law changes that happened in December and cover the tax law changes in this most recent stimulus that just passed in March. Just as a reminder, that payroll protection debt forgiveness is now not taxable. So, you can take your expenses and deductions, and if you received any PPP, which given these taxes and expenses are deductible, that is a huge, huge thing. There is also an employee retention tax credit. If your business suffered from COVID, they’ve increased the tax rate to $7,000 per worker, up from $5,000. Also, the business meal deduction. This is a big thing for us. Now, businesses can deduct a hundred percent of business meals for 2021 and 2022. As many of you know, before that, the law said only 50%. They really want to encourage people to go out there and spend money on restaurants and hotels and meals.

Laila Pence: (07:14)

So, they are making it so any time you spend money on meals and going out, it is for a business. It will be a hundred percent deductible this year, as well as last year. In the American Rescue Plan, they did something very interesting if you received unemployment. If your AGI was $150,000 or less, you’re able to exclude from taxes $10,200. Let me say that again. So if, as the single taxpayer or joint taxpayers, you received unemployment benefits last year, when you file your taxes this year, $10,200 over your unemployment payments will be tax free. Whereas before, this was all taxable as ordinary income. That’s an enormous benefit. I think it’s going to help with the laws; before, medical expenses were only deductible when exceeding 10% of your adjusted gross income. The government just made it where medical expenses exceeding 7 1/2% of adjusted gross income are now going to get permanently deducted.

Laila Pence: (08:39)

This is a permanent change. This is not just a temporary change like before; they actually made it permanent. So from now on, any time you have medical expenses that include paying for long-term care premiums, if they exceed 7 1/2% of your adjusted gross income, they will be a charitable deduction above the line. If you take a standard deduction and you made a charitable deduction last year, that allowed you to do $300 per person or $600 per couple. They extended it so that you can deduct up to $600 this year above the line. That will also allow you for 2022 (even if you don’t itemize) that it will be available. Some of the biggest changes, however, are really for enhanced child tax credits.

Laila Pence: (09:31)

This is only for 2020. Before this law changes, you basically received $2,000 in credits for having children under the age of 18. Now, they changed it where, under the age of 18, it’s $3,000 credit. Also, if you make over $150,000, you can deduct for ages under 17. Before, we were 16, and now it’s up to 17. It’s a really good credit. My nephew has five children under the age of 18; he’s going to get a $3,600 credit for each of them. That’s a huge, huge credit. If you have these children now, they’re not going to wait for you to get it next year. You can actually apply for it now and get it this year. So talk to your CPA about that if any of your children or you are in this state.

Laila Pence: (10:36)

Just as a reminder: The stimulus checks that are going out are checks instead of credit cards, like what was in the $900 billion bill that passed last December. These are checks, and they changed the limitations a bit. So if you are a single taxpayer ($75,000) a joint taxpayer ($150,000), then you got your $1,400. It actually says that 89% of filers will actually receive this payment. So this $400 billion, it’s going to go into the economy, and people are getting their checks. We think that that is going to help the market improve here from where they are. So those are just some of the changes that just happened. Also, unemployment is $300 a week, and that goes all the way to September. That also happened with the March 2021 American Rescue Plan. I want to turn it back to Dryden because I know most of you really want to hear about what’s going on with the markets — what we expect with inflation interest rates, what is happening right now on the whole. We’ve had a pretty big correction in the NASDAQ, which is not unexpected, but it’s there. Dryden is going to go through really talking about why what’s happening right now.

Dryden Pence: (12:08)

Thank you, Laila. I’ll talk a little bit about market volatility and then kind of what’s caused it. First of all, on the market volatility, every year or so, we get more than one correction of around 10% in the NASDAQ. This pullback that we see right now is not unanticipated, nor is it unusual. It just kind of feels different when you had this very long run from a market bottom a year ago. Now the thing to know that is most important here is that we’re getting into a very interesting period of time. We had the most rapid decline in the market and the most rapid recovery last year. We went kind of from peak to trough, back to peak in about 126 days. That’s the most rapid it’s ever been in history.

Dryden Pence: (13:00)

Because of that, you’re going to see all sorts of crazy comparisons. You’re going to see all sorts of different things coming into the market. People are going to talk about volatility. They’re going to talk about relative performance and these kinds of things, but what’s important to recognize now is that we’re in this moment where you had growth really take off and do very well over the last year from a very bad place. Then you had this period of time where value began to rotate in, about March. The second, they kind of met in the middle. So we’re back to a more normal relationship. That means that these value stocks had to come up. Now we’re kind of in this place that you can see for the next quarter or two. I think we’re going to have some volatility, which will create some opportunities for us, but we’re going to kind of bounce around this higher level that we’re at.

Dryden Pence: (13:54)

This will give us opportunities because bargains will arise. But we’re also going to see, as we get into earnings season, what I call the quality of prices improve because earnings now will begin to validate the prices. So, earnings will be a strong underpinning to the prices that we’ve seen in the market. I think that this is kind of the dynamic in the market. That’s going on around some of the volatility. We have two or three big things to pay attention to. First of all, we will have opportunities globally because the U.S. is recovering faster than a few other places. You could look at the consumer behavior pattern that has had markets improve here in the United States.

Dryden Pence: (14:54)

You can kind of play a time machine. You can look at Europe, which is lagging, or other lagging areas, and we can look for the companies that did well here during the recovery and look for redo there. So we’ll be looking outside the United States a little bit, but here’s the important thing I want to talk about. The volatility that we’re seeing that people are really worried about was triggered by two things: inflation and expectations. As a result of those interest rate expectations, we saw interest rates tick up kind of fast. That really made the bond market very volatile; people are not going to buy, and they get all worried about it. Then, all of a sudden, inflation. Here’s the thing: what we see here is a supply chain, constraint-driven inflation.

Dryden Pence: (15:41)

Here’s what I mean by that: supply chains globally are constrained. They’re trying to sort that out. You can see all the news items about things backed up at the port of the port of Los Angeles. You can look at the news today about the Suez Canal being blocked. When supply chains are constrained, things don’t go on sale. If you’ve tried to buy something lately, it’s back-ordered, and people can get full price for things. So when a constrained supply chain temporarily pushes prices up, it temporarily pushes inflation up. As a result of that, it temporarily pushes interest rates up. What’s being driven here is we’ve got pretty solid demand and good liquidity, but we have a constrained supply chain. As the supply chain opens back up, then this thing that has caused this blip in inflation and interest rates will kind of go away.

Dryden Pence: (16:40)

We think that this is a temporary type of situation, and it will begin to level out. I don’t think you’re going to see the Fed work to slow this down or stop it. The Fed wants inflation. They’ve been trying to get more than 2% inflation now for the last decade. So, I don’t think you’re going to see big re-cut calculations by the Fed anytime soon. What we’re going to see is supply chains normalize. You’re going to see prices begin to stabilize, and you’re going to see the interest rates and inflation expectations kind of come down from this little bubble that they’ve got. Just think about it in your daily life. If you’ve tried to buy something that was probably on back order, and you can’t find things on sale so much anymore. Because basically, the supply chains get constrained. So that’s what’s driving this, and I think it’s more of a short-term thing. As we talk about moving into the latter half of the year, we’ll see this blip settled out, and we’re going to move to a general economy and market that becomes a bit more normal.

Dryden Pence: (18:03)

But get prepared over the next 90 days. News is going to be crazy. It’s going to be volatile. It’s going to be bouncing around. That’s going to give us some great opportunities. Like I always say, take advantage of volatility, and do not be a victim. So you’re going to see us put cash to work. You’re going to see us want to put cash to work. So if you’ve got some, there are going to be opportunities, and we’re going to see this, this 90-days, 120-day period of time as we move into the second half of the year.

Dryden Pence: (18:43)

Here’s the other thing to remember: If you bought stuff at the bottom of the market last year, you’ve gone up a lot, and we just hit the anniversary. That means that people who are trying to be very tax-efficient in how they want to minimize their long-term gains and liabilities, what they’re doing now is now that we’ve got a year in, people are selling. You’ve got some selling pressure on companies that have done really, really well. You see that in tech; you’ve got some selling pressure out there right now because now we’ve passed the one-year anniversary, and you’re going to see that for the next 90 days. You’re going to see that go on because people are trying to get long-term capital gains treatment. I’m going to let Laila continue to talk about this.

Laila Pence: (19:37)

Basically, Dryden, what you’re saying is that we expect this, and it is temporary. We need a key here in the absence of earnings. What drives values right now are interest rates, inflation expectations, profit-taking, and so forth. Once earnings season starts, and these companies really show earnings (which we think they come in very well), then these companies will begin to actually start trading more based on their earnings versus the volatility that we see right now. So, which brings me now to the next thing, which is the tax deadlines. If you haven’t heard already, the IRS has extended the filing timeline for last years to May 17. The state of California follows the federal and the IRS and also extended findings for 2020 to May 17. However, as of today, both the federal and the state have not changed the time where you have to make your first quarterly estimates, which is really strange.

Laila Pence: (20:55)

We expect that to possibly change, but if they have it, you need to be ready to make your first quarterly estimated tax payments on April 15 this year for 2021. Your taxes for last year, you have an extension to May 17. We think that the IRS will change that in the next few weeks and also make the estimated tax payments due May 17th, and consequently, the state of California will follow that. One thing that is also driving the economy is that President Biden wants to have an infrastructure bill. If he’s going to have an infrastructure bill, he has to pay for it tax-wise. So there’s a lot more talk about this bill, which right now seems will follow pretty much what he said he would do when he ran for president.

Laila Pence: (22:05)

What might pass is raising the capital gains rate to 39 1/2% from the current 20% for people who make a million dollars. That could be one reason why we have some tax selling this year for really high-income individuals. They may want to take capital gains before this happens. The other thing, too, is corporate rates possibly could go up from 21% to 28%. The market is expecting that; we feel that’s already in the market. Marginal tax brackets for individuals making over 400,000 could go up from 37% to 39 and a half. They asked Biden about that the other day, and he said, yeah, it basically says $400,000 threshold. It’s the same for joint and single taxpayers. So we’ll see if that is the case or what we don’t know yet.

Laila Pence: (23:03)

The biggest thing is that we do expect estate tax to go up. In fact, the estate tax exemption that is $11.7 million for individuals could go down to $5 million. If you want to do some estate planning, that is something that you want to be conscious of. Start thinking about planning that this year because we think as a sector now, most of these tax law changes will probably go into effect the next year, but they’ll start talking about it. Maybe it might go into the bill to get passed later in a year, but most likely, it will be for something effective in the year 2022. I’m just trying to get you all thinking about these things now, as opposed to later in when you’re doing your planning.

Laila Pence: (24:01)

So those are the main things that might happen. They may come back and have the salt deduction come back, but limited to 28% of your adjusted gross. Obviously, when things pass, I would read that tax bill from cover to cover. So now we do have some questions that we did receive from clients. This is interesting: if you did receive a stimulus check and your spouse passed away, actually, as long as the spouse was alive the year you received a service package, you get to keep it.

Laila Pence: (24:52)

You don’t have to send it back. With the stimulus package numbers I’ve talked about, what they based your eligibility on is the 2019 income. So if you made more in 2020, you might still get a stimulus check because you need to look back at your 2019 tax return actually to determine if you’re eligible. There’s a question here about the stock market. Does the stock market truly represent the economy when scandals like GameStop happen? Can you address that, Dryden?

Dryden Pence: (25:31)

I think the stock market and the economy are not the same things. When you look at the whole GameStop situation, it was a situation that was created by market anomalies. You had about 140% of it being sold short. You had these big hedge funds that had sold more of the stock than there actually was available. People saw that. They looked at the data, and they took advantage of it. That’s why you saw this movement in GameStop, but it is imperative to recognize that the S&P 500 Index and all the indexes you look at are summations of various companies. They’re not necessarily the economy overall, and you can’t equate that exactly the same. They’re not going to always get synchronized with the economy as it works in terms of consumer demand.

Dryden Pence: (26:35)

Each company is a bit separate. You need to be careful trying to think about both of them in conjunction. That part of our job is to sort that out for you between those two things. Then, when you think about interest rates, the Fed decides when to raise interest rates. They’re raising interest rates to affect consumer behavior. We saw before that consumer behavior now changes at much lower interest rates than before. You saw housing drop when interest rates got around four, four and a half percent. What I’m trying to say is that even as we see interest rates rise over time through a sped-up economy or even poor policy, the thing to know is that they will probably be still, over longer periods, at significantly lower interest rate levels. This is where we’re going to be bouncing around.

Laila Pence: (27:38)

Remember, the Federal Reserve controls short-term interest rates. We keep hearing about these long-term interest rates going up or these other rates going up, but you go to the bank, they’re not paying you a dime more because the Federal Reserve controls interest rates. Those are not going up anytime soon. It’s not expected actually to go up until 2023. The participants of the bond market control long-term interest rates, which have been peaking the markets lately. They’re anticipating inflation going up, and they’re not waiting for interest rates to go up. They’re raising interest rates on their own. Those longer-term rates are what affect the mortgages because they use a 10-year bond. That is controlled by the participants of the bond market and not the Federal Reserve.

Laila Pence: (28:28)

Lately, you can see that that’s been coming down a bit more, and this whole freaky thing that happened is just because interest rates went up too fast. If interest rates go up, it’s just, you don’t want to go up from a 0.5% 10-year bond to a 1.75. It’s just a short period that freaks the market out, this most recent thing. Just one last thing here. One other question: Are many people saving their stimulus money rather than spending it? Actually, according to the data, 80% of the people are spending it, and 10% are investing it, and 10% are saving it. That’s the stats that we have. Hopefully, that answers that question. I just want to end up with some announcements. We do have a new, fantastic advisor that I want to just introduce to you.

Laila Pence: (29:20)

We have Otto Rocky. He is now a new advisor that is working with our firm, and he comes with us with 20 years of experience in retirement planning and 401k. He was recently with Merrill Lynch. He has his degree from UC Berkeley. He managed and owned businesses in financial services and the hospitality field. He has a foundation in accounting, business ownership, and financial planning solutions, along with business protections and compensation strategies—just some of the fun stuff that he told me about. He ran the largest Oktoberfest west of the Mississippi for six years. So, if you have anyone you’d like to refer to Otto, he is here, and he’s capable, and we’re really excited to have him, and welcome aboard Otto. He’s been with us for the last couple of months, but now we can introduce him to you.

Dryden Pence: (30:41)

Real quick: first, I want to remind everybody that the client luncheon is going to be Saturday, September the 18th; make sure you mark your calendar. Our next podcast is going to be Thursday, April the 29. In the next day or two, you’ll see slides for the slide presentation that I do every month, along with the video. By the way, we have a grand announcement for Laila. It just came out in Forbes magazine: she’s number seven in women advisors through the entire nation. We want to congratulate Layla for that; I’m always lucky when I congratulate my wife. That’s an important thing. As we close this thing up, there’s a couple of big things to know.

Dryden Pence: (31:40)

We’re going to have volatility as the market sorts itself out. We’re going to have crazy headlines as we look at these massive relative positions, but we’re going to also, we think, see higher earnings, which are going to increase some price quality that we have. Stimulus is beating the virus. We see government stimulus first half of the year, stimulus from consumers in the second half of the year. We think that this inflation interest rate thing will kind of subside and come back to a more normalized basis. What we’re going to be doing in accounts, again, a bit more global, we’re going to be looking a bit more consumer-oriented. We’re going to continue to move forward and take advantage of the volatility when it occurs. Typically, when those things happen, we get some opportunity to find some bargains. Thank you so much, everybody, for tuning in; we hope this has helped you.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Historical performance is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

The economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful. All investing involves risk including loss of principal.

No strategy assures success or protects against loss. All company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services.

Dollar cost averaging involves continuous investment in securities regardless of fluctuation in price levels of such securities. An investor should consider their ability to continue purchasing through fluctuating price levels. Such a plan does not assure a profit and does not protect against loss in declining markets. Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA. Unit Investment Trusts (UITS) are a fixed portfolio of securities with a set term. Strategies are long term, therefore investors should consider their ability to pursue investing in successive trusts and the tax consequences.

Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.

Pence Wealth Management does not provide legal and/or tax advice or services.  Please consult your legal and/or tax advisor regarding your specific situation.

E. Dryden Pence III and Laila Marshall-Pence are Registered Principals with LPL Financial. Securities and Advisory Services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC. Financial planning offered through Pence Wealth Management, a Registered Investment Advisor.

Forbes/Shook Research, Pence Wealth Management and LPL Financial are separate entities.

The Forbes Ranking of America’s Top Women Wealth Advisors, developed by SHOOK Research, is based on an algorithm of qualitative criteria, mostly gained through telephone and in-person due diligence interviews, and quantitative data. Those advisors that are considered have a minimum of seven years’ experience, and the algorithm weights factors like revenue trends, assets under management, compliance records, industry experience and those that encompass best practices in their practices and approach to working with clients. Portfolio performance is not a criterion due to varying client objectives and lack of audited data. Neither Forbes nor SHOOK receives a fee in exchange for rankings.

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