Mid-Year Review and Outlook

July 12, 2021

THE GOOD – The economy and the world are opening back up.  Businesses and cities and states are re-opening.  Albeit, it is different in each state and city but overall, life is getting back to some normalcy.  The TSA is reporting pre-pandemic travel numbers in several airports.  If you’ve taken a flight in the last few weeks, you understand what I am talking about.  Also, thanks to generous stimulus, extended unemployment benefits and fear of spending, a lot of households are flush with cash. Personal savings rates are the highest they have been in decades.  Because of this, extra money creates demand for goods and services.  Due to high demand and low supply (due to manufactures shutdown) we are seeing some inflation spikes in areas like lumber/housing, gas, new and used cars and others.  Microchip shortages have created a domino effect in many supply chains.  However, thanks to Covid-19 and innovation, most companies have become more efficient and streamlined, thus better profits and better products available.  We expect 7% Real GDP growth, over 7 Million new jobs and corporate profits to rise 25-30% in the next 12 months.

THE BAD – We have already mentioned inflation which is hitting most goods and services right now.  Think of inflation and today’s economy in this way.  Assume the economy has $10 available and has 10 Apples.  Demand would indicate each apple would cost $1  Now, the government has given people more money to spend (stimulus, additional unemployment benefits) so now we have $13 for 10 available apples, thus each apple would be worth $1.30.  That’s an increase of 30% (Typical inflation of supply vs. demand).  However, due to production slowdowns and shutdowns, there only 5 apples available and we still have $13.  Now, demand for those apples increases the price to $2.60.  That is the inflation we are facing today.  The Fed says this is Transitory (temporary).  We don’t see it that way.  We don’t think prices will reverse or come down, but we do see production and availability improving.  Thus, we see higher prices, therefore longer term inflation.   Combined with proposed higher taxes next year, this could result in a weaker economy going forward.   We expect the Corporate Tax rate to increase from 20% to 25-28%.  Although it does not seem like much, it does put a strain on growth and attracting more companies to the US as well as keeping the good ones here.  This results in higher prices to the consumer, lower expansion and growth for expanding companies.  We also expect a change to see a change in the Capital Gains and Dividend Tax Rates on higher earners to go from 24% from 20%.  We also expect the Step-up basis to stay intact but the Estate Tax exemption to be reduced from $11M down to $6-7M/person.  Look for some compromise between parties, but we do not expect these tax increases until next year.

THE UGLY – Politics as usual.  It doesn’t seem like we will ever escape the “Political season” and theatrics.  Just when you finish one cycle, another one starts.  Mid-term elections for 2022 are already a topic of conversation as well as the 2024 General election.  That said, expect more mud-slinging and backstabbing.  It’s hard to decipher who is telling the truth (or just lying a little less).  The good news, history shows us that the markets are not overly concerned with who is in the White House.  Take the attached slide for example.  If you had $10,000 and invested only when there was a Republican President (Since 1949) you would have roughly $80,000.  For a Democrat only, you would have earned $280,000.  Now assume that same $10K was invested the entire time, you would have roughly $2.7M.  Luckily, as we have said many times, we don’t invest in politics and politicians.  We invest in entrepreneurs, good companies that make good products.  Technology, medical breakthroughs and ideas are not dependent on our government.  However, politics and regulation can hamper the growth and timeframe so we still pay attention and make adjustments accordingly.

What does all this mean?  It means we are in a good place, right now.  As we mentioned, we expect a BOOM in the next 12 months when it comes to growth and productivity.  High profits, more jobs and low interest rates will allow companies to improve.  What are we afraid of, too much government spending will increase our national debt to levels we have never seen.  Eventually, someone has to pay that back.  Thus, more talk about higher taxes, tax re-structuring and penalizing the companies that actually create jobs and create the products we use and need.  To some degree, it’s business as usual, but we will be keeping a close eye on inflation, taxes and regulation.

Now is the time for reflection of what you have and what you love.  Always be prepared for what is ahead.  Please contact us if you would like to review your current holdings or if you have had any life or career changes that we may not be aware of.  It’s never too late or too early to plan.  We are optimistic, albeit cautious. We have faith in the people that make this country run, the entrepreneurs, the inventors and the workers.

Feel free to contact us with any questions, thoughts and concerns.  We are in this together.

Jeff

Jeffrey A Rittner, CFP®
Certified Financial Planner™
Legacy Financial, LLC
(970)416-0088 – Office
(970)232-5823 – Cell
jrittner@cfiemail.com
www.legacyfinancialcolorado.com

125 South Howes St. | Ste. 910 | Fort Collins, Colorado 80521 | Office: 970.416.0088 | Fax 970.416.0087 | www.legacyfinancialcolorado.net

Jeffrey Rittner, CFP® is a Registered Representative / Advisory Associate offering securities and advisory services through Centaurus Financial, Inc. member FINRA/SIPC,

and an Investment Advisor Representative, Legacy Financial and Centaurus Financial, Inc. are not affiliated.