Executive Summary
- Small traders make noise in beaten-down stocks, while the overall stock market fluctuated in January
- A Democratic administration and Congress could mean significant changes to tax policy and even some opportunities
- Tax season is in full swing – potential changes to come and what to look out for during tax prep time
- The housing market keeps on moving higher as mortgage rates hover at all-time lows
- The stock and bond markets were mixed to kick off the year
What to make of Robinhood, WallStreetBets, and the swings in GME, AMC, BB, etc.
Wall Street made the nightly headlines last March when the major stock market indexes were in freefall. Corrections, bear markets, and even crashes happen when it comes to long-term investing. The good news is that by setting a plan and remaining disciplined, we can remain confident that those dips are nothing but blips and buying opportunities in the long run.
What’s a little different about the headlines this past month is how the wild swings mainly took place in severely beaten-down stocks (perhaps ‘left for dead’ is a better term). I’m reminded of the barnstorming of the US Capitol in early January as it pertains to how stocks like GameStop, AMC Theaters, and Blackberry moved over the last two weeks. An aggregate of small investors took those share prices through the roof, but there were huge drops, too. The financial media, always looking to stir the puddin, deemed it “David vs. Goliath”.
It is natural to feel a ‘fear of missing out’ (or FOMO) when you hear about friends and family trading these stocks and maybe even making money. There are plenty of folks losing money, too, believe me! The small investors wanted to gang-up on the big hedge funds who are notorious for driving down stock prices for their benefit.
So that’s the story. We shouldn’t care. But we do feel the natural FOMO. This will pass like all the novelties of the financial markets. Keeping a long-term perspective when it comes to investing and not getting caught in the fads is important. Your future self will thank you for ignoring the noise.
Tax season is upon us
Let’s focus on things we control. Let’s stay productive. Tax season is in full swing, and knowing the rules after a tumultuous 2020 can be a challenge. Let TFC help you with your situation. Congress enacted several one-off measures such as stimulus checks, extra unemployment benefits, and a small charitable contribution bonus from which everyone could benefit. Small business owners had their own set of relief measures that have tax impacts we should discuss. Schedule a time with TFC to ensure you have all of your ducks in a row.
Many individuals started their own business in 2020. It was a record year for small business applications. If you are one of the hundreds of thousands who started a side hustle or even a more formal small business, it’s a good idea to ensure you have all the documents squared away this filing season.
Small business applications surged in early 2020 (Goldman Sachs Research)
A new administration takes office
Keeping the theme of rules and regulations, the Biden administration took office last month and many are concerned about what lies in store for future tax rates. There is always chatter of changes to taxes on wages, capital gains & dividends, social security, and IRA distributions. We don’t have concrete new rates yet, but tax rates may likely increase on income above $400,000 while lower-income amounts and social security rates likely won’t change much.
There could be some tweaks to tax rates on capital gains and dividends, but likely only for very high income-earners.
President Biden might look to increase corporate taxes following former President Trump’s policy which reduced corporate tax rates. TaxFoundation.org[1] sees the corporate income tax reverting to 28%. The Tax Foundation also reports that Social Security payroll taxes could increase to 12.4% for wages above $400,000.
Families with lower incomes could benefit from a new tax plan concerning a temporary increase in the Child Tax Credit and Dependent Credit. New home buyers could benefit from a new first-time homebuyers’ credit if the President has his way, too.
We don’t know much for certain yet – even with a Democratically-controlled Congress and White House. We’ll be on the lookout for more clarity on future tax policy to ensure you are in good shape to minimize your tax burden and to take advantage of new credits.
President Biden’s potential tax changes (TaxFoundation.org)
The housing market continues to run
COVID-19 may have benefitted parts of the Michigan housing market, believe it or not. Folks in the big cities along the East Coast fled those urban areas and ventured to the Midwest. Zillow[2] reports that Michigan housing prices are up more than 9% from this time a year ago – good news for current homeowners and those looking to downsize.
The latest Case-Shiller Home Price Index shows that national home prices are up about the same around the country as in Michigan. Low mortgage rates also help the situation. Freddie Mac[3] reports the latest average rates weekly. You can see the figures and trends below.
Michigan home prices up big year-on-year (Zillow) while mortgage rates continue to be low (FreddieMac)
Market summary
Your goals are the most important thing. The stock market and economy will do what they do, and that’s important, but keeping a long-term focus should be the lens through which we see the markets.
Stock prices are up big from a year and up huge from March last year. While big tech and online consumer-related stocks grabbed the headlines during COVID, small-cap stocks and international equities have done well, too. That’s good news for long-term, diversified investors.
The S&P 500 fell 1% in January while US small-cap stock rose 5%. International equities posted a fractional gain. Interestingly, micro-cap stocks surged 14% perhaps on the heels of some of the crazy moves in the aforementioned ‘left for dead’ stocks. The bond market dropped by a hair while gold was down 3%.
The bond market remains stable as interest rates hover at low levels. The 10-year Treasury rate is the most widely followed fixed-income indicator out there. It has been creeping up in recent months as inflation expectations increase. Market participants anticipate that inflation rates will move higher in light of the heavy fiscal stimulus we continue to see pour into the economy and the pocketbooks of most Americans.
The economy and stock market are two very different things – 2020 certainly taught us that! 2021 looks to be a massive year for economic growth according to expert economists. GDP, adjusted for inflation, could rise by 6% this year, according to Bank of America/Merrill Lynch. It would be the highest annual rate of growth since 1984. Of course, we need to continue to vaccinate people so that the economy can re-open successfully.
2021 US GDP growth could be the highest since 1984
The Point
It was a crazy start to 2021. We were happy to rid ourselves of 2020, but this year has gotten off to a similar tone as last year. The early January US Capitol raid was disconcerting, to say the least, and stock market volatility later in the month may have caused some stress. The good news is that COVID-19 cases and hospitalizations are improving in the country and have greatly improved here in Michigan and the Midwest. It looks like we are turning a corner. We are optimists, and perhaps this summer could be the real start to a return to normal.
So let’s focus on the good stuff going on in our world. The financial media wants to promote drama and unrest, but it’s the job of you and me to ignore all of that noise and focus on things we can manage. Your long-term financial plan is the focus of TFC. Thank you for your business relationship and we look forward to more good things in 2021!
[1] https://taxfoundation.org/joe-biden-tax-plan-2020/ [2] https://www.zillow.com/mi/home-values/ [3] http://www.freddiemac.com/pmms/#