May Market Commentary

Stocks continued to post strong gains in May, after one of the best monthly returns in April since 1987. While stocks have recovered nicely from the market selloff in March, the pain from the health care and economic crisis remains. In addition, as May closed, we now have major social unrest in the U.S., in part sparked by the death of an African American man in custody by Minneapolis police. This event has triggered the worst civil unrest in decades, with nationwide demonstrations and riots. While many of the cities impacted by unrest have been slowly reopening, protestors have flooded the streets, along with law enforcement and the National Guard, as they attempt to restore order. With the US economy slowly rebounding, recent social unrest may contribute to a delay in economic recovery, and an increase in COVID-19 infections, while small businesses in these cities are impacted by civil unrest.

One of the most common questions we hear from clients is “How can the market rally so dramatically when economic news is so bad?” As we see it, there are four primary reasons the stock market has continued to move higher. First and foremost, the Federal Reserve has unleashed powerful financial mechanisms to provide liquidity to the markets and the Treasury Department has issued checks to families and loans to businesses. This is an attempt to avoid a severe economic downturn. In other words, in economic terms, money supply has been increased dramatically and this is positive for financial markets. Second, in May, many businesses started to reopen or have developed plans to reopen, contributing to the positive sentiment on Wall Street. Third, the progress on a COVID-19 vaccine has provided hope that the cavalry is coming. There are more than 100 different programs under way to develop COVID-19 vaccines. While most of these will fail to deliver positive results, the unprecedented global effort is providing optimism for successful vaccine development. Lastly, the stock market typically looks ahead 6-9 months, as investors attempt to determine economic and corporate profit trends. Most economists believe April was the worst month for economic activity and job losses and that trends will improve from here. Despite today’s difficult news, these factors help to explain the major disconnect between Wall Street (stock market) and Main Street (broad economy).

A slow-healing economy and a massive increase in money supply may keep stock prices/valuations elevated for some time. However, keep in mind that volatility and corrections are normal market activity. Some of the triggering events may include, but are not limited to, the following: 1) A second wave of infections leading to a muted economic recovery; 2) Increasing tensions with China on the trade/political front; 3) Continued civil unrest; and 4) the beginning of a presidential election cycle. While today’s circumstances are different than past market uncertainties, we have seen markets climb a wall of worry in past recoveries and investors will need to do the same to prolong this rally.

Regardless of how this path moves forward, your team at 9258 Wealth Management is here to help you navigate this uncertainty and are happy to speak with you about your investment, tax, business and financial issues. We look forward to talking to you again!

Stay safe and healthy!

Tax Planning and Preparation

One of our key retirement planning strategies is to have different “buckets” of assets at retirement. These buckets include the typical pre-tax assets (401k, traditional or SEP IRAs), tax-free assets (Roth IRAs), and taxable assets (typical brokerage accounts that would generate capital gains/losses). Having these different types of assets allows for tax planning flexibility. Most retirees will have a substantial amount of pre-tax assets as they have been saving in employer-sponsored retirement plans, like 401Ks, for years.

The major concern with having too much of your retirement assets in pre-tax accounts is the inflexibility in tax planning during retirement. For example, if you decide to take that extra vacation or need a new roof for $10,000, you’ll likely need to withdraw $15,000 to net the cash flow needed after-tax for that extra expense. This simply drives your income higher which can result in a number of things like higher tax brackets, more Social Security being taxable, limitations on credits or deductions that have income phase outs, and higher Medicare premiums. If you had Roth assets, the additional $10,000 could be withdrawn tax-free. If you had taxable assets, you may likely have to withdraw less due to favorable capital gains tax rates vs. ordinary rates of IRA withdrawals.

Roth IRAs/401ks do not provide an upfront tax deduction with a contribution, but they grow tax-free and have completely tax-free withdrawals during retirement (typically age 59 ½). Additionally, Roth IRAs (not 401ks) do not have Required Minimum Distributions (RMDs). While there are income restrictions allowing contributions to Roth IRAs, there are no income limitations to contribute to Roth 401ks as long as your plan allows for such contributions.

Many clients will expect to be in a lower tax bracket come retirement. That may be the case, but many will not. A main reason is that we are in a historically low period of tax rates. The current tax rates are due to sunset on December 31, 2025 and revert to the pre-2018 tax rates. Consider, for example, that most of the current 24% tax bracket for married couples will revert to a 33% tax bracket, or even to a 35% tax bracket for singles if your spouse should pass away. Are you willing to bet that your tax bracket will be lower in the future? Our advice is to hedge that bet and create these different buckets of assets and provide yourself the flexibility needed for a tax-efficient retirement plan.