By Brendan Roath, EA, CFP® and Rod Roath, CPA, CFP®
Money Matters, Inc.
The economy never gives us exactly what we expected. This year was supposed to be a break-out year. Our sky high expectations included heavy travel and entertainment spending, robust consumer spending from stimulus checks, and millions spent to repair road and bridges. Instead, today's reality is reduced travel and entertainment due to the Delta variant, consumers used stimulus checks to reduce debt, and Congressional infrastructure legislation is still pending.
Stock and bond markets met 2021's hightened expectations – but only for the first 8 months. In September, economic and political obstacles set in and markets dropped. Obstacles to a strong finish for 2021 include Congressional gridlock, looming government shutdown and debt default, federal tax increases for corporations and high earners, Federal Reserve's discussions to end monetary stimulus, and a projected interest rate hike next year. Will stock and bond prices continue to drop in the 4th quarter? Based on today's reality, the remainder of 2021 looks gloomy. Is it any wonder that the S&P 500 Index lost 0.57% in the last 4 weeks? [Update: 4 week loss -4.65% as of 9/30/21]
The stock market performed exceedingly well this year through August. In fact, we became quite accustomed to spectacular returns. The S&P 500 Index 1st and 2nd quarter returns were 6.2% and 8.6%. With only 3 more trading days left, 3rd quarter estimated results of 4.7% will be near the historical average. Given today's reality, average results seem OK. [Update: final 3rd quarter return is 0.58%. Final results for Q3 is well below average, definitely not OK.]
Look for the stock market to be choppy for the next couple weeks of October. Assuming infrastructure legislation passes and the government escapes a shutdown, in late October the market will partially recover from recent declines. If either activity fails to materialize, further stock market declines and continued interest rate increases are likely.
To Do List for Fourth Quarter
For the remainder of 2021 and well before year-end, here are a few planning ideas. All the suggestions are general in nature and do not constitute professional tax advice. Implementation should be undertaken only after professional consultation and assistance. For tax clients, analysis is underway, and discussions are in process.
- Shorten fixed income durations in anticipation of Federal Reserve interest rate increases.
- Use stock market declines to add to equity positions, especially growth style.
- Enlist us to estimate 2021 income, deductions & tax payments.
- Harvesting capital gains to off-set capital losses or loss carryforwards.
- Max out contributions for Roth IRAs, 401(k)s, and health savings account.
- For higher income earners ($400,000 single, $450,000 MFJ), accelerate income into 2021 and defer deductions until 2022 because your taxes will likely go up next year.
- For other taxpayers, consider Roth conversion, deferring income and accelerating deductions.
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