3Q 2021 In Review

Market Overview

Markets were up and then down again in the third quarter this year, resulting in nearly flat returns over the last three months for some sectors and modest losses for emerging markets and small cap US stocks. One year returns are still very strong coming out of late 2020, boosted by a very strong first half of this year. It is easy to get worked up about what is happening in the markets in the short run but rarely useful to make productive investment decisions based on any current news cycle. Markets have performed exceptionally well off of the lows from Spring 2020 but that does not change the efficacy of any of our crystal balls looking forward. We will take market returns when they come, rebalance as appropriate and stay focused on the long game as ever.

	3Q 2021	1 Year	3 Year	5 Year
Large Cap US Stocks	0.58%	30.00%	15.99%	16.90%
Small Cap US Stocks	-4.36%	47.25%	10.13%	13.02%
International Equity	-1.03%	22.96%	4.95%	6.04%
EM Equity	-8.09%	18.20%	8.58%	9.23%
Aggregate Bonds	0.05%	-0.90%	5.36%	2.94%

_{Index performance is provided as a benchmark. It is not illustrative of any particular investment. An investment cannot be made in an index. Past performance is not an indication of future of results. S&P 500, Russell 2000 Index, MSCI EAFE Index, MSCI EM Index, BBgBarc US Agg Bond Index. Returns as of 9/30/2021.}

Economic Update

The state of the global economy seems to be all over the news, especially as it relates to inflation, wages, employment and housing. Inflation rates did tick up materially in the second half of this year after what seems like decades of low rates. Annual change in CPI was 5.3% through August 2021.

Price increases have been widespread, affected by higher oil prices and increasing housing costs. Oil prices have rebounded from their post-pandemic lows to over $75 per barrel (Brent Crude, September 2021).

We are also very likely still in a period of pent-up demand due to supply shortages. As an example, vehicle sales have fallen as would-be buyers are simply unable to find new cars to buy. This has also driven up the prices of used cars in the US this year.

Home prices across the country have skyrocketed, as an understatement. The 20-city Case Shiller index gained 19.7% annually through July 2021. Home affordability remains reasonable as interest rates have stayed very low, but home prices have grown much faster than rents in many parts of the country.

Housing inventory has finally rebounded after hitting near-record bottoms during and after the pandemic. Sellers are finally motivated by surging prices and supply is coming back around.

Speaking of mortgage payments, US consumers are still spending a very small percentage of their overall income (and disposable income) on debt service payments, thanks to rising wages and low interest rates.

Mortgages in forbearance have been falling steadily as the economy works out of the pandemic and are now at much more normal levels.

The job market continues to improve and initial unemployment claims are falling steadily through the year. Unemployment now stands at 5.2%.

Job openings have jumped as labor demands continue to grow and employers struggle to fill open positions.

Wage growth has been slower to keep up with job openings and inflation, as is expected. This is a lagging indicator as employers are slow to raise wages until forced to by competitive economic circumstances, as we are just now beginning to see.

Tax & Policy Updates

After what seems like a full year of proposals, negotiating, grandstanding and bargaining in Washington, it seems likely that we will see new tax legislation passed before the end of the year. While everything is still up in the air, some consensus has solidified around the following ideas:

• The personal exemption for estate and gift taxes could fall from today’s $11.7M per person to roughly $6M per person. Estate and gift tax rates would remain unchanged, and this would take effect in 2022.
• It seems unlikely that the step up in cost basis granted at the date of death will be changed at this time.
• The top marginal income tax rate will return to 39.6% for single taxpayers with income over $400,000 and married taxpayers over $450,000. (This would also represent an increased “marriage penalty” for high income dual-earner households).
• A new top capital gains rate could move from 20% to 25% for married taxpayers with income over $500,000. There has been some discussion about making this change retroactive to 9/13/2021 in an effort to hold off a cascade of selling at the current, lower 20% rate. Of course, we can’t know just yet what the final legislation could say.
• The elimination of the “backdoor” Roth IRA conversion seems likely. Non-deductible contributions to IRAs or company retirement plans would no longer be eligible for Roth conversion.
• A new cap would also be in place for pre-tax Roth IRA conversions, and taxpayers with income over $450,000 (married) or $400,000 (single) would be ineligible for Roth conversions.

These changes do present some planning opportunities, especially for those individuals and families who may face an estate/gift tax burden under the reduced personal exemption. 2021 could prove to be a valuable year to make lifetime gifts to reduce one’s personal estate. Depending on income tax status, it could also be an opportunity to sell appreciated assets or accelerate income if faced with higher rates in 2022. Individuals and families should consider how these possible changes might impact their own financial plans, and consult closely with their financial professionals on any appropriate course of action.