August 2022

Technology is allowing an investment strategy that was previously available mostly to high-net-worth clients to now be mass marketed: A customized portfolio can be offered to every client. Compared to a passive portfolio invested in pooled investments products, “direct indexing” seeks to mimic an index by owning all, or a representative portion, of the stocks in the index, individually. The next step to “custom indexing” allows the broker and the client to pick and choose those stocks from the index to invest in and hold.[1] The new products introduce the concept of tax-loss selling and its benefits to a wider audience. Not too long ago, Wall Street had suggested tax law changes to Congress which would have curtailed tax loss selling generally. Hopefully, the new push to mass market custom indexing will prevent that from recurring.

The first half of 2022 was the worst first half for stocks since 1970 and the worst six months for bonds since 1980.[1] The S&P 500 Index returned -20.0% while the iShares US Core Aggregate Bond ETF returned ‑10.2 percent. The 10-year US Treasury finished June yielding 3.02%, double the 1.51% at which it began the year. Reversing much of the stock market’s strong performance in 2021 (+28.7%), stock price levels returned roughly back to where they were in March 2021. Stocks are trading at cheaper valuations now. Markets have been rocked not only by runaway inflation, but also by the Fed’s prescription to rein it in.

The purpose of our government-directed tax system and the intended and unintended consequences of tax law changes, along with the mechanics of the tax system itself and a particular tax-saving strategy are the focus of this issue’s Tax Update.

While large corporate or individual tax increases seem to be off the table at this time, it is worth reviewing the idea that tax rate decreases can actually increase government revenue and increase benefits to individuals even if the changes are made to other than their individual rates. A review of 2017’s tax reform effort, the 2017 Tax Cuts and Jobs Act which reduced the federal corporate tax rate to 21% from 35% and liberalized expensing of new equipment investing, shows that it actually delivered both average household real income gains and higher corporate tax revenue, both absolute and as a higher percentage of gross domestic product over the two-year period after passage.[1] The focus on domestic corporate business expansion enhanced worker bargaining power to provide a bigger increase in household real income in 2018 and 2019 than in the previous eight years of a weak recovery (from 2010 to 2017).