Assessing the trends in certain data sets helps portfolio managers grapple with the TINA problem and how to best rebalance portfolios for the long term.

This issue includes a seasonal cornucopia of tax-related news: a new tax guide, good news from Social Security, and thoughts on tax revenues and the “tax gap.”

As we wait for the financial world to react to events while unsure of what theme or themes will predominate economic thought in the future, there are some strategies and tactics to keep in mind during tricky times. A popular endowment model strategy is rebalancing a portfolio. As different sections of a por tfolio gain value quickly, or slowly, or even regress, the original, and hopefully optimal, asset allocation percentages change to something different. At various times, perhaps annually, the increased percentages are sold down to their original allocation and the funds raised are reinvested in the decreased percentage assets, thereby rebalancing. As a tactic to make some investors comfortable with the risk profile of their portfolios, this works. However, one author points out that he has “yet to see a study that shows it improves your returns,” and in fact it sometimes can mean “missing out on big returns.”[1] 

With the pandemic subsiding and economic growth reaccelerating, a Bloomberg survey of economists expects US real GDP to grow a robust 6.6% this year and 4.1% next. The economy (as measured by real GDP) is expected to have surpassed its pre-pandemic peak in the second quarter of 2021. The S&P 500 Index returned a strong 14.4% through the first half of the year to close at a record high. Pent-up demand and federal stimulus funds have meant that demand for goods and services has recovered much faster than supply. Businesses can’t hire workers fast enough and they’re struggling with supply chain bottlenecks. Strong economic conditions drove the Consumer Price Index (CPI) up 5.4% year-over-year in June, following up 5.0% y/y in May. While many economists had been expecting some inflation, these inflation statistics were higher than most of them, including many Fed officials, anticipated.[1] The CPI excluding food and energy was up 4.5% y/y in June, reaching its highest level since 1991.

We’ve heard from our portfolio managers that some clients are asking about tax planning in an unsettled regulatory environment. News reports of changes to US tax laws cover a wide range of proposals — too many and at too early a stage to meaningfully discuss planning and tactics.

Measuring the effects of increased oversight and regulation brings us to the fiduciary rule: always putting the client’s interest ahead of our own. Since this is part of the Investment Company Act of 1940, we at Woodstock have been complying with this rule for all of our registered investment company life. We plan to follow it in the future.

A number of the advantages of being at Woodstock often go overlooked. Under the Investment Company Act of 1940, your investment advisor owes you a fiduciary duty, which means putting your interest before his, hers, or the firm’s interests. Being invested in an individually managed account (“IMA”) at Woodstock means that you own the assets in your portfolio, unlike in a pooled investment vehicle where you are probably merely a creditor of the real owner.

Over the past year the American economy has confronted unprecedented challenges. We haven’t seen the likes of COVID-19 during our lifetimes, with a severe human toll of more than 559,000 deaths in the United States and 2.8 million globally,[1] and the financial impacts it has had on all of us. As the COVID-19 pandemic began to rage early last year, individual state-mandated shutdowns across the country brought the US economy to an abrupt halt and caused a short but deep economic recession. Notably, by early April 2020, about 300 million Americans in 43 states and Washington, D.C. — over 90% of the population — were under stay-at-home or shelter-in-place directives to help contain the spread of the virus.[2]

Understanding when news is good probably requires disregarding what’s called the “precautionary principle,” which is the rule that “strongly encourages caution among regulators working in any field with scientific uncertainty.”[1] Throwing caution to the wind, let’s look at the state of US household wealth and income inequality. The US Federal Reserve’s March 2021 quarterly release of household net worth data showed that “the value of Americans’ total assets minus their liabilities swelled to $122.9 trillion” at the end of 2020, up from $111.4 trillion at the end of 2019.[2] Further, when US Census Bureau data are adjusted to count all of the government’s transfer payments as “income” to recipients and when taxes paid are counted as “income lost” to taxpayers. then “income inequality” is lower than it was 50 years ago.[3] 

Part of sleeping well at night, if you are invested in the financial markets, is trying to control or set limits on those elements of the financial markets that you can control: expenses and ownership. Being invested through a separately managed account (SMA) allows the portfolio manager to essentially eliminate the fee from consideration by using the tools of asset allocation and tax loss selling that minimizes taxes from recognized capital gains, to allow almost 100% of the annual gain in a portfolio to remain in the portfolio.