The S&P 500 Index dipped briefly into correction territory in mid-March (defined as at least a 10% fall from a recent stock market peak, which it hit January 3rd) before rebounding to close out the first quarter down only -4.95% as of March 31st. The tech-heavy Nasdaq Composite Index was off -9.1% on a price-only return basis for the quarter, but technically has been in correction territory since mid-January, down -11.4% from the highs it hit November 19th. Likewise, bonds had a tough quarter, finishing in the red with long-term Treasurys down -10.2%. Energy and utilities were the only equity sectors with positive price returns, +37.7% and +3.9%, respectively. All of these markets were digesting news of the Russian invasion of Ukraine, high energy prices, surging inflation, and a Federal Reserve turned hawkish with forecast aggressive federal funds rate hikes and open market bond sales to shrink its balance sheet. The question everyone is asking: Can the Fed orchestrate a soft landing with so many variables to combat? Not likely.

The first phase of the current tax season has ended. The flurry of activity to make sure that tax returns for 2021 are filed or, at least that the tax due is paid with the request for an extension, is done.

The Internal Revenue Service estimates that 15 million taxpayers requested an extension of time to file their 2021 tax return. An extension of time to file is not an extension of time to pay. Taxpayers must estimate their tax liability and pay any amount due by the April due date to avoid penalties and interest.

Filing a tax extension to file a tax return does not increase your risk of being audited, according to both the IRS and various tax professionals. Historically, it has been proven that individuals who earn $200,000 or more a year have a 3% greater chance of being audited. According to IRS data, the IRS audited 1% of people earning less than $200,000 and 4% of those earning more than $200,000.

In thinking about what may happen financially and economically over the next several years, we realize that much depends on how countries and their citizens react to medical issues. For perspective, Marcel Proust wrote in 1913: “For, medicine being a compendium of the successive and contradictory mistakes of doctors, even when we call in the best of them the chances are that we may be staking our hopes on some medical theory that will be proved false in a few years. So that to believe in medicine would be utter madness, were it not still a greater madness not to believe in it, for from this accumulation of errors a few valid theories have emerged in the long run.”

The S&P 500 Index returned 28.7% in 2021, following a 18.4% return in 2020, and a 31.5% return in 2019. Observers would be forgiven for not associating any of these returns with a two-year global pandemic. The index has in fact compounded at a 16.6% rate over the last 10 years. Equity investors have rarely had such excellent long-term returns. Last year, economic fundamentals were excellent too, with US GDP expanding 5.7% in real terms, surpassing its pre-pandemic size on a seasonally adjusted basis in the second quarter of 2021. S&P 500 Index earnings fell 13.9% in 2020 before rebounding an estimated 46% last year. The economic expansion and earnings rebound have been greatly helped by monetary and fiscal stimulus.

Sometimes changes to the US tax code seem like they are “floated” just to stir up money-making opportunities. Interest groups react to proposed changes by contacting, and throwing money at, lobbyists who counsel Congress against or for whatever was floated. There seems to be no recognition that managing the US tax code should be treated as a steering mechanism on a $20 trillion “truck.” Care should be taken when operating it, as if even a slight wrong move can send it careening.

Choices are about to be made. Central banks and legislatures seem poised to decide what they want to do. For central banks, “plentiful liquidity helped governments, businesses and households survive lockdowns. Cash flows collapsed but bankruptcies barely increased.

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.