Last year, in an attempt to diversify portfolios into areas of the technology sector, we added a position in an ARK Invest actively managed ETF which was primarily focused on Internet Disruption. This sector was a trend we felt had ample tailwinds throughout the rest of the year as more people began working from home. This investment was primarily exposed to forces that were disrupting the infrastructure of the internet space as we know it. Since our initial purchase, ARK has been one of our best performing investments. We also identified a trend forming in the Genomics sector we felt would be a five- to ten-year investment opportunity for clients. This space focuses primarily on the mapping of the human genome and DNA sequencing. We allocated to this sector through another actively managed ARK Invest ETF (ARKG). In recent days, we have identified a possible technical risk within our allocation to ARK ETF funds. The success of both investments came at a time when the capital ARK was managing increased ten-fold from $3.1 billion at the end of 2019 to $34.5 billion at the end of 2020. In December alone, investors allocated $8.2 billion to ARK’s funds. This success has given us slight pause as we believe too much capital flowing into ARK funds could potentially cause technical risks from an operation perspective inside the firm itself. Part of the attraction of ARK ETFs is the professionally managed exposure to lesser-known and smaller companies from a portfolio manager in Cathie Wood who has a stellar track record. However, as ARK grows, so does their allocation to smaller companies more closely held. This reallocation then creates a large position in a more-illiquid security from ARK Invest. After assessing the liquidity component, we believe there was ample reason to divest from ARK’s Internet Innovation ETF (ARKW) in client portfolios. If fund flows began reversing after such massive flows into the investments last year, the sizable investment ARK has in more illiquid securities posed a threat to performance. Given the potential risk, and the +100% performance of the investment since first implemented, we felt a divesting of the asset in portfolios was warranted.

To learn more about how Acumen can help you Invest Intentionally®, please contact us.

Chart used in this commentary was obtained via Bloomberg L.P. as of 2/23/2021. It shows the flows into and out of the ARKW fund.

The opinions expressed in this commentary should not be considered as fact. All opinions expressed are as of the published date and are subject to change. Information contained herein is not and should not be construed as an offer, solicitation, or recommendation to buy or sell securities. Investments in securities involves risk, will fluctuate in price, and may result in losses. The information has been obtained from sources we believe to be reliable; however, no guarantee is made or implied with respect to its accuracy, timeliness, or completeness. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. Comments concerning the past performance are not intended to be forward looking and should not be viewed as an indication of future results. Diversification does not protect against loss of principal.

Any charts, graphs, and descriptions of investment and market history and performance contained herein are not a representation that such history or performance will continue in the future or that any investment scenario or performance will even be similar to such chart, graph, or description.

Acumen Wealth Advisors, LLC® is a Registered Investment Adviser. Advisory services are only offered to clients or prospective clients where Acumen Wealth Advisors, LLC® and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Acumen Wealth Advisors, LLC® unless a client service agreement is in place.

I. What is a SPAC?

A Special Purpose Acquisition Company (SPAC) is a shell company with no actual commercial operations created solely to raise capital through an initial public offering to acquire a private company. Sponsors are required to acquire a company within a two-year span (additional year may be added given permission by SEC/investors). Following the acquisition of the targeted company, the SPAC symbol is retired, replaced by the now public company on the stock market.

SPACs are formed by a sponsor or experienced management team who possess expertise in a certain industry or business sector with intention to pursue deals in a selected area. However, typically the sponsors are NOT obligated to a specific field unless stated in the disclosure. The management team or sponsor has nominal invested capital translating into ~15% to 20% interest in a SPAC. The remaining 80% to 85% is open to public shareholders through units, or common stock, and a fraction of a warrant.[1]

[1] A warrant is a contract that gives the holder the right to purchase from the company a certain number of additional shares of common stock in the future at a certain price, often a premium to the current stock price at the time the warrant is issued.

II. SPAC versus Traditional Initial Public Offering (IPO) – Simplified

The traditional IPO process requires immense efforts to implement. The company begins by finding the most suitable underwriter for the IPO which involves many meetings. Next, executives travel to potential investors to assess demand and other factors for their IPO. As previously stated, this is a tiring process for executives, in addition to still having daily responsibilities for their company.

Through a SPAC, the sponsor(s) approaches the company, and does most of the work for them resulting in less work for the private company.

III. Initial Business Combination

The initial business combination is an important phase for an investor as the SPAC changes from essentially a “trust fund” to a functioning company. If it is disclosed the SPAC is required to acquire shareholder approval, it will provide a proxy statement. Shareholders of the SPAC can vote on approval or redeem their shares. If a shareholder decides to redeem their shares, it is the pro rata amount of funds in the escrow. For example, if the IPO is ~$10, and the shareholder bought 100 shares at $20, the share of the trust account is $1,000, not $2,000.

IV. Current Environment

According to SPAC Alpha, the number of SPAC IPOs priced and mergers closed increased ~320% from 2019 to 2020 [Appendix, 1]. The value of SPAC IPOs drastically increased ~512% to $83.4 Billion [Appendix, 1]. Market share by number of US-listed SPACs versus all US IPOs averaged 18.4% from 2015 to 2019 with the highest market share of 23% (2019) [Appendix, 2]. However, in 2020 the market share spiked to 53% [Appendix, 2].

In 2020, the equity returns on SPAC mergers, NASDAQ, and S&P 500 were 41%, 38%, and 13%, respectively[Appendix, 3].

V. Information to Consider

A 2018 study by Goldman Sachs focusing on 56 SPACs that completed acquisitions or mergers found they tend to underperform the S&P 500 during the 3-, 6-, and 12-month period AFTER transaction. A 2017 through mid-2019 study of 108 SPACS in the United States found SPACs had an average of 2% return. However, factors, such as COVID and the “rise of the retail investor”, seem to have affected the financial markets making room for abnormal SPAC returns.

Shareholders must be careful in fully analyzing SPAC disclosures as additional funding is typically needed and the interests of the sponsors might pivot from the interests of the shareholders. Shareholders should:

Be aware of dilution of shareholder’s interest.
Must pay attention to prospectus and reports.

Attention must be paid toward the investor base. A possible indicator of higher quality is the combination of who are the sponsors and larger investors. With most things, higher quality managers tend to enter first, and after their deals have been made, lesser quality managers are attracted (SPAC boom).

VI. Conclusion

SPACs offer many advantages including higher valuation, control, and time. If one were to rely on historical analysis, public companies tend to have higher valuation multiples than private. With traditional IPOs, most owners are unable to maintain a significant percentage of their companies. However, the SPAC structure allows owners to maintain a significant percentage. Speed is usually an obstacle for owners considering entrance to the stock market. The nature of traditional IPOs limits their ability to predict when the process will be complete. However, SPACs are required to acquire a company within a two- to three-year span, giving owners clarity on timelines.

One might question, why now? Well, it seems SPACs are being considered a mainstream alternative as well-known investors such as Richard Branson, Tilman Fertita, and Chamath Palihapitaiya have entered the field. Sponsors and owners might observe the increase in retail investor activities as a positive, so they want to capitalize on the increase of cash flow. Finally, in a year marked by volatility, quick entrance to the stock market at a fixed price can be seen as an advantage.

Yes, it may be appealing to enter the SPAC field as it has recently shown a strong return on investment. However, due to the nature of the asset vehicle itself, it is entirely speculative. The investor must place his full trust in the sponsors’ ability to acquire a robust company. Also, before one was to invest, she/he must read the disclosure intensely as sponsors’ and investors’ interests can separate at certain occasions in the acquisition of the target company.

With the recent SPAC performance of nearly 41%, it is worthy to remember here, an average SPAC returned a measly 2% from 2017 to 2019. However, we must remember, these are not ordinary times. The world is under conditions rarely observed before. A pandemic-stricken world has reduced the normalcy of the economy and everyday life while adding more volatility to financial markets.

In our opinion, the surge of stimulus and the rise of the retail investors are most likely the culprits behind the continual demand for highly speculative assets, such as Bitcoin and SPACs. Instead of looking at historical data or educating themselves on a topic, the average investor is flocking to the “hot news,” in this case, SPACs. We believe SPACs will perform well short term, but, contrary to current popular belief, there will be losers in the SPAC market, and one must choose wisely if they wish to enter the SPAC scene.

VII. Additional Sources/Notes

What You Need to Know about SPACs

https://www.sec.gov/oiea/investor-alerts-and-bulletins/what-you-need-know-about-spacs-investor-bulletin

Special Purpose Acquisition Companies

https://www.sec.gov/corpfin/disclosure-special-purpose-acquisition-companies

Conflicts of Interest

https://www.natlawreview.com/article/spac-disclosures-sec-focuses-conflicts-interests

Spectacular Rise of SPACs

https://www.npr.org/2020/12/29/949257672/the-spectacular-rise-of-spacs-the-backwards-ipo-thats-taking-over-wall-street

VIII. Appendix

[1] SPAC Alpha

[2] SPAC Alpha

[3] Statista

To learn more about how Acumen can help you Invest Intentionally®, please contact us.

Charts used in this commentary was obtained via Bloomberg L.P.

The opinions expressed in this commentary should not be considered as fact. All opinions expressed are as of the published date and are subject to change. Information contained herein is not and should not be construed as an offer, solicitation, or recommendation to buy or sell securities. Investments in securities involves risk, will fluctuate in price, and may result in losses. The information has been obtained from sources we believe to be reliable; however no guarantee is made or implied with respect to its accuracy, timeliness, or completeness. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. Comments concerning the past performance are not intended to be forward looking and should not be viewed as an indication of future results. Diversification does not protect against loss of principal.

The S&P 500 Index is widely regarded as the best single gauge of the U.S. equities market. The index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. All indexes are unmanaged and an individual cannot invest directly in an index. Index returns do not include fees or expenses.

For years, GameStop has struggled to adapt to the changing landscape of video gaming. It was founded in 1996 when the Nintendo 64 and first-ever PlayStation were exploding in popularity. Online retail was just getting started. Amazon and eBay had just launched their E-commerce sites the year prior when GameStop began offering gamers a place to buy, sell, and trade new and used consoles, and videogames. But, as the internet progressed, GameStop stuck to its brick-and-mortar strategy and failed to establish its online presence. Now, gamers can preorder consoles online and have them delivered to their door. And when they want to sell a used game, they can sell it themselves online.

This situation had led many Wall Street hedge fund managers to short sell (bet against) the company. Simply put, a short seller borrows shares from someone who owns them, sells them on the open market, and agrees to repurchase them to return to the owner later. The short seller hopes the price declines so, when he/she buys back the stock from the market, it will be at a lower price than what they initially sold it. If the short seller repurchases it at a lower price, he/she pockets the difference between their sell and buy prices after returning the shares. If the price increases, the short seller must repurchase at a higher price and lose money.

The chart above shows GameStop’s short ratio in blue which compares the number of shares that have been sold short and the average daily trading volume. The orange line shows the percentage of shares that have been sold short versus all the shares available to be traded. Over time, the bets against GameStop got bigger, and some thought the bets were too big.

Enter Ryan Cohen, the co-founder of the online pet supplies store, Chewy. Cohen’s venture capital firm acquired a 10% stake in GameStop in 2020, and he joined the company’s board of directors in January with hopes he could help transform the brand into a modern online retailer. This acquisition was big news to retail investors who believed in Cohen and his vision for the company. They began sharing their thoughts about a potential turnaround on social platforms, specifically on the Reddit group, WallStreetBets, which now has over eight million members.

But, instead of investing in a turnaround, WallStreetBets began planning something else; members had noticed the massive short-selling of GameStop stock and thought they could coordinate an attack on the hedge funds by forcing a short squeeze. In other words, if the smaller retail investors could band together and purchase GameStop shares, share prices would rise, and the hedge funds, who had shorted the company would be forced to buy their borrowed shares back at a higher price. As the larger hedge funds began buying back shares to close their short positions and limit their losses, the influx of demand sent GameStop shares soaring from $20 to nearly $350 in just two weeks. At the same time, more and more retail investors joined brokerage apps, like Robinhood, to help the cause and to cash in at the expense of the hedge funds. WallStreetBets and internet traders began to target other companies hedge funds had bet against, and companies, such as AMC Entertainment, BlackBerry, and Nokia, were the next on the list. Those companies would see their trading volumes more than double in the last week of January.

Sure, the hedge funds were the first to lose money, and they lost plenty. In just a matter of days, firms lost billions of dollars in the GameStop trading frenzy. But, over time, more retail investors were drawn in by $0 trading fees on easy-to-use brokerage apps and the opportunity to realize huge gains in just a few days. As hedge funds were closing their positions, retail investors kept piling money into GameStop shares either in protest against the Wall Street elite or to gamble the old-fashioned videogame retailer’s shares would keep climbing forever. Ironically, some hedge funds have made millions with new short positions since they knew price correction was inevitable, all at the expense of individual investors.

Demand for GameStop shares was detached from company fundamentals and quickly progressed to market mania. Charles Kindleberger describes how these situations play out in his book “Manias, Panics, and Crashes.” Typical of manias, some event changes the outlook, investors chase after some investment opportunities to the point of excess, and then once the excess is realized, investors rush to spare their returns and reverse the expansion. This panic causes investors to switch from real or financial assets (like GameStop stock) to cash and liquid assets resulting in the crash of the related asset prices. As of this writing, GameStop shares are trading at around $40, an 88% decline from the high reached at the end of January.

The trading frenzy is scarily similar to the outlawed “bucket shops” of the late 1800s when customers wagered on stock price movements. But, like the low-cost ETFs and free brokerage apps of today, bucket shops also opened financial markets to a new wave of participants. Robinhood and others have removed the barriers for smaller investors by eliminating account minimums and trading fees. The rise of retail investing and its effect on the broader market is a phenomenon some have dubbed the “Robinhood Effect,” and its full implications may take time to understand. While the events of recent weeks have been a case study on the matter, they have only affected a select few companies and have left everything else unaffected. Volatility indicators of major equity indices have remained near their historical levels so far this year. Investors with a well-diversified portfolio, backed by a thorough research process, can significantly reduce their risk to periods of mania and panic. We believe awareness of these excesses allows us to conduct better research and make better decisions for our clients. The bottom line is you can in all likelihood ignore the GameStop news if you keep a long-term investment horizon and focus on fundamentals.

To learn more about how Acumen can help you Invest Intentionally®, please contact us.

Notes

Two Small-Time Investors Were Buying GameStop Stock Before It Was Cool
- https://www.wsj.com/articles/two-small-time-investors-were-buying-gamestop-stock-before-it-was-cool-11612261801https://www.wsj.com/articles/two-small-time-investors-were-buying-gamestop-stock-before-it-was-cool-11612261801
The Real Force Driving the GameStop Revolutionhttps://www.wsj.com/articles/the-real-force-driving-the-gamestop-amc-blackberry-revolution-11611965586
“Where the Common People Could Speculate”: The Ticker, Bucket Shops, and the Origins of Popular Participation in Financial Markets, 1880–1920 https://doi-org.proxy.lib.utc.edu/10.2307/4486233
“Manias, Panics, and Crashes: A History of Financial Crises” Robert Z. Aliber; Charles P. Kindleberger

Chart information used in this commentary was obtained via Bloomberg L.P. as of 12/31/2020.

2020 Recap

We recently read a quote stating, “2020 is like looking both ways before crossing the street and then getting hit by an airplane.” No matter how cautious we were, it seems we could not escape the impact of the most challenging year in our recent history. It was a year to be remembered, first as a health care crisis, and then for the first ever complete halting of global economic activity brought on purposefully by governments due to the pandemic. It should also be remembered as a tale of two recoveries. The first recovery was slow and sluggish and still has not recovered to its previous level which is the recovery of global economic activity. While the incongruously high levels of jobless claims and absurdly low levels of consumer spending have trended back in the right direction, the recent rate of change has stagnated while waiting for the pandemic to come to its end. The second recovery can be seen in prices of riskier assets, which caught most investors by surprise given the economic circumstances. It was swift and, if you blinked, you could have missed it. We saw the second largest quarterly drawdown over the last 20 years in the S&P 500 (which was essentially matched across various other equity indices), followed by the largest quarterly increase, and the two subsequent quarters which were well above the quarterly average return of 1.64%. As shown below, during this recovery, we also saw the spreads of High-Yield (junk) Bonds over Treasuries compress to levels far below their average, and other speculative assets, such as SPACs and Bitcoin, produced parabolic returns. The contrast of performance of these assets in the first quarter of 2020, relative to which was seen in the following three, was not only unique in its speed, but also in the fundamentals driving the rally.

During February and March, investors divested riskier assets, such as equities and lower-rated corporate credit, and flocked to cash and treasuries. The U.S. Dollar Index (DXY) appreciated more than 8% in just ten days – a move incredibly atypical for currency markets. Almost every other financial asset suffered wide losses as liquidity completely evaporated. Even investment-grade corporate bonds with the lowest default rates could not be offloaded fast enough. This selloff happened as investors began digesting a complete stop in economic activity. Just a month later, the dynamics of the global economy became much easier for investors to understand. First, the continuous news flow on progress made in understanding and treating the virus gave investors optimism. The second dynamic was just how likely the sharp change in asset prices was in such a short amount of time. The CBOE Volatility Index (VIX) completely blew through previous highs and asset valuations were incredibly attractive, giving many investors comfort in weathering the coming future storm through the second half of the year with the pandemic. Lastly, and the one which we believe is the most important to understand what happened in 2020 and what we are most closely watching in 2021, fiscal and monetary policies provided both protection and liquidity to financial markets and consumers. In the matter of four months (2/26/2020 – 6/10/2020), the U.S. Federal Reserve increased its balance sheet by more than $3 trillion. Stepping way outside of their typical mandate, they began buying up financial assets (even corporate bonds) and propping up financial markets with massive amounts of liquidity. Even a global pandemic, which had not matured to its fullest threat, could not keep investors on the sidelines with the level of support from central banks. This action was not limited to just the United States since central banks across the globe joined in. In the United States, fiscal policymakers stepped in by providing financial support to struggling businesses, the unemployed, and even the employed with direct payments to boost consumer spending.

The fourth quarter was a different story. Once again, cases were on the rise across the globe and new lockdowns were following. In the United States, we faced one of the most volatile election seasons imaginable, and many were curious if we would even know the true result of the election until months after election day. Election day passed and markets reacted positively to both the initial results which showed the potential for gridlock in Washington and to positive vaccine news. While October presented a negative return for most risk assets, November and December carried a 16.7% rally in the S&P 500. This rally also breathed life into sectors and assets which had lagged by miles through the first ten months of the year. Sectors, such as financials and energy, commodity markets, and other cyclically sensitive assets, regained some relative strength against what had shown momentum previously. Sudden vaccine optimism, accommodative monetary and fiscal policy, an even more fiscally accommodative administration now up to bat, and the lack of opportunities to find yield, lit a massive spark across financial markets for a new “reflation trade”. This reflationary thesis is the thought 2021 will bring a resumption to normalcy, even more liquidity, and higher global growth than we experienced even before the pandemic.

2021 Outlook

In an attempt to shy away from prognosticating the absolute direction of financial markets, which we believe is ultimately impossible, we want to provide possible trends or possibilities for financial markets in 2021. These are the factors we are keeping a keen eye, and the ideas we think could have the largest effect on financial assets over the medium and long term. We prefer to keep clients well-diversified and exposed to the market because we believe it is quite difficult to predict with 100% accuracy and even harder to time. However, we make tactical allocations and tilts based on the opportunities, risks, and trends we see and our understanding of their probabilities. We are watching the following:

Fiscal and Monetary Policy should continue to be ultimately well-accommodative in 2021. The Federal Reserve has given no inkling of deciding to slow down its asset purchasing program. They are currently purchasing over $100 billion in assets every month to provide liquidity to financial markets and, if they keep this purchase up for 2021, we will see more than another $1 trillion added to the balance sheet. From a fiscal perspective, the new administration will likely usher in more stimulus and aid to the consumer and businesses, and we could be well on our way to fully experiencing Modern Monetary Theory in action. In the short to medium term, we believe this is ultimately bullish for riskier financial assets like equities. In the long term, we could see some adverse effects of a massive debt overhang.
Vaccines will likely be the star of the show in 2021. Three vaccines have been approved for full use, with two currently being widely distributed across the United States. Current market prices have assumed there will be widespread voluntary inoculation with no adverse effects.
Valuations going into 2021 are higher than what we have historically seen, mostly across all asset types. These valuations, specifically in the equity market, need to be supported by earnings growth across the global economy. The current premium investors are paying for more economically sensitive assets can probably be supported by current interest rates and liquidity, but an expansion in the premium is unlikely, and earnings will have to catch up.
Inflation is probably one of the biggest trends to pay attention to in 2021. In fact, the weaker U.S. dollar, overweight cyclical sector, and global economic growth reflation investment thesis might be the most crowded. This weakening of the dollar does not mean it is wrong. We believe the deficit and previous overvaluation of the U.S. dollar could continue the current trend, but the large inflationary pressures are simply impossible to find without an increase in the velocity of money. This pressure means people need to spend the dollars injected into the economy.
We are paying particular attention to the trends in 2021 of the continued dominance of the technology sector and the new developments across technology and healthcare. While we do not prefer to largely overweight the crowded trade of Large Cap technologies, we believe an overweight to the technology and healthcare sectors is the correct positioning for the long term. We have continued to focus on the disruption beginning before the pandemic which has likely been exacerbated by the experiences in 2020. Genomics across the healthcare sector is one of these areas we believe gives investors access to exponential growth opportunities and diversification from the broad equity market.

To learn more about how Acumen can help you Invest Intentionally®, please contact us.

Information used in this commentary was obtained via Bloomberg L.P.

The opinions expressed in this commentary should not be considered as fact. All opinions expressed are as of the published date and are subject to change. Information contained herein is not and should not be construed as an offer, solicitation, or recommendation to buy or sell securities. Investments in securities involves risk, will fluctuate in price, and may result in losses. The information has been obtained from sources we believe to be reliable; however no guarantee is made or implied with respect to its accuracy, timeliness, or completeness. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. Comments concerning the past performance are not intended to be forward looking and should not be viewed as an indication of future results. Diversification does not protect against loss of principal.

All indexes are unmanaged and an individual cannot invest directly in an index. Index returns do not include fees or expenses.

Definitions

The S&P 500 Index is widely regarded as the best single gauge of the U.S. equities market. The index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. The S&P 500 Index focuses on the large-cap segment of the market; however, since it includes a significant portion of the total value of the market, it also represents the market. Created by the Chicago Broad Options Exchange (CBOE), the Volatility Index, or VIX, is a real-time market index that represents the market’s expectation of 30-day forward-looking volatility. Derived from the price inputs of the S&P 500 index options, it provides a measure of market risk and investors’ sentiments. The U.S. Dollar Index (DXY) is a measure of the value of the United States Dollar (USD) against a weighted basket of currencies used by US trade partners.

As 2020 comes to an end, we look forward to what 2021 will bring. We hope more happiness, less uncertainty, stronger relationships, and more time together will take place. With only a few weeks left in 2020, we would like to remind you there are some steps you can take to make the most of this year financially.

Gifting to Family Members

Annual gifts including gifts to 529 plans – the maximum an individual can gift in 2020 without reducing their lifetime exemption amount ($11.58 million) is $15,000. This amount is also known as the annual gift tax exclusion amount. Additionally, a special lump-sum contribution rule exists for 529 plans where an individual can gift five years’ worth of the annual gift tax exclusion ($75,000 in 2020) in one year to a 529 and elect to spread the amount out over five years.
- Hypothetical Case 1 – Mr. and Mrs. Smith want to gift to their son and daughter-in-law. Mr. Smith can gift $15,000 to his son and $15,000 to his daughter-in-law. Mrs. Smith can gift $15,000 to her son and $15,000 to her daughter-in-law. The total amount of non-taxable gifts is $60,000.
- Hypothetical Case 2 – Mr. and Mrs. Smith want to fund a 529 for their granddaughter who will be attending college in five years. They want to gift the largest amount so it can grow tax-free for college expenses in a relatively short amount of time. Mr. or Mrs. Smith can contribute $75,000 individually or $150,000 combined and elect to spread this amount over five years. They will not be able to gift $15,000 to their granddaughter (in cash or through 529 contributions) until after five years.
Roth accounts for young professional children – One of the most tax efficient type of retirement accounts is a Roth IRA in which after-tax dollars can grow tax-free. Many young individuals who are working part-time or full-time jobs do not contribute to a Roth IRA even though they can contribute up to $6,000 or the amount of their earned income for the year. Additionally, individuals who are under a certain income threshold can both contribute to their 401k as well as make Roth IRA contributions.
- Hypothetical Case 1 – Mr. and Mrs. Lee’s son is home for the summer from college and has taken up a part-time job. He earned $5,200 in wages for the summer so he or his parents can contribute to a Roth IRA in his name for that amount.

Gifting to Charity

$300 above the line deduction – An above-the-line deduction is a deduction that can be taken in addition to the standard or itemized deduction amount; however, the deduction cannot be counted twice. The CARES Act allows for an individual or married couple filing a joint return to take an above-the-line deduction for up to $300 in donations to a 501(c)(3) organization.
- Hypothetical Case 1 – In 2020, Mr. and Mrs. Brown donate $300 in cash to a qualified 501c3 organization so do not have to pay federal taxes on this amount.
Donations of Cash or Appreciated Assets to Donor Advised Funds – Charitably inclined individuals with donor-advised funds can deduct up to 60% of their Adjusted Gross Income (AGI) for cash contributions to their fund and 30% of their AGI for contributions of appreciated assets.
- Hypothetical Case 1 – Mr. and Mrs. Patel have 500 shares of XYZ stock which has a current value of $100,000 and $70,000 worth of unrealized, long-term capital gains. They donate $25,000 every year. They decide to front load fund their donor-advised fund with the 500 shares of XYZ. They do not have to pay taxes on the gain and also take a deduction up to 30% of their 2020 AGI.

Tax

Retirement Conversions – The CARES Act has waived Required Minimum Distributions (RMDs) from retirement accounts for 2020. This waiver provides a rare opportunity for individuals to replace the income recognized through RMDs with a Roth conversion. Roth conversions are not only advantageous for those in RMD mode; individuals who have capacity to recognize income at a low tax rate can convert an amount up to the tax bracket limit and enjoy tax-free growth.
- Hypothetical Case 1 – Mr. and Mrs. Garcia usually have a combined annual RMD amount of $45,000 and are in the 12% tax bracket. Since they do not have to take their RMD for 2020, they decide to convert $45,000 to a Roth IRA and pay taxes at the 12% tax rate so they can lower their RMD amount for subsequent years, pay taxes at a historically low tax rate, and create a tax-free account for legacy planning.

Hypothetical Case 2 – Mrs. Williams is a 28-year-old who was just notified of a large raise which will take effect in 2021. She and her husband are currently in the 12% tax bracket but the raise will propel them into the 22% bracket. Mrs. Williams has $15,000 in a traditional 401k and her plan allows for in-plan Roth conversions. Mrs. Williams converts the $15,000 to Roth funds and pays taxes at 12% on the conversion. When she retires at 62 years old, her Roth amount, averaging a 5% annual growth rate, has grown to a tax-free amount of $78,800.22.

These are just a few examples when it comes to planning strategies. The planning team at Acumen is here to help if you have any questions. Please remember that due to increased processing times, we need to execute any strategies well before year end to ensure they are processed in time. Smart financial decisions year after year help increase the probability of financial success. As Warren Buffett says, “The more you learn, the more you earn.”

Thank you for working with us and stay safe!

To learn more about how Acumen can help you Invest Intentionally®, please contact us.

Sources:

2018 Charitable Giving Statistics, Trends & Data: The Ultimate List of Charity Giving Stats | Nonprofits Source

Giving USA 2020: Charitable giving showed solid growth, climbing to $449.64 billion in 2019, one of the highest years for giving on record

This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice. Any opinions expressed in this commentary should not be considered as fact. All opinions expressed are as of the published date and are subject to change. Information contained herein is not and should not be construed as an offer, solicitation, or recommendation to buy or sell securities. Investments in securities involves risk, will fluctuate in price, and may result in losses. The information has been obtained from sources we believe to be reliable; however, no guarantee is made or implied with respect to its accuracy, timeliness, or completeness. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. Comments concerning the past performance are not intended to be forward looking and should not be viewed as an indication of future results. Do not act or rely upon the information and advice given in this publication without seeking the services of competent and professional legal, tax, or accounting counsel. Any projections, targets, or estimates in this report are forward looking statements and are based on the firm’s research, analysis, and assumptions.

With the presidential election only one week away, our team at Acumen has been researching a variety of topics relating to the potential impacts of the election and we are sharing this information with you in a three-part series called “The Election Effect.” In today’s final installment, we explore the policy implications on investment portfolios. We hope you find this information interesting and welcome your thoughts on the series.

The Election Effect: Part 3 of 3

Policy Implications on Investment Portfolios

Acumen has previously communicated our belief the broad understanding of the effect of presidential elections on financial markets is widely misinterpreted. From our research, we found the party holding control of the White House, or even sometimes the White House and Congress, does not have a high correlation with asset class returns in financial markets. This research does not discount the potential definitive effect this election could have on specific asset classes or industries. In fact, we believe we can better position portfolios for the future after assessing many of the potential policy moves by both candidates and after assessing the odds of each outcome.

One of the possible misunderstandings investors may have about this election season is the fear of sudden financial market turmoil if Joe Biden is elected president. Whether our research about political party correlation to financial market returns reigns true or not, we must be aware of the more progressive ideas a Biden presidency could bring. One factor we have focused on extensively is the sudden increase in the betting average Biden will become president over his polling average and the decrease in the betting average Trump will become president below his polling average. We saw this trend play out in 2016 with Trump and Hillary Clinton. Clinton’s polling average showed her in a significant lead over Trump, but their betting averages were much closer together. We saw the two measures begin a greater divergence after the first debate. Since then, the S&P 500 is up more than 6%, the 30-year yield is up 11 basis points, and the spread in high-yield bonds versus treasuries is down more than 10.5 basis points. These indicators are all financial market characteristics supporting the forecast that a Biden nomination will not crash financial markets. Granted, there will be long-term implications of a Biden presidency possibly producing slower nominal growth. The implications of a higher corporate tax rate, large fiscal spending, and more heavily regulated markets could be a reason to forecast slower (still positive) economic growth in the long-term. At the same time, industries within the stock market that will probably benefit more from a Biden presidency have outperformed the broad equity market. Sectors such as Industrials and Financials have been outperforming Technology – a sector which will likely face greater scrutiny under a Biden presidency. Those who believe in the forward-looking nature of the stock market are likely discounting a Biden win right now.

We believe understanding policy propositions from both parties and the effects they could have on financial markets is incredibly important. For starters, there are a few policy implications we believe will be realized no matter who is elected. In our eyes, the most important factor to watch would be the pace at which we continue to grow our fiscal deficit. For instance, both candidates are likely to impose a new infrastructure plan. Trump attempted to put an emphasis on the infrastructure during his first term. Biden has said he would propose a $2 trillion spending plan on infrastructure. Obviously, this action should generate better returns in infrastructure assets.

Both candidates also support another stimulus package for the coronavirus pandemic. This influx of liquidity leads us to believe that with the roughly 20% fiscal deficit the IMF has projected for 2020 will continue to grow. Our economy may not grow at the same rate, but we do not believe either candidate will be able to simply reverse the trend. There are major implications to this. For one, a higher than expected increase in economic growth could spark higher inflationary pressures. We believe alternative assets, like gold and real estate, should benefit from these pressures. At the same time, fixed income has become less attractive than both equities and alternatives due to the negative REAL rate of return investors will see across the bond market. This rate is truly one of the only ways governments know how to deal with large deficits – they “inflate it away”. In fact, we have already seen the Federal Reserve change the way they measure inflation targeting. During their last meeting, the Fed said they would now allow inflation to overshoot their typical 2% target after periods of extremely low inflation. This change likely speaks to the prospect of ever actually seeing inflation greater than 2%. Either way, we believe the rate of change towards greater deficits will continue. The other implication that may result from larger fiscal deficits is higher taxes. The Biden administration has offered insight into their plan to cut back much of the Trump administration’s tax cuts and jobs act. These cuts would likely increase the tax rate many “big-tech” companies are currently paying. One way we have begun diversifying this risk is by reaching out into tech disruptors, such as cloud computing and software-as-a-service companies, instead of the crowded trade seen in many large-cap technology stocks. We still believe a strategic allocation into these investments are prudent, but also do not believe it should be the primary source of allocation.

One of the largest policy implications on the horizon is the movement toward a greener future. While a Biden administration and a Trump administration will likely mean much different strategies in the short term regarding our dependence on fossil fuels, this difference is a policy area we believe we will make significant headwinds on in the near future no matter who controls the White House. Green and sustainable energy has become a much greater bipartisan issue over the last few years. We see this issue, as well as a lower dependence on oil and gas, continuing to cause disruption in the energy sector.

To learn more about how Acumen can help you Invest Intentionally®, please contact us.

Information used in this commentary was obtained via Bloomberg L.P as of 10/12/2020.

The opinions expressed in this commentary should not be considered as fact. All opinions expressed are as of the published date and are subject to change. Information contained herein is not and should not be construed as an offer, solicitation, or recommendation to buy or sell securities. Investments in securities involves risk, will fluctuate in price, and may result in losses. The information has been obtained from sources we believe to be reliable; however no guarantee is made or implied with respect to its accuracy, timeliness, or completeness. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. Comments concerning the past performance are not intended to be forward looking and should not be viewed as an indication of future results. Diversification does not protect against loss of principal.

According to Moody’s, China, Indonesia, and India will be the only G-20 emerging economies to grow real Gross Domestic Product (GDP) enough through the end of 2021 to end next year above pre-Covid levels. In part, this GDP represents the better position of advanced economies to provide fiscal and monetary stimulus to combat the coronavirus; these governments can support small businesses and their payrolls, provide additional help to struggling industries, and distribute direct payments to boost consumption.

Bloomberg: The S&P 500 index recovered and reached pre-Covid highs as the two major Indian market indexes remain below Q1 levels.

Estimates provided by Bloomberg: Quarterly data shows that the United States saw a sharper decline in GDP growth compared to India. Looking at Q3 20 data, the U.S. is expected to see a quicker quarter-over-quarter (QoQ) recovery. As India experiences rising coronavirus cases, the virus’s negative economic impact could be prolonged.

India has posted the highest new daily case numbers of any country in the world with the current 7-day average hovering around 90,000 cases. Despite the number of these cases, the government’s response has been relatively conservative so far compared to the massive stimulus bills passed in the United States. The focus has been on reforms meant to boost long-term growth (e.g. decreasing regulations with interstate trade and privatization of airports). Bloomberg’s Abhishek Gupta argued for more emphasis on fiscal policy saying, “Reforms can be effective in boosting long-term potential growth by improving the supply response of the economy. In the current context, reforms are unlikely to support a quicker rebound – the recovery is constrained by weak demand, not insufficient supply.” Parts of the country have even increased gasoline and diesel taxes to offset expenditures incurred while fighting the pandemic. The tax hike and other government expenditure cuts are likely to counteract fiscal stimulus and have already ignited consumer price pressures which threaten the central bank’s ability to meet its inflation targets or cut rates to support growth.

Bloomberg: Rural unemployment rates have benefited from movement from urban areas to rural ones and from productive growing season.

The financial sector was under some stress as it dealt with elevated levels of default risk compared to other emerging economies and must now deal with muted consumer demand due to coronavirus restrictions. Gupta points out the non-oil import demand fell by 45% year-over-year (YoY) in June and weekly retail sales from ShopperTrak reported a 78% YoY drop in mid-July.

This year’s surplus monsoon rains are likely to benefit India’s large agriculture sector as the rainfalls are essential to crop yields and represent around three-fourths of annual rainfall. Bloomberg reports rainfall was nearly 5% higher than average and had led to better sowing overall and record water reserves. The rural unemployment rate has benefited from the rains, seasonal job gains, and a move among urban workers to rural areas due to the pandemic. However, there is worry stress could emerge as seasonal jobs expire.

A standoff on the India-China border has caused additional uncertainty. In May, Chinese soldiers crossed the Line of Actual Control (LAC) which has been the subject of a border dispute between the two countries since 1962. Since then, both sides have been trying to gain a tactical advantage with India occupying mountain areas in Chushul; the mountain peaks in this area give India the high ground near an important pathway between the two countries, but the area was left free of militarization in accordance with various confidence-building agreements. While diplomats have claimed the confidence-building agreements are still relevant, troops from both India and China remain on their sides of the LAC. Relations with China will likely remain elevated because of these disputes which could hurt consumers’ and investors’ sentiment.

India’s young population and growing middle class are both positive for long-term growth prospects. Additionally, we believe some opportunities exist in healthcare and agriculture; India falls below global averages in healthcare spending and capacity, and rural farming operations would benefit from digitalization and innovation. (Productivity increases here would be especially valuable since agriculture accounts for over 40% of the country’s employment and over 15% of GDP.) But the government’s conservative efforts in supporting businesses and consumers during the pandemic, surging Covid-19 cases, geopolitical tensions with China along the LAC, and amplified stress in an already struggling financial sector due to increased defaults, significantly weaken India’s short-term outlook. While there may be select, long-term opportunities, Indian equities could see a relatively slower recovery and enhanced volatility due to these circumstances over the next year.

To learn more about how Acumen can help you Invest Intentionally®, please contact us.

References:

https://economictimes.indiatimes.com/news/economy/indicators/india-to-post-strong-enough-growth-pick-up-in-second-half-of-2020-moodys/articleshow/77747607.cms

https://www.washingtonpost.com/politics/2020/09/16/india-china-are-taking-new-risks-along-their-border-it-will-be-hard-restore-peace/

Bloomberg Economics: “India Country Primer” – Abhishek Gupta

Index, Unemployment, and GDP estimate data provided by Bloomberg as of 9/30/2020.

The S&P 500 Index is widely regarded as the best single gauge of the U.S. equities market. The index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. The S&P 500 Index focuses on the large-cap segment of the market; however, since it includes a significant portion of the total value of the market, it also represents the market. The NIFTY 50 is a benchmark Indian stock market index that represents the weighted average of 50 of the largest Indian companies listed on the National Stock Exchange. It is one of the two main stock indices used in India, the other being the BSE SENSEX. The BSE SENSEX is a free-float market-weighted stock market index of 30 well-established and financially sound companies listed on Bombay Stock Exchange. The 30 constituent companies which are some of the largest and most actively traded stocks, are representative of various industrial sectors of the Indian economy. All indexes are unmanaged, and an individual cannot invest directly in an index. Index returns do not include fees or expenses.

Moody’s Investors Service, often referred to as Moody’s, is the bond credit rating business of Moody’s Corporation, representing the company’s traditional line of business and its historical name. Moody’s Investors Service provides international financial research on bonds issued by commercial and government entities.

Gross domestic product is a monetary measure of the market value of all the final goods and services produced in a specific time period.

The G20 is an international forum for the governments and central bank governors from 19 countries and the European Union.

10/10/2020

The third quarter of 2020 continued this year’s narrative of dynamic financial markets and a recovering global economy. The S&P 500 ended the quarter up nearly 9% after retreating from a new all-time high on September 2^nd where it was up more than 15% for the quarter. What happened during the month of September gave many investors pause when a 10% correction came during one of the greatest equity market rallies anyone has ever seen. Throughout the third quarter, we were still receiving positive data on the economic front. Weekly jobless claims declined from the June average of 1.5 million to an approximately 870,000 average in September. The unemployment rate declined to 7.9% (as of 8/31/2020) – a sharp decline from the 14.7% rate witnessed during the second quarter, and even lower than a year and a half after we began recovering from the Great Financial Crisis.

An incredibly sharp rebound occurred during the third quarter as some consumers, who were flush with cash from trillions of dollars in fiscal and monetary policy response, met a now reopening economy. The upside surprise of economic data began slowing toward the end of the quarter as we better understood just how the sudden stop in economic activity had affected us. Economists revised their 4Q2020 GDP numbers upwards, as well as their 2021 numbers, to reflect a current situation not as bad as the 35% stock market decline assumed in March and a reason to begin focusing on where we go from here. When we began re-evaluating our current situation with a better understanding of when we might receive a vaccine, how the pandemic has affected the consumer, and what reopening the global economy looks like, investors noticed stocks had outpaced themselves while looking down the barrel of a very uncertain election season. Sentiment indicators, like the Put/Call ratio which measures investor bullishness and the VIX Volatility index, had reached extreme levels of optimism. We believe the pullback witnessed in September was more likely a slowdown and resetting of investor sentiment after a 60% rally. It was difficult to rationalize new highs in equity prices during what is probably the most uncertain election season we have faced.

We do not believe the rebound is unwarranted or irrational. The rate of change of the global economic data we have analyzed still speaks to a newly formed economic expansion. Things are not “back to normal”, but they are getting better, and this is a reason to be optimistic on riskier assets like equities in the long term. In our view, equities may be fairly valued on an absolute basis when using historical levels, but they are attractive when relatively valued to fixed income. One measure we often use as a relative valuation tool is the Earnings Yield on the S&P 500 compared to the 30-Year Treasuries and the Aggregate Corporate Bond Market. The current forward earnings yield on the S&P 500 is close to 4%, while the earnings yield on a 30-Year Treasury bond is closer to 1.4% and the earnings yield on the Bloomberg Barclays Aggregate Corporate Index is 2.02%. We believe this relative attractiveness is a large reason investor are more willing to invest in more expensive equities than they have historically.

We further believe this environment calls for more active rather than passive management. The crowdedness of the current equity market, the election environment, and the monetary and fiscal policy response we saw during the pandemic lead us to believe investors will have to be much more focused and thematic than they have in the past. The pandemic and the recession it caused is likely to change many dynamics about our global economy. One of the dynamics we expect to continue is the pursuit of deglobalization. We also believe the pandemic has likely exacerbated our greater reliance on technology, especially amidst a new work from home movement. Also, the policy response has driven fixed income yields to the floor while flooding the economy with liquidity – likely pointing to a new normal for monetary and fiscal policy. Our research has shown the political party controlling the White House does not have a correlation to forward equity market returns. Therefore, we do not believe in basing an investment thesis primarily on which party wins the election. However, there are many changing dynamics we face as a nation giving us better insight to how our future economic landscape will likely be changed when viewing the policy. Additionally, we get a better idea of which policy changes are likely to happen no matter which party has control. For example, while Donald Trump has not crafted policy around the implications of climate change, it has become much more of a bipartisan issue than it has in the past. This bipartisanship leads us to believe further investment decisions will have to be crafted around oil and gas exposure. Another example is the likely new normal in fiscal and monetary policy, and we believe the implications of this change are greater inflationary pressures moving forward.

The financial markets are incredibly dynamic and must be monitored on a continuous basis to better understand the probabilities of what is to come. From our research, we have attempted to focus our investment thesis moving forward on a few key themes:

The fiscal and monetary policy brought about by the Coronavirus pandemic has likely changed our economic landscape. The response is a primary reason why the current recession has not been as bad as it could have been, and why we believe a cash-flush consumer that meets disrupted supply chains will produce greater inflationary pressures moving forward. This pressure is one reason we have increased both international equity exposure and alternative asset exposure through gold.
Our reliance on technology will only be exacerbated by the pandemic and more socially distanced future. However, we believe investors are likely to find better returns and lower risk outside of more crowded equity trades like Facebook, Amazon, Apple, Netflix, and Google (FAANGs). We believe new economic recoveries bring about great disruption and technological advancements, and investors should be positioned accordingly. Internet and healthcare disruption are two thematic exposures we prefer.
A 40-year bull market in bonds has led to interest rates settling at all-time lows. Spreads to risk-free rates in Corporate Credit and High Yield have even corrected to their historical averages. While we believe exposure to bonds is important from a portfolio construction aspect to decrease risk, our long-term outlook on bonds is not as optimistic from an investment opportunity perspective.

Acumen’s thoughts on the chart above:

Equities – Most equity indices have risen significantly since the bottom occurred in March. This increase has led many investors to be weary of future equity prices. While we believe near-term volatility will persist due to election concerns and froth from a crowded trade, the long-term fundamentals are sound as the beginning of a new economic expansion is underway and the relative valuation to Fixed Income is attractive.

Fixed Income – A 40-year long bull bond market, coupled with expansionary monetary policy, has led rates across the world to the zero bound or, in some cases, even into negative territory. The United States Federal Reserve policy rate is now at 0.25% and riskier fixed income investment spreads have normalized to their historical average. A dynamic has been created where many investors are receiving a negative return when adjusted for inflation from investment-grade fixed income. We continue to believe fixed income should be implemented across portfolios in the long term to serve as a ballast during volatility, but also believe investors can find further diversification through other assets with positive real rates of return.

Alternatives – With historically higher valuations in the equity market and a more crowded trade across some sectors, as well as negative real yields across many areas of fixed income, we believe investors will be pushed to find alternative investment sources. With inflation pressures and investor uncertainty, gold and its positive correlation is an attractive opportunity in our opinion; given we do not foresee a slowdown in inflation expectations or the monetary policy response which has contributed to them.

Cash – Current inflation expectations lead us to believe investors should not currently have a large allocation to cash and, instead, should put cash to work in a currently dislocated financial market.

To learn more about how Acumen can help you Invest Intentionally®, please contact us.

Information used in this commentary was obtained via Bloomberg L.P.

Political policy information obtained from https://graphics.reuters.com/USA-ELECTION/POLICY/ygdpzwarjvw/ and https://educationvotes.nea.org/presidential-2020/biden-vs-trump/

The opinions expressed in this commentary should not be considered as fact. All opinions expressed are as of the published date and are subject to change. Information contained herein is not and should not be construed as an offer, solicitation, or recommendation to buy or sell securities. Investments in securities involves risk, will fluctuate in price, and may result in losses. The information has been obtained from sources we believe to be reliable; however no guarantee is made or implied with respect to its accuracy, timeliness, or completeness. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. Comments concerning the past performance are not intended to be forward looking and should not be viewed as an indication of future results. Diversification does not protect against loss of principal.

The S&P 500 Index is widely regarded as the best single gauge of the U.S. equities market. The index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. The S&P 500 Index focuses on the large-cap segment of the market; however, since it includes a significant portion of the total value of the market, it also represents the market. The Volatility Index, or VIX, is a real-time market index that represents the market’s expectation of 30-day forward-looking volatility. The Bloomberg Barclays Aggregate Bond Index is an index used by bond traders, mutual funds, and ETFs as a benchmark to measure their relative performance. The index is broadly considered to be the best total market bond index, as it is used by more than 90% of investors in the United States.

With the presidential election only 27 days away, our team at Acumen has been researching a variety of topics relating to the potential impacts of the election and we are sharing this information with you in a three-part series called “The Election Effect.” In today’s second installment, we explore the tax plans of the presidential candidates. We hope you find this information interesting and welcome your thoughts on the series.

The Election Effect: Part 2 of 3

Tax Plans of the Presidential Candidates

The November election is drawing closer and with all of the news coverage surrounding this event, the tax plan of each candidate seems to have been put on the back burner by political pundits and voters alike despite tax reform being one of the most influential and pivotal platforms. Any change in tax policy has the potential to create immediate, mid-term, or long-term effects on fiscal policy, the economy, and the markets. The Tax Cuts and Jobs Act of 2017 (TCJA) was the most sweeping reform to the tax code made in the past 30 years but is scheduled to expire after 2025 and revert back to pre-2017 policies unless the changes are made permanent. Although the specific details and policies regarding the candidates’ respective tax plans change, there are broad concepts and motives that differentiate the candidates. The Republican candidate, Donald Trump, aims to make the TCJA changes permanent while the Democratic candidate, Joseph Biden, would most likely advocate for an increase in taxes for high income individuals and corporations. What we believe is, no matter the result of the election, tax policy will remain the same for 2020. If there is a change in control, we believe there may be a short window to implement certain strategies. For this reason, Acumen is ensuring we have a plan in place to execute quickly, if needed. Please keep in mind everyone’s tax situation differs, and the possible strategies outlined below are general strategies and should not be considered as an individualized recommendation or investment advice.

Although the result of the November and the Congressional elections will ultimately dictate what changes to tax laws will be made, Acumen Wealth Advisors’ Financial Planners are diligently keeping track of the proposed changes as well as formulating strategies to mitigate increased tax liability which may be produced as a result. Please feel free to reach out with any questions.

To learn more about how Acumen can help you Invest Intentionally®, please contact us.

Sources:

https://www.cnr.com/insights/article/tax-plan-proposal.html

https://www.cpapracticeadvisor.com/tax-compliance/news/21152588/election-2020-comparing-the-biden-and-trump-tax-plans

https://www.accountingtoday.com/list/election-2020-trump-vs-biden-on-tax-policy

https://aboutbtax.com/R7C

With the presidential election only 41 days away, our team at Acumen has been researching a variety of topics relating to the potential impacts of the election and we are sharing this information with you in a three-part series called “The Election Effect.” In today’s first installment, we explore the historical impacts each political party has had on S&P returns. In the upcoming weeks, we will explore additional topics including the tax plans and policies along with their implications for each candidate. We hope you find this information interesting and welcome your thoughts on the series.

The Election Effect: Part 1 of 3

Is the Republican or Democratic party better for S&P returns?

Donald Trump surprised the world and, briefly, the financial markets when he overcame a large polling deficit to defeat Hillary Clinton and become the President of the United States. By historical polling standards, Clinton had close to an almost insurmountable lead and many wrote off the Republican Party’s chances for gaining back control of the White House. What happened in the Futures Market late on election night and in the early hours of the next morning was a spectacle. From the candlestick chart below, we can see that the S&P 500 Index Futures Prices fell suddenly more than 5% when it became clear Trump would become the next President of the United States. The massive line down on November 9^th shows the lowest point that S&P 500 futures prices got, but the highest point of the clear box shows where they closed. Prices quickly corrected and the market opened higher than the previous afternoon’s close, and then rallied 4.5% over the next two months. We believe the sudden drop in the Futures Market seen on election night in 2016 is a direct result of the anxiety low probability events, or uncertain outcomes, bring the market. In the short run, the market is like a voting machine – where investors display the popular belief in price action. When the popular belief is suddenly disproven or put to a test, financial markets display volatility. In the long run, the market is more like a weighing machine; the actual substance of market-moving factors is displayed in the price of assets. These factors were even seen in live action to a degree on election night. After the immediate drop we saw in the market, we then observed investors begin discounting the prior written-off pro-business policy implications of a Trump presidency.

After the 50% rally in equity prices this year, the past few weeks have displayed a much slower or volatile path ahead. We believe this is more a result of the uncertainty of the future election and future policies on both sides of the aisle, and less a result of a possible “blue wave”. Below is a candlestick chart of the S&P 500 Futures Price. The massive line down on the 9^th displays at one point the S&P 500 Futures Price was below 2050 when Trump was announced. In the chart, a blue box indicates the close was lower than the previous days close signifying a down day. A clear box indicates the days close was higher than the previous days close. The ends of the sticks represent the range of prices with the highest part of the stick being the intraday high and the lowest being the intraday low.

There is sometimes a common misconception one political party is better for the stock market than the other. However, from a historical perspective, there really is not a clear winner. Since 1953, three Republican party presidents have produced an average annualized return in the S&P 500 of 10% or more during their tenure. The Democratic party has produced two candidates with an average annualized return of 10% or more since 1953. During the same time frame, the Democratic party has a higher average annualized rate of return in the S&P 500 of 10%, compared to the previous five Republican presidents averaging an annualized return of 5.79%. The Democratic party has also produced an average annualized return of greater than 5% during each of their four stints in office since 1953. The large difference is likely a result of the two previous bear markets occurring during Republican party terms, which is also displayed by the higher average annualized standard deviation from the S&P 500 during Republican terms – 14.97% versus the Democrat’s average of 13.52%.

One of the biggest concerns of investors right now is the idea of possible negative effects on returns from increased taxes and regulation if the Democratic Party gains control of the White House and Congress. However, our research shows the average annualized rate of return for the S&P 500 during periods of a one-party controlled White House and Congress are much higher than when it is split – with returns slightly favoring Democrats. To us, market returns and volatility can be arranged a thousand different ways to frame a believed correlation. But, overall, there is not a clear-cut picture of any party with a more positive effect on market prices.

Shown above is a study of 88 years of returns for the S&P 500. The colors of each data point represent the party controlling the White House during that year. The blue line through the middle represents a trend line staying relatively stagnant. From here, we see close to no correlation between the party controlling the White House, and yearly returns of the stock market. The exact correlation is approximately 10%. Many investors believe the most important event for Future Market returns, when factoring in the presidency, is Red or Blue. However, we like to look past this singular factor, as our research shows the correlation between the party controlling the White House and Future Market returns is almost absent. The uncertainty surrounding future policy as well as policy implications themselves are the most important factors from the data we have analyzed.

We attempt to steer clear of making guesses about who WILL BE the next President of the United States, and instead observe the most likely policy responses from both parties and position portfolios accordingly to the most probabilistic outcome. However, if history tells us anything, it is incumbents have a hard time finding themselves in the Oval Office again when there has been a recession within the two years leading up to the election itself.

Our research finds no correlation between specific party control of the White House and asset returns. For this reason, we do not anticipate on making asset allocation decisions based on any party winning the 2020 election. Instead, we believe the long run weighing mechanism of the market will discount the most probabilistic policy outcomes no matter what party controls the White House.

To learn more about how Acumen can help you Invest Intentionally®, please contact us.

Information used in this commentary was obtained via Bloomberg L.P.

All indexes are unmanaged, and an individual cannot invest directly in an index. Index returns do not include fees or expenses.