Capital Gains Tax Hike a Possibility

Written by Rob Copeland | 03 September 2020

The 2020 elections are just about two months away, and if the 2016 contest taught us anything, it's that predictions are a fool's game.

But for now, the polls are showing that a Democratic sweep – where they retake the White House and Senate while keeping control of the House of Representatives — is at least a possibility.

So investors should be aware of what could be in store under a Democratic government. In particular, tax reform is a major part of Democratic presidential nominee Joe Biden's plans. And one of his most ambitious proposals involves raising the long-term capital gains tax rate for households earning capital gains above $1 million per year.

Long-term capital gains — the sale proceeds from stocks, bonds, mutual funds, real estate and other investments that are owned for more than a year — are taxed at a special rate. For married couples with total income above $80,000 and below $496,600, the current rate is 15%. For couples with income above that level, the rate is 20%.

Biden's plan calls for increasing capital gains rates to the same rate as ordinary income for households with income above $1 million. Those households' capital gains rate would rise from 20% to 39.6%.

Remember that Democrats would need a clean sweep in the November elections to implement Biden's plans. Whether that will happen is unknowable. The important thing for investors is to plan for the possibility. Should power change hands in Washington, steps such as selling highly appreciated shares might be appropriate.

It's also quite possible that we will end up with divided government, where neither Democrats nor Republicans control all three branches of government. In that scenario, we'd likely see the status quo prevail, with neither party able to pass new significant tax changes into law.

In addition to increasing capital gains taxes, Biden would target the top 1% of earners, with a higher income-tax rate. Specifically, taxes on ordinary income above $400,000 would return to the Obama-era 39.6% rate, which was lowered to 37% early in Donald Trump's presidency. Biden has also proposed an increase in the payroll tax to income above $400,000, in order to shore up the Social Security system.

President Trump has been more vague about his tax agenda for a second term; he's spoken about keeping more of workers' pay in their pockets, for instance. But he hasn't offered the level of detail that Biden has.

As a financial advisor, it's not my place to tell you who to vote for. But I am advising my clients to be prepared for the different eventualities that could lie ahead, and to be prepared to make money moves to suit your situation. If you'd like to discuss your investments, please don't hesitate to reach out to us.

What the Elections Mean for Your Investments

Written by Rob Copeland | 14 July 2020

November's elections are less than four months away, and if history is any guide, many investors will experience growing anxiety between now and then.

At the root of that anxiety is uncertainty about whether or not control of the presidency, and perhaps Congress, will change hands. Such a change could trigger policy and legislative changes impacting the economy—or more specifically, certain sectors of the economy.

Facing this uncertainty, some investors will be tempted to move to the sidelines until after the votes have been counted and the future seems more clear. I'd caution folks about taking that approach because it could cost you gains.

Historically, broad stock markets are generally flat in the year of an election cycle, although actively managed portfolios have the potential to beat markets. In the year after the opposition party wins the presidency, markets tend to rise—and they rise a bit more sharply when the incumbent party remains in power. (Bonds, by the way, tend to slightly outperform after elections no matter which party takes office.)

So which sectors are most sensitive to the results of this year's elections? Two that could be impacted are healthcare and energy. President Trump has been supportive of the fossil fuel industry, and has sought to chip away at Obamacare. A President Biden would presumably put pressure on both areas.

But the stock market is constantly uncovering and interpreting forward-looking information, and thus it's continually re-pricing stocks. Whatever Washington does to impact healthcare, energy and other sectors, the market will largely have priced it in by the time it happens.

Furthermore, neither presidential candidate will be able to make sweeping changes unless they control the presidency, the Senate and the House of Representative. And markets are not currently pointing to such a scenario.

My advice to investors is to be cognizant of the election news, and understand which sectors might be affected by the election results, but don't overreact. Make sure that your portfolio is properly allocated—that you own the right balance of different sectors, and that your risk is in line with your goals and risk tolerance. If it's costing you sleep, you may want to shift from riskier assets into more defensive ones.

The bottom line is that selling out or making impulsive moves—perhaps influenced by your politics—is not in the best interest of your portfolio. Please don't hesitate to contact me if you'd like to review your investments.

Raise Cash, Look for Opportunities

Written by Rob Copeland | 16 June 2020

The stock market has had an astounding run over the past three months, or it had anyway, until the June 11 correction interrupted it. Even in the midst of the market's sharp selloff, the S&P 500 index of blue-chip stocks remained 35% above its March low. The tech-heavy Nasdaq was up 39%.

The fact is that the stocks that have led the recovery are still expensive and have little near-term upside. That's why I believe it's time to raise cash and look for companies that offer immense value, but that the market has left behind.

The bull market that followed the mid-March lows has been led by big companies in tech, communications and healthcare – sectors that were seen as good bets during a time of uncertainty. But having piled in and driven up prices, investors had already started rotating out prior to June 11.

The reason for the rotation is simple: With the market-leading sectors having grown prohibitively expensive, investors want alternatives with the potential for greater price appreciation. I agree that a lot of the big names out there are way too expensive right now. Zoom, the videoconferencing company, is up over 200%. Facebook is up more than 50% since mid-March. AstraZeneca, which is working on a Covid-19 vaccine, is up 34% from its March lows.

I have begun paring back winners and raising cash in accounts with low cash levels, which I'll use as buying opportunities arise.

The auto industry looks interesting right now – and I don't mean Tesla, whose sky-high shares are up 126% this year. Traditional automakers like Ford, whose stock has lost a third of its value since January, are worth checking out as the economy continues to reopen and stir-crazy families start to take trips. Note that Americans will be more likely to drive than to fly, given continuing concerns about being around strangers in enclosed spaces.

Certain energy companies are also interesting now that oil prices have rebounded to near $40 per barrel from negative valuations. Higher oil prices allow oil producers to pay their debt stay in business and make a profit.

I'd even look at airlines here, not as long-term investments but as short-term, opportunistic plays. Southwest Airlines stock, for example, has lost more almost 40% of its value since February. As Americans gradually begin to fly again, it and other airlines should be able to cut their losses and begin to recover – especially domestic travel-focused carriers like Southwest. But airlines' fortunes are particularly vulnerable to coronavirus news because their business model consists of jamming people together in closed-off spaces.

Indeed, the ongoing pandemic remains the greatest risk to the economy. Market watchers are hopeful that states can reopen safely, but are looking warily at a surge of new cases in several states.

The bottom line: The market has begun rotating out of the big, growth-oriented companies that led the way after the March lows. This is a good time to raise cash and pivot to selected, lower-priced stocks that could get a lift from the nascent economic recovery and the tailwind of market rotation.

Because the economy and the markets remain touch and go, and it's important to really do your homework before investing. Please give us a call if you'd like to discuss your investments.

Be Very Careful Here

Written by Rob Copeland | 13 May 2020

Something strange is happening in the stock market. While earnings among companies in the S&P 500 index are down 25% this year, the index itself is down just 10%. Meanwhile the broad economy is in dire straits, with unemployment having jumped from 3.5% in February to 14.7% now.

What's happening? It may be that the 11-year bull market that just ended has trained investors to see any and all trouble as temporary. It may be that investors are just willing to bet on America. This optimism bias, as I'd call it, is a dangerous thing right now.

We are in a new normal of uncertainty. With Covid-19 still raging in the United States, frightened consumers are, for the most part, staying home and keeping their wallets shut. If the country re-opens too quickly, without proper precautions in place, we could be in for a second wave of the outbreak very soon. Some promising treatments are being developed for those who fall ill, but a vaccine is months if not years away.

That all adds up to uncertainty for businesses. Certain companies have little or no revenue right now. Many have stopped offering revenue projections altogether because it's just not clear when consumer demand, which is responsible for 70% of the U.S. economy, will pick back up.

And yet investors are buying as though Covid-19 were just a speed bump in the rearview mirror. Even technology stocks, which might seem to be immune to the troubles faced by restaurants or concert venues, have been bid up to an irrational degree.

My view is that we're in uncharted waters, and that while there are still buying opportunities, extreme caution is warranted. When markets drop again, and they will, I'll be looking at selected companies in the technology sector. I'll consider buying consumer preferred retail such as Amazon, and discount retail. Cloud storage and data provider companies look promising, as do companies that support and profit from these businesses.

I'm absolutely staying away from travel and leisure, non-discount retail, oil companies with lots of debt, and most real estate. And while some badly beaten down stocks in the airline and hospitality industries may bounce back over the long term, there is very, very little visibility into the future of those industries right now, so I'm staying well clear and not adding to any current positions.

There's one more reason people may be plowing money into the market: Fear of missing out on the rally that's taken place since the crash back in March. Don't worry if you've been on the sidelines; you'll still have a chance to make money. Prices will fall eventually because rationality will win out.

For now, keep cash available for opportunities that could come at any time. Be patient. Even Warren Buffet, one of the greatest investors of all time, recently said that he doesn't see anything worth buying at current prices. And when buying opportunities arise, be ready. Please don't hesitate to contact me if you'd like to discuss your investments.