Growing old is rarely easy and this applies to both people and business cycles. It can be difficult to assess which stage of the business cycle we’re in, but there are some useful indicators. One of these is the Treasury yield curve. The steepening of the yield curve that we experienced early this year has reversed to a significant degree. The bond market is hinting that the early-cycle phase, in which risky assets are indiscriminately embraced, may be ending.
As reopening continues across major economies in the second half of 2021, the focus of investors has shifted to implications for inflation and, eventually, higher interest rates. The consensus of most economists is that the recent inflation spike is transitory – a result of CPI decreases during the lockdown and temporary supply bottlenecks. However, there is the risk that higher inflation may have a more enduring structural component.
Global equities are expensive, but non-US markets are cheap relative to the US. Also, despite the recent performance of value stocks, the value spread remains at or near historic highs. It is important to maintain exposure to both international stocks and the value equity factor in portfolios.
Another major concern is the potential for tax increases. While a tax increase may be likely, caution should be exercised when extrapolating the impact of tax policy on investment portfolios. In 2013, the Bush tax cuts expired for those making more than $400,000, in effect, this was a tax increase on income above that range. The S&P 500 increased in 2013, 2014, 2015, and 2016; illustrating that the tax increases did not cause a market collapse. However, for anyone considering the sale of a business or another highly appreciated asset, the prospect of a significant increase in capital gains taxes should be considered.
As always, we urge you to have a financial plan, to follow the plan, and to discuss it with your advisor if you have any questions. If you haven’t yet completed a plan that can help guide you through potential market turmoil, we’re here to help with that. We can also assist with the structuring of your business sale to reduce your personal tax liability and we can be most effective when we are involved early in the process.
Please take a moment to view our Q2 2021 Market Review.
J. Brent Everett
Chief Investment Officer
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