This article represents the opinion of the writer. As always, though, you should remember to consider every piece of investment information you receive. Realize not all investors are in the same situation and needs. If you require the service of a Financial Advisor, we recommend you seek out one and verify their experience. You can also click the link below to contact us.
Now let us unlock KW Wealth Management's December 2021 market insights
The market is back to worrying about the new COVID variances and inflation risk. It is not a piece of NEW information. It is also not a new piece of concern regarding the market fundamentals and valuation. I recommend not increasing or decreasing your cash and stock allocations with fear. Do not reposition a sound investment philosophy based on day-to-day diplomacies. You have to be consistent with the long-term income and growth approach. As stated in my client's monthly newsletter, we are also right about forecasting market rotation in Q4 2021. That being said, let us review our current principal of trading strategy.
Infrastructure Bill
The "Once In A Generation Investment" infrastructure investment bill made it to Congress. Trillion-dollar spending on repairing roads, bridges, railways, airports, etc. I expected these investments to enhance broadband internet, power grids, and water or sewage repairs and upgrades in the future. However, I am not yet buying the theory that these investments add millions of jobs per year to our country. My theory is based on the fact and the circumstances around the cost of labor and anticipated inflation. If corporations are savvy, they are inclined to scale back investment in labor costs or materials. The corporation will pass the increased cost to the consumer; then, the inflation rate may be an even higher year ahead. Secondly, many corporations will explicitly assert investments in automation and reinforce a hybrid working model to maintain the control of labor and operating costs/expenses. In short, investors shall expect an upside risk in inflation while an upside growth potential in the technology industry with progression on cost management and robotics automation.
Estate Tax and Capital Gains Tax
Active estate and tax planning are always necessary as part of our client's overall financial plan. Our company culture is to partner with local CPAs or estate planning attorneys to assist our clients in long-term planning. That being said, we know that the updated bill is pushing back an increase to required minimum distributions from IRAs starting in 2029. This limit would apply to taxpayers with income more than $400,000 (single) or $450,000 (married-joint) and an ultra-large balance between defined benefit plan, defined contribution plan, and other retirement accounts. It also forbids high-income earners' further contributions to a Roth or Traditional IRA. But as I said, it is not effective until 2029.
Moreover, the top long-term capital gains rate of 25% (up from 15%) will take effect at the same threshold ($400,000 for single filers; $450,000 for married couples filing jointly) at which the 35% ordinary income tax bracket becomes the 39.6% ordinary income tax bracket. Things can change again between now to 2029. But depending on the individual's circumstances, it may make sense to accelerate income into 2021. A back door ROTH IRA contribution is another proactive way to secure more contribution and increase the sheltered tax portfolio growth rate. Ultra-high-net-worth clients have likely known this and would probably already have done such planning. Wait! Would that be the reason why Elon Musk sold millions of Telsa shares this year to pay tax?
Supply Chain Condition
Motor vehicle and parts jobs rose +27.7 K in October after declining -5.6 in September, indicating a hint of resolving chip shortages. What is more important is to concentrate on the big picture. What are the steps to migrate risk or avoid supply chain disruption in the future? I see a newfound focus on US-based corporate planning to produce small parts or chips locally. We are medium-term bullish with shipping companies engaged in the seaborne transportation of containerized goods, material, and dry cargo. We are also long-term bullish with business-to-business providers of packaging, publishing, and hygiene products in the U.S. Finally, we are also long-term bullish with 3D printing technology and companies building a self-reliant manufacturing prototype. It is the future way to map out the policy on clean energy, non-plastic consumption, and flow management. It is also one way to reduce the systematic risk of depending on China, Korea, Europe, or Africa supply chains conditions. I believe this is a fashionable approach to control inflationary issues down on the road. And due to the current investing climate, we are short-term bearish on the energy, natural gas, crude oil, and semiconductor industries.
Fed Tapering
This risk-free benchmark rate was 1.48% on Nov 8. In November, the Fed announced the plans to slow bond purchases by $15 billion every month from the existing $120 billion a month, with the program ending midway through 2022. However, the Fed remains shy on how soon they may need to increase interest rates. We have no plan to follow the market sell-off now due to the Fed's decision on bond tapering. Also, we have no plan to go out and buy, buy, buy just because the price dropped on Black Friday. As I pointed out since Q4 2020, inflation is a real concern in 2021, and it is more severe than what the government addressed in the Fed meetings throughout 2021. I am not surprised now the Fed admitted the current inflationary risk on Nov 30, 2021. We will continue to hold dividend-paying stocks to hedge inflation. We also have material stocks, individual corporate bonds, short-term treasury, and other fixed-income to hedge the volatile of the portfolio. When the opportunity presents to us, we might rebalance our percentage of holdings in those areas.
Omicron Coronavirus Variant
My friend, the world is not blowing up, although sometimes I feel firmer about some opinions than others. I started my career in 1998 when many were afraid of Y2K, also known as "the year of 2000". It was a widespread outcry worrying about the computer change from "99" to "00" and bringing down computer systems for banking and power plants. Many feared it was the end of the world. I learned that fear is the worse enemy when it comes to making trading judgments. Be a cautionary opportunist. Let's look outside of the box with the current Omicron coronavirus variant. Some of us might need to take some vaccination until the date we perish. Hence, I am long-term bullish on investment in the health care industry. I am short-term bearish with airlines, restaurants, or the leisure sector. Furthermore, I believe the labor force participation rate will stay at around the current level of 60%. Many will stay home, not look for work, or retire until they know more about the new variance, child care arrangement, wages increase, etc. However, I don't foresee this trend will affect the ongoing U.S. GDP Growth recovery. I also think temporary help jobs will pick up during the holiday seasons. I continue to use retail commerce, cloud computing, and cybersecurity companies as offensive and defensive portfolio acquisitions.
I conclude that the world is not over. After all, Costco, Walmart, and Amazon are still getting more money from me than I want to spend. The risk of overspending on these retailers is not going away, and these companies' potential to make more money from you and me will prevail. Sometimes it is simply a matter of looking at it differently or not worrying so quickly. Focus on long-term asset management instead of doubts and fears is our area of specialization.
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Disclaimer:
Past performance is not a guarantee of future results. KW Wealth Management does not guarantee any minimum level of investment performance or any index portfolio or investment strategy success.
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