Market Growth and Earnings
The U.S. stock market was positive through the second quarter of 2021, bolstered by the accelerating economic growth of the U.S. economy. JP Morgan reports that,
“Real GDP numbers for the first quarter showed a strong 6.4% annualized growth. However, April data for consumer spending, inventories, and durable goods orders reinforced our view that this growth is accelerating and that second-quarter growth could be over 10%.”
Even if the economy should begin to slow in the second half of the year, it is not unreasonable to expect the fourth quarter to grow 7.5% over 2020. Amazingly, this would essentially mark a full recovery from the pandemic-induced recession.
When markets rise to new heights, as they have recently, investors become increasingly nervous that the stock prices may be unsustainable and susceptible to correction. Markets tend to be more fragile when valuations worsen due to the earnings of the underlying companies not keeping pace with the prices of the stocks. But so far this year, earnings have recovered remarkably and year-over-year earnings growth is expected to hit an all-time high. Many sectors in the U.S. economy continued to do well during the pandemic and still show healthy revenues. Other companies are showing signs of recovery. Additionally, some companies have shown increased efficiencies, allowing the increased revenues to result in wider margins and increased earnings per share. Although valuations are historically high in the U.S., strong company fundamentals are supporting the current stock prices.
However, looking ahead, growth in the U.S. stock market may be stifled by external forces. Wage costs, higher interest rates, inflation, and, potentially, higher corporate tax rates could negatively impact future growth. Many factors have led to higher inflation but none more significant than increased consumer spending pulling against systemic supply-chain interruptions across the economy. Economics 101 teaches that an increase in demand and a decrease in supply will often result in higher prices. And while reports of rampant inflation may be somewhat overblown in the short term, there has been a material increase in prices, a 4.9% increase in May. The increase was shocking but not entirely unexpected and was due to the state of the economy in May of 2020 and the significant improvements since then. However, more important is the annualized 2.5% increase in the CPI over the last two years. This means the average consumer has seen noticeable increases in costs of goods and services dating back to 2019. Some of these price increases should be transitory but economists suggest inflation could still be 3.0%-4.0% through the end of 2021 and could remain much higher in 2022 than the Fed’s former inflation target of 2.0%.
Financial Planning Concepts
5 ways to improve your estate plan
It is common knowledge in the financial planning community that very few people LIKE working on their estate plans. And while the process may feel like a necessary evil, there are some fundamental steps you can take to help avoid a mess for your heirs after you are gone:
1. Review your estate plan with your attorney at least every 3-5 years.
A quick meeting with your attorney will keep your plan updated from both the personal and legal perspectives and provide a “tune-up” to ensure there are no surprises for your heirs. A regular review is the most crucial step in improving your plan since, of course, you cannot fix problems with your plan after you are gone.
2. Prepare a personal Net Worth Statement that includes the ownership of your assets and your beneficiary designations.
The Net Worth Statement is an essential tool for helping your Personal Representative settle your estate. It includes all your assets and all your liabilities listed by ownership. Simply knowing locations of accounts, account numbers, beneficiary designations, and ownership speeds up the settlement process and can also help avoid the risk of an account or insurance policy not being claimed and ultimately lost (or significantly delayed) in the process.
3. Regularly review the beneficiaries on all your accounts and add them when appropriate.
Naming beneficiaries on your accounts can be a powerful but sometimes dangerous planning strategy. Beneficiaries on retirement plans like 401(k)s, 403(b)s, and IRAs receive special tax treatment and the proceeds of those plans avoid the probate process when properly designated. Non-qualified accounts like bank accounts and taxable investment accounts also avoid probate when a beneficiary is added. However, a beneficiary designation may supersede the provisions of your will. Reviewing your beneficiaries and your will provisions together is the best way to use this powerful tool wisely.
4. Prepare a personal property list.
As most planners know well, families often break apart when trying to settle the sentimental items in an estate. Mom’s pie plate will always elicit more emotion than her checking account, and a well-crafted personal property list with designated heirs can help avoid the trouble that often arises. Talk with your heirs about your plans, gather feedback and write down everything you hope to designate. Most families do not expect the children to disagree, but unfortunately, it happens often.
5. Prepare the next generation for the inheritance sooner rather than later.
Wealthy families often make a mistake when they depend on the estate plan to “teach” the heirs how to manage the wealth by creating trusts to limit access, appointing trustees, and using guardians to “protect” the heirs from the hazards of wealth. “Shirtsleeves to shirtsleeves in three generations” is the adage that describes the curse in these families. Involve the children early and often and empower them with responsibility and challenges to help prepare them to take over the reins. Then, when you need help later, you can rely on your children to know exactly what to do.