As 2020 came to a close, the world was in a place that very few people, if any, would have anticipated at the beginning of the year, explains Nell Sloane of Capital Trading Group.

There is no need to reiterate how the world is different, but I will highlight a few economic and financial facts that give me pause and that I don’t think should be ignored as we continue into 2021.

  1. Inflation has not been obvious despite the Fed adding $6.93 trillion to the money supply over the last five years. $3.96 trillion came in just the last year. When more money is added to the system inflation shows up…eventually. This is financial physics, and we can probably expect to see some real inflation in 2021.
  2. About 25% of all US dollars in circulation were printed this past year.
  3. US total market capitalization (i.e., the value of all stocks) is about 185% of total Gross Domestic Product (GDP). This ratio is sometimes known as the “Buffett Indicator.” The long-term average is around 85%. Although there are arguments about how the total market capitalization should be measured, the conclusions are all the same: the US stock market is “significantly over-valued.” Many financial models that use current market value as a predictor are forecasting negative market returns over the next seven-eight years. Forecasts are often wrong, but it would seem to merit some attention.
  4. Apple stock is a good example of what has happened to the US market in the last year. Apple went from a market cap (i.e., the value of all of its stock) of $1.28 trillion to $2.24 trillion. A 75% increase. In the same timeframe, Apple’s revenue grew by 5.51%. In other words, most of Apple’s stock growth is a result of their stock simply getting more expensive, and this happens because more people want to own their stock. Why? Who knows? But if those same people who drove the stock up change their minds, or decide they now want to own Tesla or Scotts Miracle-Gro, an equal and opposite phenomenon can take place. Again, Apple is just an example.
  5. And what about Tesla? Tesla was added to the S&P 500 in December of this year and is already the sixth largest stock in the Index. Tesla has a larger value than all other car companies put together. Elon Musk is definitely a visionary, but who is the #2 person at Tesla? Nobody knows.
  6. The last time corporate bond yields were less than 5% was 1957. In 2000, they were north of 8%. In 2010, they were 5%-6%. Today, the iShares Corporate Bond Index has a yield of 2.75%. The days of bonds serving as a safe way to make a reasonable return are over, at least within our lifetime.
  7. With the passing of the SECURE Act in 2019, the Required Minimum Distribution (RMD) age was pushed from 70 ½ to age 72. This gives investors with IRA accounts a couple of extra years before the IRS begins forcing money out and collecting their taxes. That’s nice for IRA holders, but not nice for their beneficiaries. The SECURE Act eliminated the “Stretch” IRA function that allows Inherited IRAs to be withdrawn over the survivor’s lifetime. Inherited IRAs now need to be drawn down to $0 within 10 years, making them less attractive to pass along to kids (because they will need to pay taxes at their income rates) and creating the need for more thought when it comes to legacy planning and the potential benefit of Roth IRA conversions.
  8. It is likely that income tax rates will go up at some point under a Biden/Harris administration, creating more of a potential need for tax deferral or tax avoidance strategies (Roth IRA, life insurance, irrevocable life insurance trusts, etc.)
  9. For 2021, the estate tax exclusion amount is $11.7m for individuals and $23.4m for married couples. These amounts are due to “sunset” in 2026, but there have already been proposals to reduce these amounts prior to 2026, with the exclusion being reduced to somewhere between $5.5m and $3.5m depending on the proposal. The IRS has a rule in place that gifts made prior to a limit reduction cannot be “clawed back,” or cannot result in retroactive taxes, so proposals like this may require some “just in case” planning to be prepared for different scenarios.

This is a long list (and not comprehensive) of things that could make you go “Hmmm.” Can we expect future returns in a stock market that seems to have become disconnected from math? While no investment can assure us of future success hence why we often state, “Past performance is not indicative of future results,” we must be cognizant of the fact that some alternatives within managed futures can offer a low correlated means to take advantage of potential gains when the stock market fails or disappoints.

Learn more about Nell Sloane by visiting Capital Trading Group

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