Quarterly Update
It has been a quarter of change, from political leadership to progress with vaccine distribution to new openings across the state and the country. Three months ago, to know someone who had received a vaccine was a rare and special circumstance. Now, it seems like more and more folks within our social circles are getting their shots. Almost 40% of Americans over 18 have gotten at least one shot, with one in five being fully vaccinated, and that number is expected to skyrocket over the next few months.
It finally seems like we are in the end stages of the pandemic, so what’s left is to figure out how this will wrap up. How will local restrictions adapt to the downturn in spread that vaccination causes, and how quickly will that happen? When will it be safe for schools to return to 100% in-person teaching, and when will kids be able to get their own vaccinations? The questions that confront us now are so much better than the fearful questions we asked ourselves at this time last year.
On the political side of things, the big topic of the last few weeks has been tax rates. Could we see a tax hike during a Biden administration? When would it take effect, and who would be included? As you can see from the chart below, federal tax rates for individuals are largely at their lowest level of the past thirty years.
The plan Biden campaigned on proposed increasing the top individual bracket, covering incomes $400,000 and up, to 39.6%, which was the rate prior to the Tax Cuts and Jobs Act of 2017. The current tax conversation primarily covers corporate taxation, but a following plan to push investment in education and healthcare is expected to follow that closely. A major question is how much of that will fly with more conservative Senate Democrats like Joe Manchin of West Virginia and Kyrsten Sinema of Arizona. Because Democrats must vote unanimously to pass bills in a 50-50 Senate without Republican support, Manchin and Sinema have wide latitude to shape legislation. It’s reasonable to expect that tax increases will be toned down prior to passing – if they indeed do pass.
On an investment side, the stock market continues to perform extremely well, but bonds have not fared as well year to date. Bonds are interesting due to the relationship between bond prices and current interest rates. As current interest rates rise, the prices of existing bonds fall. 2021 has seen the second worst start of the calendar year ever for bonds. However, our friends at Blackrock put together a great chart looking at historically poor starts for bonds and what they looked like for the rest of the year.
We continue to hold bond funds within our portfolios, because they’re an important hedge against volatility within the stock market. As an example, during the COVID downturn in March of last year, we were happy to own this asset class. Despite this poor short-term performance, from a long-term perspective those positions are important to helping keep our client portfolios balanced.
We wish you and yours well entering this spring season. May the sun emerging bring you some much-needed Vitamin D! Please do not hesitate to reach out if we can be of help.