Author Archive for Taryn Clark

The Morning View: October 20, 2020

Announced this morning, Housing Starts were 1,415,000 in September, an increase of 1.9% which is slightly less than expected. Building Permits were 1,553,000 in September, up 5.2%, which is higher than estimates. Overall, these figures indicate the housing market is maintaining its strength, especially with Building Permits, as we continue through the impact of COVID-19. With interest rates at extremely low levels, it promotes mortgage activity and accepting lines of credit for home projects. In addition, the housing market helps to support other industries, such as manufacturing which has exhibited strength in recent months as well. In all, with reports this morning of progress on another round of fiscal stimulus bond yields have ticked higher and equity futures are also higher as we head into the market open.

This material is intended to be for informational purposes only and is intended for current or prospective clients of Argent Trust Company. This information is obtained from sources believed to be reliable, and its accuracy and completeness are not guaranteed. Information does not constitute a recommendation of any investment strategy, is not intended as investment advice, and does not take into account all the circumstances of each investor. Forward-looking assumptions are Argent Trust Company’s current estimates or expectations of future events or future results based on proprietary research and should not be construed as an estimate or promise of results that a portfolio may achieve. Actual results could differ materially from the results indicated by this information. Investments can go down as well as up. Past performance is not a reliable indicator of future results.

Estate Planning for After the Election

U.S. Election day outcome could result in significant changes to current tax policies

BY: Chris Kelly, JD
Market President, Nashville
(615) 599-9863

There is truth in Founding Father Benjamin Franklin’s famous quote written in a letter  to a friend, “… but in this world, nothing can be said to be certain, except death and taxes.” But he was wise enough not to elaborate on what type of taxes, because there is great uncertainty on that topic, especially as we await the outcome of the November elections.

Of course, no one knows what the future may hold. Will the Democrats take the White House and both houses of Congress? Or will the Senate be the one chamber that remains in Republican hands? Or will both major parties retain control over the offices and houses that they currently control?

Despite this uncertainty and any resulting effect on our tax laws, it is still worthwhile to review what the candidates from the major parties have proposed to see what impact, if any, there may be on taxes if a particular candidate or political party is successful.

For the most part, President Trump’s tax policies are reflected in the 2017 Tax Cuts and Jobs Act (TCJA). Other than a few mentions of some minor tweaks (like lowering and/or indexing the capital gains tax rate and extending the federal estate and gift tax exclusion), the Trump campaign has not put forth any substantive proposals that would dramatically affect the current tax code.

On the other hand, Vice President Biden has put forth proposals that, if they do become law, would make significant changes to current tax policies in the United States. His campaign has made it clear that a Biden Administration would increase taxes on wealthier taxpayers. While his proposals would potentially impact many sections of the tax code for businesses and individuals, the more significant ones of which investors should be aware are as follows:

Federal Estate and Gift Tax Exemption – The Biden campaign has proposed moving the federal estate and gift tax exemption back to its pre-2017 level of $3.5 million per person from the current $11.6 million per person. (NOTE: the current exemption amount will still revert to $5 million in 2025 if Congress does not act.) By lowering the exemption amount, more estates in the United States would be subject to the federal estate tax.

Step-Up In Basis – Under current law, when a person inherits an asset from an estate, the new owner is able to legally change or “step up” the cost basis of the asset to its market value as of the deceased person’s date of death, irrespective of what the deceased person paid for the asset. Thus, when the new owner sells the asset, he or she pays capital gains (if any are due) based on the difference between the “stepped-up” basis and the actual sales price. The Biden plan removes the “step up” provision of the current law, which may result in (1) the new owner having to still use the deceased owner’s cost basis when the asset is eventually sold or (2) a tax being due at the time of death on the unrealized gain embedded in the asset (based on the difference in the deceased person’s cost basis and the date of death value). The effect of this change would be an increase in capital gains due after the sale of assets because of the lower cost basis.

Income Taxes – The Biden proposal suggests increasing the top income tax rate to 39% from 37%. While the Biden plan does include reinstating some of the income tax deductions that were in place before 2017, it does put some limits on these deductions for households with income that exceeds $400,000.

Capital Gains Taxes – For those taxpayers with adjusted gross incomes above $1 million, the Biden plan would remove the favorable tax treatment for long-term capital gains (based on the sale of investments held for more than 12 months) and would tax capital gains and dividends at the same rate as ordinary income. This would effectively double the tax rate on long-term capital gains for these taxpayers.

If the Biden/Harris ticket is successful, their Administration may first focus on areas believed to be more critical than tax policy, such as stimulus or infrastructure spending. However, when it comes to revising the tax code, it is quite possible that any changes made any time in 2021 will be retroactively applied back to Jan. 1, 2021. (The U.S. Supreme Court has held that the retroactive application of a tax law is constitutional.) Thus, just because a law is in effect on a day that a taxpayer takes action (i.e. early in 2021 before any new tax legislation is passed), he or she is not guaranteed that the law governing the action will not be changed before the end of the tax year. Thus, if any action is required to take advantage of current (2020) tax laws, it would be prudent to have it completed before the ball drops at midnight on 12/31/2020.

While it may be premature to take final action before knowing the conclusive election results, there are still preliminary steps that would be sensible to take before Nov. 3:

1| Review your current financial assets (e.g. stocks, bonds, mutual funds, real estate, business holdings, etc.). Consider the income tax and capital gains implications that are tied or embedded in each one.

2| Review your current estate plan. Review your will or other testamentary documents. Consult now with your trusted advisors—such as your attorney, accountant or trust officer—to ensure you have a good understanding of your current strategy for distributing your assets at your death and how the proposed tax changes might affect your plan today if you take no action.

3| Evaluate possible actions to take if the election outcome favors the thesis that the White House and Congress will enact significant tax law changes in 2021 that will impact you directly. By making a tentative plan now and identifying possible solutions that you could implement under various scenarios, when the election results are confirmed, you will be in a better position to move forward quickly with implementing those measures required to best protect your income and/or estate from unnecessary taxes.

Now is a good time to go through the process above, especially in light of (1) the substantial changes being proposed by the Biden/Harris team and (2) the fact that many of the income tax and estate provisions will expire or change at the end of 2025 irrespective of the election outcome. If any of the tax legislation that has been proposed becomes the law, you will be glad that you took the time to thoughtfully consider its impact and take action as your advisors and you deem to be in your best interest. It is expected that after the election many of the professionals with whom you may need to meet could be extremely busy working with clients who are also in need of review and changes before year-end. As a result, it is advisable to meet with your advisors before the election rather than afterward, when time may be of the essence.

It’s true that anything can happen in politics, but having an idea on how to respond ahead of the possible outcomes is a prudent exercise to undertake.

Don’t Let These Too Common Estate Planning Excuses Stand in Your Way

The top reasons why people don’t have an estate plan may sound pretty familiar to you. Here’s what they are, and what’s at stake.

Originally published on Kiplinger.com on October 16, 2020

 

James Ferraro, JD  |  Vice President & Legal Counsel

We all lead busy lives. Our children, significant others, parents, co-workers and many others place demands on our time, barely leaving us time to do the things that we want to do, much less those things that we should do.

I have spent many hours working with clients and their attorneys to construct estate planning documents that have been structured to meet a client’s needs at the time, but which are not later updated as circumstances change. I’ve also spent a significant amount of time creating estate plans in a hurry in the face of a major life event. Finally, I have assisted with a third variety of planning — plans that are proactively created, communicated to the prospective beneficiaries and periodically reviewed.

Although this last category arguably produces the best results for clients, it is sadly the least common. So why do most people delay in creating a thoughtful plan or fail to regularly review the plan that they have? I hear many justifications from clients or would-be clients for postponing the creation of an estate plan or neglecting its review. Here are a few of the most common:

 

1. I do not have much, and my family knows what I want to happen to my assets.

If you don’t have an estate plan, the state where you reside at your death has a plan for you. Every state has default legal rules for administering the estate of a person who has made no other plans.

If you are married, these rules of “intestate succession” generally pass all, or most, of your assets to your surviving spouse, provided that your children are also your spouse’s children. If you are not married and have no children, then your parents may receive your estate. This can disrupt any benefits planning or other estate or disability planning that they may have undertaken. If your parents are no longer living, then your brothers or sisters, nieces and nephews are generally next in the line of succession in most states.

It is important for you to know that without a will, you allow a judge, who doesn’t know you, to apply the law and distribute the assets that you have worked for in a way that you may not want. At a minimum, you should consult with an attorney in your state to confirm that your state’s plan is compatible with your wishes.

 

2. Consulting with an attorney will cost money that I would rather give to my family, spend now or invest for the future.

The law in many states allows for the executor of an estate and her attorney to charge as much as 2% of the value of all the estate assets as a fee. A typical probate estate valued at $300,000 — consisting of a house, car and bank account — could generate more than $6,000 in fees and court costs. If your plan keeps a certain amount of your assets outside of probate, these statutory costs may be reduced or eliminated.

If any of your heirs are presently disabled, or may later become disabled and wish to apply for any government benefits to assist with their care, the lack of effective planning may force your loved ones to spend money that they receive from your estate for their basic needs rather than special things that might add to the comfort of their lives.

For these reasons, spending a little on your planning today can add significant value for your heirs later.

 

3. I don’t care what happens to my assets because I’ll be dead.

Your estate plan is not limited to the transfer of assets at your death. Revocable living trusts are a valuable estate planning tool that can provide protection if you are ever unable to pay your bills and manage your affairs due the natural aging process, illness or an accident.

It is quite common for a person to serve as trustee of her fully revocable trust tending to her own affairs in the same way she does now. If the creator of the trust were no longer able to manage her accounts and pay bills, a family member, a trusted adviser or a bank or trust company can serve separately or collectively to continue those necessary tasks without interruption.

Without any planning, it may be necessary to incur the time and expense of asking a court to appoint a person to accept this responsibility. A trust also allows for the efficient distribution of your assets following your death, either outright or in further trust for your heirs, without incurring the time and expense of any court involvement.

 

4. I will never die, and I will always be mentally sharp.

If this is the case, you’re right — you don’t need an estate plan!

Most people are too busy enjoying their lives to think about the possibility of losing their physical or mental capacity or their eventual demise. This is understandable, but it ignores the inevitable. Most attorneys and financial advisers welcome a conversation about planning techniques to ease any future hardship on you and your family that may be caused by your death or disability.

You should have that conversation sooner rather than later, because you’re worth it, and so are your loved ones.


Jim Ferraro is a vice president and trust counsel in the Shreveport, La., office of Argent Trust Company. Ferraro is a 2003 graduate of the University of Missouri at Kansas City School of Law, past president of the family and the law section of the Kansas City Metropolitan Bar Association, and is a member of the Tax and Estate Planning Council of Shreveport.

The Morning View: October 16, 2020

Announced this morning, Retail Sales for September increased 1.9%, more than double what was expected. Strength occurred in Clothing & Accessories stores as well as Sporting Goods, Book, and Hobby stores. Meanwhile, Electronics & Appliance stores were weak. The Control Group, which excludes sales for food, autos, building materials, and gas stations, increased 1.4% in September, also much larger than expected. Overall, a strong report in September, following weaker data in months prior. With clothing and book retailers exhibiting strength, individuals likely spent on back to school items in the month as many school systems reopened a bit later than usual given the impact of COVID-19. In addition, the report should give confidence to the prospects of economic growth given consumer spending is a large portion of GDP. In all, bond yields moved higher following the report and equity futures are higher as we head into the market open.

This material is intended to be for informational purposes only and is intended for current or prospective clients of Argent Trust Company. This information is obtained from sources believed to be reliable, and its accuracy and completeness are not guaranteed. Information does not constitute a recommendation of any investment strategy, is not intended as investment advice, and does not take into account all the circumstances of each investor. Forward-looking assumptions are Argent Trust Company’s current estimates or expectations of future events or future results based on proprietary research and should not be construed as an estimate or promise of results that a portfolio may achieve. Actual results could differ materially from the results indicated by this information. Investments can go down as well as up. Past performance is not a reliable indicator of future results.

Using Forfeitures to Fund Retirement Plan Contributions During a Financial Crisis

BY: CHRIS SHANKLE, CPA, CGMA
Senior Vice President, Argent Institutional Services

This is the final article of a three-part series that provides guidance for plan sponsors who are faced with cash flow pressures at their business. (You can find the first article here and the second one here). The goal of the series is to offer alternative solutions to consider before reducing employer contributions to participant benefit accounts.

Chris Shankle

As much as everyone wishes it would go away, the coronavirus pandemic remains a threat to many businesses

and to employee retirement savings. Plan sponsors searching for ways to sustain contributions to company qualified retirement plans should look closely at forfeitures to help reduce expenses and help their workers save for their financial future.

When applied correctly per the terms of a company’s retirement plan, forfeiture dollars could be an invaluable source of cash – and should be the first accounts to analyze before contemplating an amendment to reduce the employer match or change contributions.

WHAT ARE PLAN FORFEITURES?

Forfeitures, for plan sponsors unfamiliar with the term, are the non-vested portions of former employees’ account balances that are in a company retirement plan. Once employees who are not fully vested are terminated and take distributions, these unvested dollars are tracked and recorded in a special account in the retirement plan’s accounting called forfeitures.

Benefits executives must always remember that forfeitures are plan assets. These amounts have been added to the plan balance and allocated to participant accounts. As plan assets, the plan document will contain language that controls how forfeitures can be used. Examples include paying plan administrative expenses or reducing employer contributions. Forfeiture dollars not applied per the terms of the plan document would be considered a breach of fiduciary duty by the employer and put the plan at risk of losing its qualified status with the IRS.

Forfeitures are tied to the plan’s vesting schedule (which may be nonexistent in some safe-harbor 401(k) plans). It is not uncommon for forfeiture dollars to build up within the forfeiture account. Oftentimes, the plan’s auditor will notify benefits executives that the balance needs to be allocated per the terms of the plan’s forfeiture provisions.

APPLYING PLAN FORFEITURES

In many circumstances, plan sponsors can treat unvested amounts in a participant’s account as forfeitures, even though a participant has not taken a distribution. This will depend largely on the specific terms of the plan document. A common issue centers on the unvested balances of accounts of terminated participants who have five consecutive years of break in service but have not worked for the company for more than five years. Depending on the plan’s forfeiture provisions, those dollars generally could be reclassified and added to the forfeiture balance.

Plan sponsors should also review the vested account balances of terminated participants. A generally accepted best practice is to maintain accurate address and contact information for former employees who have participated in the company’s retirement plan.

Administrative problems often arise when employers lose contact with plan participants and they reach the age of required minimum distributions (RMDs). A qualified plan is required to distribute these funds to those individuals. Generally, these small, vested balances can be distributed to the participants or transferred into an individual retirement account in the participant’s name and the unvested portion placed in the forfeiture account.

By understanding plan provisions for forfeitures, plan sponsors will be in a better position to leverage use of those funds to maintain the company’s retirement plan contributions. It’s also a healthy play because it encourages the timely distribution of funds to former employees when they reach RMD. Most importantly, it will help employees by giving them financial peace of mind, knowing that their employer is going the extra mile to sustain the company’s retirement plan during the most challenging economic period of our generation.

How Dynamic Financial Planning Can Help Young Couples

THIS ARTICLE IS THE SECOND IN A SERIES IN CELEBRATION OF NATIONAL FINANCIAL PLANNING MONTH DURING OCTOBER

Our first article discussed the importance of financial planning, and our next article will explore how middle-aged couples can benefit from a dynamic financial plan.

BY: David W. Russell, CFP®, CSA® VP, Trust Officer
(601) 707-0008

David Russell

“A little ditty ’bout Jack and Diane, two American kids growing up in the heartland.”

So begins “Jack & Diane,” John Mellencamp’s classic 1982 hit song about two normal American kids thinking about their future. As we embark on a financial planning journey through the three life stages of young adulthood, middle adulthood, and senior adulthood, we analyze the life transitions that occur in the lives of Jack and Diane. While fictional, our couple typifies many of the life transitions that occur during Young Adulthood phase of life, and how dynamic financial planning adjusts to them.

When Jack and Diane first came into our office, they were young adults who met in medical school. Now they are in their early thirties and are both just out of medical residency – Jack in pediatric cardiology and Diane in radiology. While Diane was from an affluent Texas family, Jack was raised by a single mom in North Carolina. Both had recently accepted positions with a hospital system nearby and were invited to a financial orientation seminar we sponsored for new physicians. They liked our approach as fiduciaries who provided advice and counsel for a fee rather than being paid a commission on a financial product they purchased based on our recommendations. Still, they came to our first meeting a little skeptical about what they would get from financial planning because they were just starting out, with each earning a high income, but having zero savings and a lot of student loan debt.

Many young couples often face challenges learning how to manage their spending and saving within the constraint of their income. Dynamic financial planning is critical to success. Here is how we worked with Jack and Diane.

Year 1 (Age 31-32): Getting started with financial planning

In the first year of our engagement with Jack and Diane, we help them focus on the next five-to-ten years rather than a lifetime of planning. Their incomes are on a vertical upward trajectory and they likely will have ample time to fund their retirement later in life, but there are shorter-term priorities, financial land mines and risks to address. Their biggest concern is the management of nearly $250,000 of student loan debt. Diane plans to work at least five years before they begin a family (with more than one child). Their combined income at nearly $500,000 annually is more than they have ever managed, but they have already taken the plunge on a new house with a $695,000 mortgage. They have also blindly accepted three new credit card offers with combined credit limits of $75,000, not understanding that the high limit will negatively affect their credit rating

Using the Financial Planning Table of Thematic Events, we addressed these major themes through a series of project plans and action steps to address each predominant theme.

Year 2 (Age 32-33): Unexpected surprises

Things were rocking along well for Jack and Diane. By the end of the first year, their student loan debt was reduced from nearly $250,000 to $175,000 and with rising incomes expected, we planned for the debt to be eliminated in only four more years. However, when they arrived at our meeting Diane shared the news that she was expecting twins. Her plan was to work until the seventh month of her pregnancy, then go on maternity leave until the twins were six weeks old before returning to work.

Based on those assumptions, we forecast their cashflow for the next 24 months. Other than pulling back on the student debt reduction for three or four months, we were confident they could get back on track and still meet their four-year plan to be free of their student debt.

Three months later, however, Jack called to say that for health reasons Diane had been ordered to bed so they would be without her income for six months rather than the three for which they had planned. The good news was that they had been living primarily on one income and the spending discipline they had developed in the prior year meant that it would not cause a major disruption in their lifestyle. We revised the debt reduction plan slightly and coordinated new action steps needed to address their circumstances.

Years 3-7 (Age 33-37): The importance of a dynamic financial plan

Bearing the twins took a physical toll on Diane. She became anemic and though the twins were healthy, it took longer than expected for Diane to get her strength back. After a lot of thought and soul-searching, Diane decided to resign her position at the hospital and take a position with another radiological group that would allow her to work from home three days a week. This resulted in a 30% reduction in pay for her, but allowed her to spend more time at home with the twins, while maintaining her license and remaining engaged in her work. Two years later they had a third child.

In the meantime, Jack’s income increased substantially to where his salary was now close to $500,000 and he became a shareholder at his practice after the hospital sold it to a private group. Diane wanted to remain engaged in her field, but wrestled with the life/work balance. With two toddlers and a newborn, they decided to budget for a full-time nanny at a cost of roughly $1,000 per week. Two years later, at age 37, Diane became a self-employed contractor and was able to earn roughly $150,000 per year working part-time at home reading radiology images from around the world. Looking back over the previous five years, we addressed several themes and action items for Jack and Diane as they experienced these transitions.

Jack & Diane’s Financial Planning Milestones

  • Celebrated the payoff of student loans in year seven, three years later than planned, but paid off, nonetheless.
  • Increased the life insurance coverage on Jack and Diane to $3 million to insure sufficient resources for either surviving spouse to provide care for the children until their independence.
  • Increased Jack’s disability insurance coverage to the maximum for which he could qualify.
  • Began a 529 College Savings Plan for each of their children, funding each with $1,000 per month.
  • Updated their wills to include trusts for the care of a surviving spouse and dependent children.
  • Began maximizing contributions to Jack’s employer-sponsored retirement plan and provided guidance on how to allocate his contributions.
  • Teamed with their CPA to help Diane form a PLLC for her contracting work.
  • Started a ROTH 401k for Diane’s practice.
  • Identified a private banker to be a part of their financial team and to address their credit needs.

Takeaways & Lessons Learned

Having a dynamic financial planning strategy that can be modified can help couples and families overcome unexpected challenges in life. Here are three takeaways from how Jack and Diane benefited from dynamic financial planning:

  1. Remember that no matter what stage of life you are in, a financial plan is more of a compass than a roadmap. As such, it requires constant monitoring and adjustment when events occur that might alter its course.
  2. Financial Planning is a verb, not a noun. It’s not a product you are sold, but a professional relationship where open and honest conversations can be held about your hopes, fears and dreams.
  3. Your financial planning team should include experienced professionals who have helped other clients walk through many of the same life transitions you will face. With a professional team working with you, no challenge is too difficult and no obstacle too big to overcome.

If you are in a young adult phase of your life and could benefit from financial planning or simply need advice on related wealth management strategies, please contact me or any one of our professionals at 800.375.4646. We are ready to help.

The Morning View: October 8, 2020

In this morning’s data, Initial Jobless Claims were 840,000 for the week ending October 3rd, above forecasts and only a slight decrease from the previous week’s revised figures.  Continuing Claims were 10,976,000 as of September 26th, lower than expected and also lower than the previous week’s revised figures.  Overall, claims continue to show some difficulty in the labor market, especially when coupled with last week’s mixed jobs report.  Given the continued effects of COVID-19, there are still large portions of the economy that are not yet back to normal, such as the Travel and Leisure & Hospitality industries.  It may take time for the labor market to improve to levels seen before COVID-19 until people begin travelling more and creating some demand in related industries.  In all, bond yields are little changed and equity futures are higher as we head into the market open.

 This material is intended to be for informational purposes only and is intended for current or prospective clients of Argent Trust Company. This information is obtained from sources believed to be reliable, and its accuracy and completeness are not guaranteed. Information does not constitute a recommendation of any investment strategy, is not intended as investment advice, and does not take into account all the circumstances of each investor. Forward-looking assumptions are Argent Trust Company’s current estimates or expectations of future events or future results based on proprietary research and should not be construed as an estimate or promise of results that a portfolio may achieve. Actual results could differ materially from the results indicated by this information. Investments can go down as well as up. Past performance is not a reliable indicator of future results.

Monthly Investment Commentary

Third Quarter 2020

BY: FRANK HOSSE
Director of Investments
(615) 385-2720

Despite some choppiness in September, equity investors were treated to solid gains during the third quarter. The S&P 500 Index rose 8.9% in the quarter and has recovered all its losses for the year. Smaller-cap U.S. stocks posted a return of 4.9% but remain negative year to date.

However, beneath the market surface a major bifurcation remains. The mega-cap growth names continue to lead the market. The often-referenced FANMAG group of stocks (Facebook, Amazon, Netflix, Microsoft, Apple and Google-parent Alphabet) are up an astonishing 42.5% year to date on a price basis. The price return for the S&P 500 is 4.1%. And excluding the FANMAG stocks, the other 494 names have a 3.6% price loss year to date (numbers from Ned Davis Research).

The mega-cap growth effect is not only driving the returns of growth versus value in the United States, but also the relative returns of U.S. stocks versus foreign stocks. For the third quarter, developed international stocks gained 4.8%, almost 400 bps behind U.S. stocks. However, emerging-market stocks outperformed U.S. stocks with a return of 9.6%.

Within the fixed-income markets, core bonds gained 0.6% for the third quarter. Treasury yields were unchanged over the last three months. Investment-grade corporate bond spreads narrowed slightly over the quarter, as did spreads for high-yield bonds. This led to good gains for high-yield bonds, up over 4% during the quarter.

Bond markets have been calm throughout the summer, thanks in large part to extremely accommodative monetary policy from the Federal Reserve. Fed officials have signaled that they do not expect to raise rates at least through the end of 2023. With a new policy of “average inflation targeting” around 2%, coupled with inflation that has rarely topped that level over the last decade, many market participants are expecting low rates and supportive monetary policy to continue for a long time to come.

 

Outlook: Reasons for Caution, Reasons for Optimism

As is typically the case, our market crystal ball is foggy, with multiple crosscurrents and uncertainties presenting both investment risks and opportunities. Below, we highlight some key reasons for caution and other reasons for cautious optimism. We conclude with a discussion of our portfolio positioning and the need for balance given this backdrop.

REASONS FOR CAUTION

Looking out over the rest of the year, the potential for market volatility and a stock market decline is elevated, primarily due to two unusual current events: (1) the U.S. election in November and (2) the ongoing coronavirus pandemic. Two other investment risks to remain wary of are (3) expensive valuations for the U.S. stock market and (4) the ever-present potential for a negative geopolitical shock. We’ll briefly address each of these below:

  1. Election risk

For a variety of reasons, this election, and the circumstances surrounding it, really does seem unique. As one commentator on Bloomberg put it, “There is a high probability that the U.S. elections this November are going to be a mess.” There is a meaningful likelihood that we will not know the final result of the presidential election for several days or weeks after election night as mail-in ballots are counted, creating meaningful uncertainty. (It is worth remembering that the 2000 Bush-Gore election took 34 days for the winner to be declared. The S&P 500 lost about 4% during that time.) Beyond a vote-counting delay, we could ultimately have a disputed or contested election result.

Given the extreme political partisanship, polarization and divisiveness in the country, we could see social unrest (or worse) disrupt the functioning of government and day-to-day society. Putting aside the potential societal impact, the immediate financial market impact would likely be fear and investor flight from risk assets, pushing down stock prices and likely boosting Treasury bond prices.

Obviously, we hope for a peaceful election resolution. But should markets selloff very sharply, our inclination will be to “look through” the short-term fear, assume our democracy and governing institutions will remain intact and, depending on the magnitude of the selloff, view it as a potential buying opportunity.

Even absent a disputed election result, the weeks leading up to election day are likely to be volatile. The fiscal and economic policy implications between a President Donald Trump or a Vice President Joe Biden victory are meaningful, particularly if the Democrats sweep Congress. For example, a Democratic sweep raises the likelihood of corporate and/or capital gains tax increases—market-unfriendly policies. On the other hand, the economy may get a near-term boost in a Biden administration from increased fiscal stimulus (e.g., extended unemployment benefits and infrastructure spending) as well as the potential for a reduction in trade tensions and tariffs relative to a Trump administration.

Moreover, given the polling results over the past several weeks, the financial markets should already be incorporating some meaningful likelihood of a Biden victory and a Democratic sweep of Congress. In other words, a Biden victory at this point would not be a market surprise. Nor would a Trump victory, unlike in 2016.

This is certainly a monumental election along many dimensions. But from a long-term, fundamental investment perspective, it is important not to let your political views infect your investment process. While new facts and circumstances must always be incorporated into one’s fundamental investment analysis and decisions, election outcomes in any given year should rarely be the basis for major investment portfolio changes. Even more rarely should portfolio decisions be based on political predictions before the fact.

History shows that the political party in power is not a significant differentiator or driver of investment returns. There are simply too many other factors, variables and events that impact markets and asset prices over time, beyond election outcomes.

  1. The economic risk due to a resurgence of COVID-19, along with the potential lack of additional fiscal support

The coronavirus pandemic remains a significant risk in the near term. While the U.S. and global infection and fatality curves have been generally flattening/improving, the potential remains for a resurgence of the coronavirus in the fall and winter months. One recent news headline read, “‘Pandemic fatigue’ leads to resurgence of coronavirus in Europe.” The same could happen in the United States. This raises the risk of renewed shutdowns and another economic downturn. Fed chair Jerome Powell emphasized this at his September press conference saying, “The outlook for the economy is extraordinarily uncertain and will depend in large part on our success in keeping the virus in check.”

On the positive side, the unemployment rate has dropped sharply from its April high of 14.7% to 8.4% in August. But while about half the 22 million jobs lost in March and April have been recovered, the number of “permanently” unemployed has been increasing in recent months and now accounts for about one-third of the currently unemployed, up from under 20% in the early months of the pandemic. As this number increases, it increases the risk of long-term structural damage to the economy.

In his recent press conference, Powell also said that while the fiscal stimulus (CARES Act) earlier this year has been critical in supporting the U.S. economy, “my sense is that more fiscal support is likely to be needed” to help the roughly 11 million people still out of work due to the pandemic, “struggling small businesses,” and state and local governments facing budget shortfalls. And he noted that “the overwhelming majority of private forecasters who project an ongoing recovery are assuming there will be a substantial additional fiscal support.”

However, as we write this, it remains unclear whether Republicans and Democrats will agree on another fiscal stimulus package—for example, in the range of $1–$1.5 trillion—prior to the election. Time is running out and the two sides still appear far apart in their negotiating positions. It would seem to be in most of the key players’ political interests to agree on a new package. But if it doesn’t happen, it will be a hit to fourth quarter economic growth and likely the stock market as well. The extent of the impact will also depend on what is happening with the spread of COVID-19 and related medical developments (vaccines, treatments, rapid testing and tracing, etc.).

 

  1. U.S. equity market valuation risk

After soaring more than 50% from its March market low, the S&P 500 Index is again in historically overvalued territory (driven largely by a handful of mega-cap tech/growth stocks). This is clear when evaluated across a wide variety of absolute valuation metrics. By “absolute valuation” we mean the current market price of an asset relative to its underlying economic fundamentals (e.g., its sales, earnings, cash flow, dividends).

It is also very unusual that the stock market has been rallying so strongly while consumer confidence has been plunging. The two are usually highly correlated—a rising market coinciding with rising consumer confidence. This type of divergence is not sustainable. The only question is which line will catch up (or down) to the other.

While there is no economic law preventing valuations from rising even further over the near term, we do know that over the longer term, there is a very strong inverse relationship between starting valuation and subsequent investment returns: Higher starting point valuations imply lower future returns, all else equal.

 

  1. Geopolitical risks and other unknowns

There is always the potential for a negative surprise or shock on the geopolitical stage. This is not meant to highlight any particular risk—although increasing U.S.-China conflicts and the ongoing Brexit saga are two obvious ones. It is simply a reminder that stock markets and other “risk assets” are always subject to short-term volatility and drawdowns due to unexpected negative events and shocks. The coronavirus pandemic is only the most recent example, albeit an extreme one. Unfortunately, there will inevitably be other events that shock and scare the markets.

 

REASONS FOR OPTIMISM

Balanced against these market risks and macro uncertainties, we also see several reasons to remain cautiously optimistic about the investment prospects for global equities and other risk assets. We highlight four below:

  1. The economic recovery underway

An economic recovery is underway and it appears the pandemic-induced recession—both globally and in the United States—is over, barring a severe virus resurgence. For example, in August, the Global Composite Purchasing Managers Index (PMI), for manufacturing and services, registered its fourth consecutive monthly increase and its second straight month above 50, indicating economic expansion. The U.S. Composite PMI is also back in expansion territory.

Another data point on the economic recovery: In September, the Organisation for Economic Co-operation and Development (OECD) revised upward its outlook for the global economy, forecasting it will shrink 4.5% this year, compared to the 6% annual decline it had forecasted in June. The OECD is forecasting 5% global real GDP growth for 2021, which would bring the world economy to slightly above where it ended 2019. The OECD expects a gradual “swoosh”-shaped recovery from here, which is consistent with the broad consensus forecast for 2021. But as with most macroeconomic predictions, one should allow for a wide band of uncertainty.

All else equal, a backdrop of rebounding U.S. and global economic growth should be supportive of equity and credit markets as increased consumer and business spending flows through to corporate sales and profits. But, as noted above, equity markets—large-cap U.S. stock valuations in particular—are already implicitly assuming a continued recovery from the deep pandemic recession. So it remains to be seen how strong the actual recovery is and how much of it is already discounted in current prices.

 

  1. The likelihood of an effective and widely distributed coronavirus vaccine next year

Nine coronavirus vaccines are currently in Phase 3 trials, including four in the United States. Although far from a certainty, based on our understanding of consensus medical opinion, it seems a reasonable base case to assume there will be an effective and widely distributed vaccine(s) within the next six to 12 months. This will be necessary for economic activity to return to its full pre-pandemic potential. In the meantime, countries, businesses and communities are learning to adapt to living with the virus—via mask-wearing, social distancing, digital rather than in-person interactions, better treatments for those infected, etc.—without total shutdowns of economic activity.

We are confident the pandemic will end in the not-too-distant future, although the exact timing is uncertain and significant human and economic damage can still occur in the meantime. The financial markets seem to be pricing in a reasonably optimistic outlook on vaccine developments, so there is potential for short-term volatility and pullbacks if incremental news is disappointing. But there is also room for positive surprises on the medical side and therefore the economic and stock market sides, as well.

  1. Extremely accommodative monetary policy

In response to the pandemic, the Fed pulled out all the stops, flooding markets with liquidity, purchasing government and corporate bonds and cutting the federal funds rate to near-zero. The Fed has made clear it remains committed to maximum monetary policy accommodation, given the state of the economy and the uncertainty surrounding the pandemic.

At its September Federal Open Market Committee meeting, Fed officials indicated they do not expect to raise the fed funds interest rate at least through the end of 2023. Importantly, the Fed also introduced new “forward guidance” language, stating it would keep rates at zero until the labor market achieves “maximum employment,” and inflation has risen to 2% and “is on track to moderately exceed 2% for some time.” This is the new policy of “average inflation targeting.”

Given the inability of the Fed to consistently hit its 2% inflation target during the past decade, let alone “moderately” above that, many market watchers interpret this to mean interest rates could remain at rock bottom levels well beyond 2023. That’s certainly possible. But remember that economists (including the Fed itself) and other financial market experts are notoriously poor interest rate forecasters.

The Fed also said it will continue indefinitely to buy at least $120 billion of Treasury and agency mortgage-backed securities per month. Since March, the Fed has purchased roughly $3 trillion of assets for its balance sheet, which has swelled to a record 36% of U.S. GDP. These bond purchases have gone a long way to offsetting (“monetizing”) the debt being issued by the Treasury to fund the massive pandemic fiscal stimulus and deficits. This has kept downward pressure on interest rates. Otherwise, the massive increase in bond supply relative to demand would likely have pushed down bond prices, increasing bond yields/interest rates and increasing the interest expense on the federal government’s huge and growing pile of debt. But as long as rates stay low—below the growth rate of GDP—the government debt service cost should be manageable and the debt-to-GDP ratio sustainable.

Other major central banks have also been highly stimulative. Global central bank assets as a percentage of global GDP have spiked to an all-time high, an increase of nearly $7 trillion since the pandemic. These central bank actions support financial asset markets and valuations. Additional fiscal stimulus, which seems likely whether before or after the U.S. election, would be further support.

  1. The relative valuation of U.S. stocks (versus bonds) is attractive, and even more so for foreign stocks

In the “Reasons for Concern” section above we highlighted the high absolute valuation risk of the S&P 500. However, a countervailing factor is that U.S. stocks look relatively cheap when compared to current sub-1% Treasury bond yields. Put differently the “risk premium” for owning equities relative to bonds is historically high and attractive, suggesting stocks should outperform bonds over a medium-term horizon.

Investors have to put their capital somewhere. With bonds and cash yielding little to nothing, investors seeking higher potential return or yield are pushed further out on the risk spectrum—for example, into equities and lower credit-quality corporate bonds. This pushes stock prices and valuations higher. This has been the Fed’s explicit policy intent going back to the 2008 financial crisis. And as we note above, with the labor market far from full employment and inflation well below the Fed’s new 2% average target, there is no end in sight to the Fed’s accommodative policies.

Now, the Fed is powerful but not omnipotent. Market downturns can and do happen while Fed policy is accommodative. But, among many other considerations, weight must be given to the old market maxim: “Don’t fight the Fed.”

Our Portfolio Positioning: Maintaining Balance & Resilience Amid the Uncertainty

Given this macro and market backdrop, the risks and unknowns and the wide range of potential outcomes, our watchwords for portfolio construction and positioning remain “balance and resilience.”

A reasonable base case economic scenario involves one in which the global and U.S. economies continue to recover and the pandemic risk recedes without major economic disruption beyond scattered localized flare-ups. With central banks keeping interest rates exceptionally low, this would be supportive for global equity markets and credit markets.

On the equity side of our portfolios, as a reminder, we held a modest underweight to large cap U.S. stocks going into the pandemic. In March after the initial large decline, we added to U.S. growth stocks at more attractive prices. Since that time, U.S. stocks have appreciated strongly, outperforming most other investments.

We have maintained a growth bias in many models even as the market appears overvalued on an absolute basis. However, the relative valuation of U.S. stocks versus core bonds and the likelihood that the Fed will keep interest rates “lower for longer” provides support for high valuations, at least until rates meaningfully rise.

Related to this, within our U.S. equity exposure we want to remain broadly balanced to growth versus value stocks. Growth has crushed value in recent years and now looks extremely overvalued relative to value. And we do expect this cycle to turn at some point, as it always has. But the tailwinds to the recent growth/tech stock outperformance—superior earnings growth and zero interest rates—may continue for a while. Alternatively, if and when the consensus believes we are in a durable economic recovery (for example, when vaccines are available), that may be the catalyst for a market rotation out of expensive growth stocks into undervalued out-of-favor value sectors, such as financials and industrials. As the Bank Credit Analyst recently put it, “The ‘pandemic trade’ will give way to the ‘reopening trade.’”

Our underweight to developed international stocks is offset to some extent by an overweight to emerging-market stocks, which are cheaply priced (undervalued) with much higher five-year expected returns.

On the fixed-income side of our portfolios, we are balancing the need for core bonds as ballast and protection in the event of a negative economic shock (a widespread resurgence of the virus forcing widespread shutdowns, election-related or geopolitical volatility, etc.) with their lack of yield and very low expected returns over a multiyear horizon. As such, a larger allocation of our fixed-income exposure is in flexible actively managed bond funds with a broad investment opportunity set beyond traditional core bond sectors. We expect these funds to generate much higher returns than the core bond index over the next several years. The tradeoff is that they will not hold up as well as core bonds on the downside in an economic shock.

The flipside of core bonds providing recession/deflation protection is that they have significant interest rate and inflation risk. Rising inflation implies rising interest rates—absent the Fed stepping in to control the level of interest rates across the entire yield curve, which many observers expect the Fed will do at some point. Rising rates are negative for core bond prices and returns. If the 10-year Treasury yield were to rise one percentage point over the next 12 months from its current level, we estimate the core bond index would lose 4.5%.

We do not view inflation as a near-term risk, given high unemployment, depressed aggregate demand and excess productive capacity. But the massive monetary and fiscal stimulus we are seeing (and with more likely on the way) could set the stage for an inflationary regime in this country. There is a tug of war between deflationary and inflationary forces, and the ultimate outcome is uncertain. Therefore, it is important to have fixed-income exposures that diversify risks and provide return opportunities across a wide spectrum of outcomes.

In sum, we have built our portfolios to diversify and balance the wide range of risks and return opportunities the financial markets are presenting us near term and longer term. Overall, we are very comfortable with how our portfolios are positioned and nothing in our assessment indicates a shift in positioning would improve the risk/return balance. Yet our actions in March show we won’t hesitate to take advantage of compelling opportunities when they arise. We believe we are tilted in the direction markets are headed.

History shows markets are consistently unpredictable. Adding to the uncertainty are the unprecedented circumstances, challenges and structural changes the global economy is currently facing.

Having a high degree of conviction in any single outcome strikes us as imprudent. Instead of trying to continuously predict the future, we are focused on building resilient portfolios across multiple plausible scenarios, accounting for a range of shorter-term risks but keeping our primary focus on the medium- to longer-term fundamentals that ultimately drive investment returns.

Investing in this way requires discipline, patience and a willingness to stand away from the herd at times. It can feel uncomfortable to stay the course, or add to equities, when markets are plunging or to care about valuation and not chase markets higher when they are soaring. But in the end, this is the best approach we’ve found to achieving one’s long-term investment goals.

Certain material in this work is proprietary to and copyrighted by Litman Gregory Analytics and is used by Argent Financial with permission. Reproduction or distribution of this material is prohibited, and all rights are reserved.

Why Financial Planning is a Verb, Not a Noun

This article is first in a series in celebration of National Financial Planning month during October. Look for weekly posts that explore financial planning during the key stages of each person’s adult life.

Financial Planning is defined by the Certified Financial Planner Board of Standards as “a collaborative process that helps maximize a client’s potential for meeting life goals through financial advice that integrates relevant elements of the client’s personal and financial circumstances.” This definition of financial planning represents a paradigm shift, with the term now representing a verb rather than a noun. Additionally, while financial planning looks toward the future, it also functions in the present and dynamically adjusts to an individual’s ever-changing life.

Charts, projections, scenario forecasts and probability analysis – traditional tools of the financial planning trade – are guides at best. Like sailing by the stars under cloudy skies, constant adjustment to the navigation is necessary.

Numbers Don’t Lie, They’re Just Usually Wrong

When the financial planning profession was still in its infancy, the October 1984 cover of Forbes magazine featured a chimpanzee in a 3-piece suit next to a chalkboard scribbled with an assortment of financial planning jargon with the caption, “These days, everyone’s a financial planner.”

This jab can partially be attributed to the advent of the personal computer and sophisticated financial planning applications that allowed the financial planner to enter assumptions about a client’s assets, savings rates, inflation, retirement date and investment earnings. The software then allowed financial planners to produce volumes of reports that were delivered to clients in leather-bound binders with the label “Financial Plan.” Most of the time, these mislabeled books went home with the client – only to gather dust and soon became obsolete due to changes not contemplated in the original planning. For all their wizardry, not a single one of those “plans” accurately predicted where those clients would be in 20 years.

The problem was not with the formulas embedded in the software programs, but with the complexity of the data inputs – with the “inputs” representing the course of an individual’s or family’s life over many years. Not surprising, the “plans” ultimately became useless because not even the best algorithms can accurately predict where anyone is likely to be financially over a time period of more than three-to-five years. Financial planners who rely on precise analytical planning that seems so capable of predicting the future often fail to adjust when life events change the assumptions on which the plan was based. Financial planning has less to do with the concrete input used by financial planning technology and more to do with intuitive “best-guess” decisions on how to respond to a person’s ever-changing life.

Who Needs What Kind of Planning When?

Because no two clients are alike, financial planning is an extremely personal process. However, there are several financial planning themes that accompany the major stages of life – young adulthood, middle adulthood and senior adulthood. These themes can be illustrated by the Financial Planning Table of Thematic Events to the right. Addressing each of these themes involves establishing adjustable goals and devising coordinated action plans around each goal while not derailing progress towards other concurrent goals. The level of advisor time, number of collaborators and the complexity of the solutions vary greatly across the socio-economic spectrum. Some of these themes will be chosen to illustrate how Argent’s financial planning process seeks to address them in subsequent articles in this series.

Whose Interest? The Fiduciary Standard

To truly follow the definition of financial planning, an advisor must avoid serving his or her own interests. Anyone providing financial advice to a client falls under a fiduciary standard. The word fiduciary comes from the Latin word fiduciaries, the root of which we get a word like fidelity. In modern use, it implies a position of trust and conveys both obligations and liability for one’s actions. When collaborating with a client to help them reach life goals, there can be no question as to whose interests are being represented by the financial planning team. Argent’s financial planning services embrace the fiduciary standard. Though we may assist clients with implementing various financial strategies that might utilize financial products and services, we always act in the best interests of our clients, avoid conflicts of interest and clearly disclose any conflicts that may arise.

Our Financial Planning Mission and Guiding Principles
Remaining true to the Certified Financial Planner Board of Standards definition, financial planning as practiced by Heritage is a dynamic process of walking with our clients through their financial transitions such that their quality of life is constantly supported by their available resources. In practice, this means implementing strategies that protect and grow their wealth during their lifetime and that preserve it for future generations. We are guided by an adherence to the fiduciary standard, as well as to our core value of humble confidence, confident in the value and expertise we bring to the table, but humble enough to know we must always be learning and reaching to do better.

If you are in a phase during your life where you could benefit from financial planning or need advice on related wealth management strategies, please contact me or any one of our professionals at 405-848-8899. We are ready to help.

Monthly Investment Commentary-October 2020

A Bull Market Looking for a Cause?

by Jim McElroy, jmcelroy@argentfinancial.com

 With three quarters behind us and one quarter left, 2020 has already been an historically unpleasant year. With 200,000 plus COVID 19 deaths (1,000,000 worldwide), alphabet-busting numbers of hurricanes, record-setting wildfires in western states, continuing protests and riots in our cities, an increasingly ugly election cycle and the highest rate of unemployment since the Great Depression, it’s hard to imagine how investors in the quarter just ending could have mustered enough optimism to buy stocks, much less fuel new highs in an already six month old bull market. But here we are, with a bear market bottom behind us, a trailing quarter growth in the S&P 500 of 8.5% and the best trailing two quarter growth (30.1%) since 2009; even including the first quarter bear market, the year-to-date growth in the S&P 500 was still positive (4.1%).

Has all the stress made the market delirious or is there some method behind this madness? Markets have been known to succumb to madness — we see it whenever wild rumors create buy or sell orders with panic-driven high transaction volumes — but these are usually periods of short duration. Despite some evidence to the contrary, we don’t believe that the market has completely lost its way. Ahead of itself, perhaps, but not deranged.

A major source of stress for investors in the coming quarter is the election in November. No matter what one’s political affiliation, the uncertainty of elections alone can create greater than normal volatility. This is especially the case during this COVID-19 year when an anticipated higher percentage of absentee and mail-in ballots could delay the tabulation of results well past Election Day. And we should probably expect that with delays in naming winners there will be claims of miscounting, false ballots, unjustified voter disqualifications and foreign interventions in the election process. Oddly enough, the history of markets following elections — whether the result is a change in regime or a victory for the incumbent — suggests that, following a short period of heightened volatility, the markets tend to return to their pre- election path. Our judgement is that fears about the outcome of the election are mostly baked into the current markets: after the votes are counted, the winners announced and the results digested, the market should settle back into its prior state.

It’s a commonplace observation that market valuations are determined by future expectations. In addition to the election, the other great stress for investors and cause of much uncertainty about the future is the Coronavirus pandemic. But in at least one respect, the virus has clarified the task of discerning near future expectations: since it was the sudden outbreak of the virus in the first quarter of this year, as well as the subsequent government responses to that virus, that caused the recession and bear market, it’s fair to assume that the near future of the global economy and its markets will hinge on the future path of the pandemic. The appearance of new bull markets in global stocks, following lows in late March, strongly suggests a market belief that the pandemic’s deleterious effects have peaked. And since it appears that infections are decelerating, it’s plausible to believe that total lockdowns in the future will be rare and that effective vaccines will be available during the second quarter of 2021. Of course, these assumptions may turn out to be incorrect — and there have been some indications since Labor Day that infections are increasing — but, for now, they seem reasonable and the bull market continues.

Overall, the pandemic’s ill effects do appear to be lessening — or businesses and the population are just adjusting their processes and habits — and the economy is showing growth after the lockdowns of the second quarter and the worst GDP reading in 40 years (-31.7%). Employment is recovering from truly jaw-dropping numbers: recent Initial Claims for Unemployment Insurance came in at 870 thousand, down from the late March peak of 6.9 million, though still well above the 211 thousand of early March; and the unemployment rate, currently a whopping 8.4%, has been steadily declining since the April figure of 14.7%. Not surprisingly, the largest component of continuing unemployment is in the leisure, travel and hospitality industries (hotels, cinemas, restaurants, sports bars, airlines, etc.), where social distancing can be devastating. The ISM Purchasing Managers Indices for both manufacturing and services, after declining into the 40s (below 50 is contractionary, above 50 is expansionary) at the beginning of the pandemic, now register 56 and 56.9, respectively. And while the Conference Board’s Index of Leading Economic Indicators is still forecasting contraction (-4.7), this is a dramatic improvement from its pandemic low (-12.5). For the sake of comparison, the LEI registered -20 at the end of the Great Recession of 2008-2009. The economy is recovering from its first quarter vertical collapse, but its return to pre-pandemic levels is taking a somewhat less than vertical path: it’s likely to be the second half of 2021 before things return to normal.

Corporate earnings, arguably the most desirable statistic for assessing the health of the economy and the stock market, showed a decline of 23.2% from the fourth quarter of 2019 through the second quarter of 2020. However, since these numbers are neither predictive, timely nor set in stone — like GDP, they’re subject to revisions — they provide little in the way of judging market expectations. Under normal circumstances, we would look at the next quarter’s and next year’s earnings expectations from Wall Street analysts, compare those to current stock prices, produce a P/E ratio for the overall market and determine if that valuation seems plausible. But due to pandemic induced dislocations, Wall Street estimates of earnings for the next twelve months are dubious. Even the companies themselves have difficulty providing earnings guidance for the year ahead. But, for what it’s worth, the P/E for the S&P 500 is 24.6 times expected earnings and 25.2 times trailing earnings: this means either that Wall Street is forecasting no earnings growth over the next four quarters or simply has no confidence in earnings estimates and is using last year’s number as a “place holder” until something like clarity returns.

An absence of earnings growth over the next four quarters or great uncertainty over the future should not describe a market trading at about 25 times earnings. The long-term average P/E of the S&P 500 is about 18 times earnings; zero growth and/or great uncertainty should produce a much lower multiple than both the average and the current P/E. It’s possible that the market is over-extended: that happens from time to time. However, the most likely cause for this elevated valuation in stocks can be laid at the feet of the Federal Reserve. In the absence of even a whiff of inflation and the presence of an economy-wrecking pandemic, the Fed has committed itself to holding overnight interest rates between 0% and .25% over the next three years and has dramatically added to its balance sheet by buying bonds, thereby driving prices up and yields down.

It may very well be that stocks are now trading much more on yield than on P/E ratios: when ten year U.S. Treasuries yield .65%, with no growth, and the S&P 500 yields 1.7%, with the strong likelihood over the next ten years of higher dividends and higher prices, there doesn’t seem to be much competition. Negligible interest rates also have the power of “telescoping” time by increasing the present value of future returns: instead of basing P/E multiples on 2021 earnings, investors may be skipping the next four quarters and focusing on 2022 earnings. TINA, or “there is no alternative”, may be an exaggeration, but it’s certainly true that there are few alternatives to stocks.

2020 to date has been a very volatile year for the stock market. It has moved from a bull market to a bear market back to another bull market, all in less than three quarters. Most of this has been due to the onset of the COVID-19 virus and the government’s seemingly draconian responses to it. While we believe that the market is an efficient discounter of the future and that the bull market is forecasting an end to the pandemic and the accompanying recession, there is little reason to believe that volatility will not continue into the fourth quarter of this year. We recommend that investors look at their long- term objectives and rebalance their portfolios accordingly. While we do not recommend over-weighting equities, we certainly would not recommend under-weighting them.

 

Not Investment Advice or an Offer

This information is intended to assist investors. The information does not constitute investment advice or an offer to invest or to provide management services. It is not our intention to state, indicate, or imply in any manner that current or past results are indicative of future results or expectations. As with all investments, there are associated risks and you could lose money investing.

When Businesses Fail or People Can’t Pay Bills, Liability Limits Can Save the Day

From LLCs to trusts, protections are here to help — not just companies and individuals, but our whole economy itself. So, anyone struggling in these trying times should be aware of their rights and new possibilities for recovery.

 

Originally published on Kiplinger.com September 18, 2020

 

BY: TIMOTHY BARRETT
Trust Counsel, Argent Trust Company | (502) 569-7400

Most people would agree that a person who borrows money, contracts for the manufacturing or delivery of goods and services, or enters into agreements that require or encourage substantial investment by other parties should not be allowed to fail to meet those obligations without consequence. Regardless of the cause of these breaches of contract or the good faith of the perpetrator, the losses they cause necessitate recovery efforts by lenders, suppliers, contractors and distributors, often at great monetary and opportunity cost.

Our economy is fed and supported by people making such “promises” and other people acting in reliance on them. Keeping those promises is essential to a community’s economic health and its members’ financial well-being, so any breach supports an actionable cause for recovery. On the other hand, protecting people from destitution for business and financial risk-taking is necessary to encourage and sustain economic growth, so even such a perpetrator should have reasonable protection from financial destruction — especially this year, with the onset of the COVID-19 pandemic and recession.

Laws Limit Losses to Help Spread the Cost of Business Risk

So, when a business or personal financial risk is undertaken in good faith but fails by some breach or unrelated cause, the law seeks to avoid an inequitable outcome that imprudently favors the lender, the investor, the supplier or the manufacturer over the borrower, the operator, the buyer or the retailer — and vice versa. The law in most states also allows people to isolate unrelated investments, retirement savings, personal homes and other assets from the reach of such creditors to protect them from financial ruin.

These protections — along with state and federal supports, recovery funds, bailouts and tax relief — help spread the costs and risk of business enterprise and personal financial failures among all of us. Similar safety nets and supports for wage employees, the unemployed, retired and disabled persons, and their dependents distribute income and resources to sustain a minimum standard of living and drive an economy mostly dependent on a thriving population of consumers. This symbiotic social structure is made more or less durable by the politically driven choices we make and the protections we establish and support.

Protections Start with LLCs

Business owners commonly protect themselves through the creation of limited liability companies or limited partnerships, which shelter investors from losses exceeding their investment in those entities. Those entities stand between the actual people and the promises and obligations they undertake and shield them from losses caused by reasonably unforeseeable events as long as they sufficiently fund those entities or insure them against the reasonably foreseeable ones.

Should a breach occur, a fair settlement of these competing interests may be sought through private mediation or arbitration, public litigation, in bankruptcy court or a combination of any of the above. But what happens when the legally available resources of one of the parties, whether a person or a business entity, are insufficient to cover their obligations? In many cases, the judgment or settlement is structured to fit their financial ability, which may include forced liquidation of capital (i.e., selling land or equipment), garnishment of wages, an order for installment payments, or an unfulfilled judgment that may be enforced against future income or resources.

But what if this lack of capital resources is due to the breaching party’s own negligence or bad faith? What if the breaching party failed to properly capitalize the venture, failed to prudently obtain available insurance coverages, or improperly siphoned off necessary capital reserves? Well, then the injured party may seek to recover from the obligor’s personal assets, even those usually protected by limited liability and other laws. But even some of those assets warrant further protection.

Protections Can Be Extended with Trusts

Qualified retirement plans and individual retirement accounts (IRAs) are mostly shielded from such creditors. Why? Because our economy is better protected by encouraging personal investment in retirement than by protecting business investment. Trusts established for a person’s loved ones — such as a spouse and descendants, charitable purposes or other favored uses — also enjoy greater creditor protection if they are irrevocably funded without an intent to defraud known creditors. And some states even allow a person to be among the trust beneficiaries of his own irrevocable trust and still shield those assets from creditors.

These so-called domestic asset protection trusts exist solely under state law in 17 states: Alaska, Delaware, Hawaii, Michigan, Mississippi, Missouri, Nevada, New Hampshire, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Virginia, West Virginia and Wyoming. Their assets may not be beyond the reach of some courts and government agencies, including the bankruptcy court, and taxing authorities, including the IRS (with some limitations). In 14 states, these asset protection trusts are still subject to child and spousal support; support, maintenance and property settlement orders; and/or obligations through divorce proceedings.

If a person is not a resident of one of these asset protection states, he can usually establish the trust anyway through a qualified trustee, typically a resident corporate fiduciary with trust powers in that state. On top of sheltering these assets from creditors, these states also may severely limit the time period during which a creditor claim can be brought against the trust and set the standard of proof required to win an award substantially higher than typically applied to contract and business litigation cases.

The assets that may be transferred to an asset protection trust must not be directly related to an operating business (a capital reserve account or its accounts receivables, for example). The transfer of personal assets must not cause the trustor to be undercapitalized for his existing obligations or cause him to be otherwise insolvent (unable to support himself and his dependents). Finally, the trustor must retain sufficient assets to cover known and reasonably foreseeable obligations, including existing creditor claims, even if not yet noticed or included in a civil complaint. Other than these exceptions, these states have determined that the benefits of entrepreneurial risk-taking outweigh the additional burdens on creditors.

Keep on Top of Changes and New Possibilities

The efficacy and ethics of asset protection trusts are still being debated. But most attempts to reach assets properly transferred to such trusts are settled out of court. There are still numerous reported court cases that guide advisers and trustors alike in ways to properly structure, fund and respect the independence of trusts. This can reduce the temptation for creditors to seek recovery from the trust and compel them to accept a lesser amount in the recovery of a valid claim.

It may be too late for many failing business owners to investigate legal ways to reduce creditor risk during the pandemic and recession. However, they may benefit from recent changes in bankruptcy laws, not covered in this article. For everyone with substantial assets at risk, beyond and including operating business investments, now is a good time to seek legal, accounting and insurance advice. These experts can help you restructure business entities, review tax elections and insurance strategies, and research trust strategies for wealth transfer and asset protection, possibly using nonresident trusts.

 

Take the next step:

If you would like to discuss trust strategies in more detail with an expert at Heritage Trust (sister company to Argent Trust and part of Argent Financial Group), give us a call at our main number at 877.887.8899. One of our many trust professionals is ready to help. We look forward to hearing from you.

Why a Corporate Fiduciary Could Be Right for You

BY: CHRIS KELLY, JD
Market President, Argent Trust
(615) 599-9863

In today’s world, estate planning can be an intense and complex process. These issues can be caused by many factors, such as federal and state tax laws and the types of property or assets a person owns. If you layer on unique family dynamics (e.g. a blended family, estrangement, etc.), the process becomes even more challenging.

Because of these considerations and others, a practitioner may recommend utilizing the services of a trustee or executor to best accomplish a client’s estate planning goals. One of the most important decisions a person can make is choosing and naming the person or organization who will serve in this role. A fiduciary can be a family member, a friend, a trusted advisor such as an attorney or accountant, or a bank that offers fiduciary services.

As with many choices, there are advantages and disadvantages to each of these options. A family member or a friend both probably know the family members for whom the trust is being established. A trusted advisor may also know the family while additionally possessing unique skills that may be valuable in managing the trust. Additionally, these individuals may often serve without the expectation of being compensated for their service.

For certain situations, an individual may serve well in this role, but a corporate fiduciary may be a better option when unique family situations exist, significant tax implications are at stake, the estate includes complex assets, or the estate plan involves techniques or strategies that will take a number of years to accomplish.

So what does a corporate fiduciary offer to navigate these situations? Here are a few factors to consider.

1. A corporate fiduciary is not influenced by sensitive family issues or past experiences.

One of the benefits of naming an individual as a fiduciary — the fact that she knows the family — may also be a detriment. A fiduciary has an obligation to be unbiased and objective. An individual serving in this role may have difficulty being unbiased as she deals with the beneficiaries because of their past personal history, whereas a corporate fiduciary will make necessary and critical decisions free of these biases.

2. A corporate fiduciary has the expertise and the experience to fulfill its duties.

A corporate fiduciary understands the various facets of fulfilling its duties. It is apprised of current tax laws. It knows how to manage investments. It understands how to invest to meet the various, and many times competing, interests of the beneficiaries of a trust. It has dealt with complex assets, such as retirement accounts, closely held businesses and real estate. Furthermore, a corporate fiduciary has experience interpreting legal documents, preparing accountings and working through complex family situations. An individual serving as a fiduciary can often unintentionally breach his duty simply because he may not understand the particulars of the duties of a fiduciary or may not even understand what resources he even needs.

3. A corporate fiduciary has the systems and infrastructure in place to fulfill its responsibilities as a fiduciary.

Not only does a corporate fiduciary understand the various components of effectively serving in a fiduciary role, but it also has a professional practice comprising the necessary people and systems to best accomplish its duties. If an individual is named, the person may not readily have available the resources she needs to properly fulfill her role, which often leads to inefficiencies and possible liability on her part.

4. A corporate fiduciary will exist beyond the natural lives (and health) of people.

If the effective implementation of an estate plan requires a fiduciary to serve for many years, as in a multigenerational family trust, a corporate fiduciary offers a higher probability of being able to serve from beginning to the end of the strategy. An individual, depending on his age and health, may not be able to serve through a full term of service, thus requiring a new fiduciary to step in midway through the life of a trust. While the employees of a corporate fiduciary may change over the same span of years, having an organization in this role brings continuity to the office of the fiduciary that an individual may not offer.

Even the most detailed, specific estate plan may fail in its implementation if the appointed fiduciary does not properly fulfill its responsibilities, either intentionally or unintentionally. Utilizing a corporate fiduciary may be the best way to ensure a client’s estate planning goals and expectations are accomplished.

Take the next step:

If you would like to discuss in more detail the benefits of having Heritage Trust (sister company to Argent Trust and part of Argent Financial Group) serve as your corporate trustee, give us a call at our main number at 877.887.8899. One of our many expert trust professionals is ready to help. We look forward to hearing from you.