Market Insights November 1, 2021

A fresh wave of positive corporate earnings surprises sent markets to new record highs last week. The Dow Jones Industrial Average increased 0.40%, while the Standard & Poor’s 500 rose 1.33%. The Nasdaq Composite index picked up 2.71% for the week. The MSCI EAFE index, which tracks developed overseas stock markets, was up 0.68%.1,2

Earnings Drive Market
The week kicked off with the Dow Jones Industrials and S&P 500 index setting record highs as the financial markets carried over the previous week’s price momentum.4

Stocks continued to climb on a string of forecast-beating earnings results. With about half of the S&P 500 constituent companies having reported earnings, more than 80% of them have beaten Wall Street analysts’ consensus estimates. Based on these results, earnings for all S&P 500 companies are expected to come in approximately 39% above the third quarter of last year. (Forecasts are based on assumptions, and may not materialize.) Stocks overcame disappointing earnings from two mega-cap tech names on Friday to maintain the week’s solid gains.5

GDP Growth Slows
While businesses managed to post strong earnings in the third quarter, the first look at economic growth came in below consensus estimates. The Gross Domestic Product (GDP) grew at a 2.0% annualized rate in the third quarter, a slowdown from the two previous quarters, each of which posted annualized growth rates in excess of 6%.6
The spread of the Delta variant and backlogs in the supply chain were two major factors dragging on economic activity.
1. The Wall Street Journal, October 29, 2021
2. The Wall Street Journal, October 29, 2021
3. The Wall Street Journal, October 29, 2021
4. CNBC, October 24, 2021
5. CNBC, October 28, 2021
6. The Wall Street Journal, October 28, 2021

Market Insights for October 25, 2021

Stocks rallied last week on a stream of positive corporate earnings surprises.

The Dow Jones Industrial Average rose 1.08%, while the Standard & Poor’s 500 advanced 1.64%. The Nasdaq Composite index gained 1.29% for the week. The MSCI EAFE index, which tracks developed overseas stock markets, was up 0.23%.1,2,3

EARNINGS IGNITE RALLY
Fears over inflation, supply shortages, and slowing economic growth in China were pushed aside last week as investors reacted to a daily succession of positive corporate earnings surprises. After the Dow Industrials reached an all-time high intraday on Wednesday, fresh earnings reports, an increase in existing home sales, and a new pandemic low in initial jobless claims–and continuing claims–propelled the S&P 500 index to a new record high the following session.4,5

Disappointing earnings before the market opened on Friday hurt a few social media stocks, resulting in a choppy trading session and a selloff in the Nasdaq to close out the week.

Congress Targets IRA’s

These are proposals only (Released by the House Ways and Means Committee on September 13, 2021)

Recent retirement proposals from Congress would upend planning strategies for retirement accounts, especially Roth IRAs. These changes are currently only proposals, but they have been the focus of attention and intense speculation. No one knows for sure what Congress will do, but given the current climate in Washington, changes like these could gain traction. Your clients, especially those with larger IRAs, will have questions. Here is what advisors need to know about these proposed changes:

Elimination of Backdoor Roth Strategies

This proposal takes direct aim at Roth planning strategies by prohibiting both employee after-tax contributions in qualified plans and after-tax funds in traditional IRAs from being converted. Neither Roth IRAs nor Roth plan accounts would be allowed to accept after-tax dollars as conversions. This would be effective after December 31, 2021.

Planning Point: This would be an all-out ban on Backdoor Roth conversions from IRAs, Mega Backdoor Roth conversions from plans, and in-plan conversions of after-tax dollars, all regardless of income. At least this inadvertently finally answers the question of whether Backdoor Roth conversions are currently legal. They obviously are, because if they weren’t, Congress would not need to end them!

Income limits on Roth Conversions of Pre-Tax Funds

Roth conversions of pre-tax funds would be eliminated from both IRAs and employer-sponsored plans for single taxpayers with taxable income over $400,000 and married taxpayers filing jointly with taxable income over $450,000. However, this proposal would not be effective for 10 years. The effective date says this would apply in years after December 31, 2031.

Planning Point: This proposal would end Roth conversions for high-earners, but Congress still wants its conversion tax dollars. What to do? Maybe this delayed effective date shows us that Congress still needs Roth conversion revenue so it can fill budget gaps, at least for the next 10 years. But now that Congress has tipped its hand on this issue, it may be a good time to have affected clients start planning ahead and begin a series of annual Roth conversions over the next decade. This planning would be even more effective if done before RMDs will begin at age 72, since RMDs cannot be converted.

Contributions to Mega-IRAs Prohibited

The bill would prohibit additional contributions to Roth or traditional IRAs for a calendar year if:

(1) The total value of an individual’s IRAs, Roth IRAs and defined contribution retirement accounts exceed $10 million as of the end of the prior calendar year, AND,

(2) Income is in excess of $400,000 (single), or $450,000 (married-joint).

This would be effective after December 31, 2021.

Planning Point: This likely won’t make that much of a difference to anyone with over $10 million in their retirement accounts because the IRA contribution limits are so small in relation to the total assets in a “Mega-IRA.” For example, the maximum IRA (or Roth IRA) contribution for 2021 is only $6,000 ($7,000 if 50 or over). Plus, there is no such restriction in the proposal for SEP IRA, SIMPLE IRA or company plan contributions, which have much higher contribution limits.

RMDs for Mega-IRAs

If an individual’s combined traditional IRA, Roth IRA and defined contribution retirement account balances exceed $10 million at the end of a calendar year, and income exceeds the $400,000 / $450,000 limits (the same two conditions as in the above provision), a minimum distribution would be required for the following year. The RMD would be 50% of the balance above $10 million. The RMD would apply even if the individual is not subject to existing RMDs (i.e., is under 72). No 10% penalty would apply to these RMDs, regardless of age, and they could be considered qualified Roth distributions if otherwise eligible. These RMDs would not lessen any other RMDs owed for the year.

To make things even more complicated, there is a special 100% RMD rule that applies when account balances exceed $20 million. When account balances exceed this threshold, the amount over $20 million is required to be distributed from Roth IRAs and Roth plan accounts up to the lesser of (1) the amount needed to bring the total balance in all accounts down to $20 million, or (2) the aggregate balance in the Roth IRAs and Roth plan accounts. Once the individual distributes the amount of any excess required under this 100% distribution rule, he can then choose the accounts from which to distribute to satisfy the 50% distribution rule.

These provisions would be effective after December 31, 2021.

Planning Point: While these proposed RMD rules are extremely complicated, they would likely affect very few IRA owners, especially the requirements for those with balances over $20 million. One way those with these gigantic IRA balances might get around these rules is to keep income under the $400,000/ $450,000 limits. Wealthy clients who could be affected by these Mega RMDs should start planning now to keep income low, since this provision, if enacted, would be effective next year.

Tighter Self-Dealing Rules

To prevent self-dealing, the bill tightens the self-dealing rules by prohibiting an investment where the IRA owner owns 10% or more of the entity (currently 50% or more) or where the IRA owner is an officer or director. This would be effective after December 31, 2021.

Planning Point: The self-dealing rules have always been minefields. Recent increased IRS scrutiny has increased the hazards. The new proposals would make it even more important for IRA owners looking to invest in unconventional assets (such as real estate or a small business) to know the risks.

IRA Investments Limited

Investing an IRA in a Foreign Sales Corporation (FSC) or Domestic International Sales Corporation (DISC) would be prohibited. This would be effective after December 31, 2021.

Planning Point: This seems to be Congress’ response to recent court cases allowing these unusual investments because nothing in the law prohibited them. These proposals would once and for all make investing an IRA in an FSC or DISC a prohibited transaction which would result in an IRA being disqualified.

The bill would also prohibit an IRA from holding any security if the issuer of the security requires the IRA owner to have a certain minimum level of assets or income, or to have completed a minimum level of education or obtained a specific license or credential (i.e., “accredited investors”). Any account holding such investments would no longer be considered an IRA. This rule would be effective after December 31, 2021 and would include a 2-year transition period for IRAs already holding these investments.

Planning Point: This provision is intended to target investors with certain knowledge and opportunities that other run-of-the mill retirement savers lack, with the goal of leveling the playing field for all investors. Critics say that it would unfairly impact many retirement savers, not just those with large balances. Also, many of these existing assets could be difficult to liquidate within the 2-year transition period.

Expand the Statute of Limitations for IRA Noncompliance

The proposal would extend the statute of limitations for IRA noncompliance related to valuation-related misreporting and prohibited transactions from 3 years to 6 years. This would be effective after December 31, 2021.

Planning Point: This would help the IRS pursue violations that may have originated outside the current statute’s 3-year window

IRA Owners Treated as Disqualified Persons for Purposes of Prohibited Transactions Rules. The bill clarifies that, for purposes of applying the prohibited transaction rules with respect to an IRA, the IRA owner or IRA beneficiary is always a disqualified person. This would be effective after December 31, 2021.

Planning Point: This is just clarification of a rule that was already considered to be in effect by most.

Copyright © 2021, Ed Slott and Company, LLC Reprinted from The Slott Report, October 3, 2021, with permission. Elite Member Access | Ed Slott and Company, LLC (irahelp.com) Ed Slott and Company, LLC takes no responsibility for the current accuracy of this article.

Market Insights 10/4/2021

Market Insights 10/4/2021

Higher bond yields and a legislative stalemate in Washington, D.C., added up to losses for the week.

The Dow Jones Industrial Average declined 1.36%, while the Standard & Poor’s 500 lost 2.21%. The Nasdaq Composite index fell 3.20%. The MSCI EAFE index, which tracks developed overseas stock markets, shed 2.58%.1,2,3.

An Ugly Week
The reality of a more hawkish Fed finally hit the bond market, sparking a sell-off in bonds that sent yields higher. Higher yields hurt technology and other high-growth companies, and that weakness spread to the broader market. (Higher yields can reduce the value of a company’s future cash flow, which may reset valuations.)

Congress added to the market uncertainty. It was unable to advance an infrastructure bill, and it made little progress on the debt-ceiling agreement. After a sell-off to close out September, stocks surged on Friday on news of a potential Covid-19 oral therapeutic, an easing of yields, and reports that President Biden was traveling to Capitol Hill to help break the logjam on legislation.

National Hispanic Heritage Month

From Sept. 15 to Oct. 15, we celebrate National Hispanic Heritage Month. It’s time to honor the culture and contributions of the Hispanic and Latin Americans that make up our great nation.

National Hispanic Heritage Month started as a week of recognition in 1968 and was expanded in 1988 into the month-long celebration we know of today. The dates were chosen to honor the independence days of several Hispanic and Latin American countries, including Costa Rica, El Salvador, and Chile.1

As the United States is a melting pot of customs and traditions, so is the history of Hispanic and Latin American cultures. While every community has its own way of connecting with its Hispanic and Latin American heritage, National Hispanic Heritage Month is a great opportunity to celebrate this vibrant history.

Whether you celebrate National Hispanic Heritage month by spending time with your familia and hearing their stories, or whether you’re taking this opportunity to learn more about these rich and diverse cultures, we wish you an amazing National Hispanic Heritage Month, this year and every year.  Follow link to learn 10 ways to observe National Hispanic Heritage Month: bit.ly/2WlMr5l