While corporate earnings have been strong in 2021 we believe higher wage costs could crimp profits and lead to higher prices for consumers.¹ While we believe that inflation pressures will moderate in the near term as supply chain issues resolve, we are concerned that wage growth pressure could increase inflation in two to three years.

The stock market has been on a tear since the COVID crash in March 2020. The performance of equity markets since then has been incredibly strong.²

This kind of strong performance is normal in the early stages of an economic recovery. ³ We anticipate greater stock market volatility if economic activity slows as we expect.

With this strong performance valuations have become stretched. Higher valuations do not necessarily mean that a stock market crash is imminent. It is more likely to lead to lower average annual returns for the following 8-10 years. At current valuations we are lowering our estimates of future average annual returns. For example we are projecting annual returns of 6.5% per year for US Large Cap stocks in our financial projections for clients. Historically they have returned 11% per year. ⁴ By using lower projected numbers we can help ensure our clients will not outlive their assets if future returns are lower. At current valuations we encourage investors to evaluate their exposure to equities carefully. It may be helpful to rebalance back to equity targets or focus on less expensive parts of the stock market such as International Stocks and Emerging market stocks

A recent concern for investors has been COVID variants such as the Delta Variant. The Delta variant is more contagious and may cause more serious symptoms in some patients. ⁵ This is one factor driving higher COVID cases, hospitalizations, deaths. If cases were to continue rising it could lead to more government shutdowns, economic contraction, and a stock market crash. While this is a possibility we don’t foresee this happening for two reasons. First, the current vaccines seem to be effective against the variants. ⁶ This should prevent the need for wide-scale shutdowns. Second, we believe that people will act in their own best interest. According to the CDC the unvaccinated are most at risk from COVID variants like Delta. We anticipate this will drive more people to get vaccinations and help drive down COVID cases.

The possibility of higher taxes could increase stock market volatility. President Biden has proposed increasing the top tax rate from 37% to 39.6%, increasing capital gain tax rates for those that make more than $1mm per year and for unrealized gains for those who pass away, and lowering the amount of inheritance exempt from estate tax. ⁷ While the future of Biden’s tax proposals is uncertain taxes are likely set to rise for the Wealthy regardless. Current tax rates were lowered with the passage of the Tax Cut & Jobs Act in December 2017. These lower rates are set to expire at the end of 2025. Successful families could still take action in 2021 to lower their risk of higher taxes. These actions include taking capital gains and income in 2021, selling a business or appreciated asset in 2021, or making gifts or implementing trusts to pass assets to loved ones.

The global recovery from COVID is progressing but uneven. Investors can be addressing risks such as higher inflation and high equity valuations by adjusting their equity exposures, focusing on less expensive areas of the stock market, and including alternative strategies that can provide protection from down movements in the stock market.