Q3 Client Note – Change of Investment Seasons?

While the S&P 500 (Total Return) Index eked out a 0.58% gain for the quarter; that was on the heels of September’s worst one-month (-4.8%) performance since March 2020. The US market is still up 15% for the year. The International Developed Markets (MSCI World Ex-USA) index was down 0.66%. The MSCI Emerging Markets Index returned -8.09%. Reflecting current concerns about the prospect of increased inflation, however, the Bloomberg Commodity Index rose 6.59%.

In Fixed Income, the Bloomberg Aggregate Bond Index rose .05% in the quarter, despite interest rates edging up slightly; with the yield on the benchmark 10-year treasury note increasing 8bps to 1.54%.

Our friends at Dimensional Funds nicely summarize all the data in their Quarterly Market Review.

Can I interest You in a Condo in Evergrande?

Evergrande sounds like the perfect name for a Florida condo development. Actually, it’s a giant Chinese real estate company that spooked the markets in September and may be on the verge of bankruptcy and a possible “Lehman” style implosion. Evergrande owns over 1,300 projects in 280 cities and is now world’s largest indebted company; owing $300 billion.

So far, Chinese authorities have been able to keep it under control. But it sure seems likely someone is going to get stucco.

Economic Uncertainty Endures

The future course of the global economy and the capital markets will depend largely on how we continue to work our way out of the pandemic’s continuing effects; including the supply chain logjams.

Distributing vaccine supply to the third world will be extremely important, as well.

A short-term agreement kicked the debt-ceiling can to December, when we will go through this wrangling all over again.

When the Fed finally begins tapering, and – potentially – tax law changes in the US to support whatever spending package eventually makes it through a divided Congress will be further drivers of what lies ahead.

Where Are Taxes Going?

One of the biggest questions is whether and to what extent the Biden administration will be able to pass its Build Back Better economic agenda.

The American Families Plan is the so-called “soft infrastructure” – and most ambitious – component of the agenda. In September, the House Ways and Means Committee released its version of the plan, which would be accompanied by significant income tax increases; but generally only for taxpayers with incomes above $400,000 (single) and $450,000 (married, filing jointly.) The bill also brings forward from December 31, 2025 to December 31, 2021 the halving of the estate tax exemption to $6,000,000 ($12,000,000/for married couples.)

It’s always a difficult decision whether to act preemptively or rather to wait until the legislation actually passes. If you are at these thresholds, it may pay to contact your tax and estate planning advisors before the end of the year.

Your Humble Advisor

Everyone wants to know what it takes to be a successful investor. Simple: Buy Bitcoin at $1.00 and sell at $60,000. But if you didn’t actually do that, I suggest instead a dose of humility.

The market presents a constant battle between overconfidence and humility. Every trade has a resolute participant on each side. The buyer of BTC thinks it’s going to the moon. The seller fears it may be going to zero. Are interest rates going up, or are they going down?

It’s always best to entertain the possibility we are neither as smart nor as certain as we think we are. And don’t underestimate the role of luck. Either good or bad, in your investment successes and failures. Instead of pretending to know what’s going to happen next, have a plan (and the discipline to stick with it) that will likely succeed in almost any environment

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