Thought Leadership


Forward Momentum™: Post-Election Issue

 

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Equity Markets Rise Above Politics and a Pandemic

 


With the election behind us, markets have continued to climb and reflect the optimism investors have in the post-COVID-19 economy. Many overestimated short-term risk going into the election only to be faced with a markedly strong bull market immediately afterwards. Obviously, many questions still remain as the US market may now be ahead of itself and COVID-19 cases are indeed rising in much of the world. At the same time, vaccines are showing miraculous promise. Nonetheless, the investment policy-based strategy we advocate for once again proved to be a valid course in the face of investment uncertainty. 


The Russell 3000 Index has risen 51% from the initial economic shock of the COVID-19 pandemic – specifically, March 23rd through the end of the third quarter. That is an incredible recovery for stocks. Though some might say it’s overly optimistic, there are clear reasons for the market’s sharp rise. As investment professionals, we are humble enough to know that markets sometimes see things differently than we do and are often more prescient than any individual.

Multiple factors support the equity market’s upward momentum:

  • The Federal Reserve’s unprecedented monetary support in response to the pandemic has significantly expanded the money supply. M2, a basic money supply measure, is up 23% year over year – that’s significantly higher than the 4%-6% increase in a typical year and even the 8%-9% increase that marks a bullish year. The velocity of that money being reinvested into the economy will drive growth.
  • Economic recovery is well underway. Throughout the summer, the forward-looking economic data that we follow – employment, corporate earnings, global and US purchasing managers’ indexes (PMI) – all surpassed expectations. 
  • Asset allocators currently prefer equities to fixed income. They will continue to do so as long as the Federal Reserve provides a backstop for capital markets through its monetary policy.

In the context of these drivers, current market behavior appears at least somewhat understandable. It’s true, there have been some signs of speculation, which we talked a bit about last quarter, but these appear secondary to the structural support for equities. It’s also true that equities are expensive. However, history tells us stocks can stay expensive for quite a while without a downturn, and in this case, they probably will until real interest rates start to rise. Support from institutional asset allocators, which we noted above, is likely to hold firm given concern that excessive caution will mean missing out on big returns. This “fear of missing out” is itself a sign of speculation but is definitely a factor driving the rally.

 

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Post-Election Insights and a Look Ahead to 2021

Pitcairn Chief Investment Officer Rick Pitcairn recently led a post-election roundtable featuring an expert panel of Pitcairn directors with special guest Jason Trennert, one of Wall Street’s leading thought leaders and Founder, Managing Partner, and Chief Investment Officer of Strategas Securities, LLC. Panel participants shared their perspectives on an unprecedented year and presidential election and discussed potential implications on investment portfolios and planning in the year to come.   

Here are a few key takeaways:

There’s reason for optimism in 2021. A coming COVID-19 vaccine, likely additional fiscal stimulus, and rising long-term interest rates are likely to spur economic activity.  

Bruce Stewart, Pitcairn Managing Director of Client Investment Strategy, detailed Pitcairn’s buy and hold investment approach and the firm’s continued focus on combining disciplined, long-term investment strategy with tactical manager selection to capitalize on key sectors such as health care in the year to come.  

Leslie Heffernen, Pitcairn Director of Fiduciary and Legal Services, discussed potential changes to the current exemption for estate and gift tax and other planning considerations given current uncertainty over which party will control the Senate following runoff elections in Georgia.  

Matthew Hilbert, Pitcairn Director of Tax, outlined potential tax changes under a Biden administration with a focus on capital gains, donating appreciated securities, and retirement planning.  

 

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End of Year Estate and Gift Planning Post-Election

Updating your estate and gift planning is recommended in any given year, especially in an election year which is likely to bring policy changes. Accordingly, there are a few areas, in particular, that should be given special attention as you think about your planning.

President-elect Biden’s proposals include a reduction of the estate and GST exemption to $3.5 million or $5 million. Also, we can expect a proposed reduction in the gift tax exemption to $1 million. Whether either of these proposals will make it through the Senate remains an open question; however, planning for them now can help you take action when needed.

As you consider your exemption options, keep in mind that you do not have to use all of them at once. You may want to gift in stages to ensure the security of your current lifestyle and the goals for future generations. Your Pitcairn relationship manager can help you consider your options and run financial models for pre- and post-transfer impact in any gifting scenario you consider. Two common estate planning techniques we are using include:

SLATs (SPOUSAL LIFETIME ACCESS TRUSTS)
In general, this trust is created by a spouse (grantor spouse) for the other (income spouse). The income spouse may receive principal and income from the trust for life. Upon the death of the income spouse, the trust assets are distributed to the children outright or in trust. Access to the trust assets can be retained by the grantor through the ability to swap assets or receive loans from the trust. Charitable organizations can also be listed as a potential beneficiary.   

DAPTS (DOMESTIC ASSET PROTECTION TRUSTS)

Asset Protection Trusts protect assets from creditors and, if properly drafted, can keep assets out of the estate. Delaware is a common situs for these trusts. If using a DAPT, prepare a solvency affidavit even if it is not required to avoid fraudulent conveyance claims. 

Tips:

  • Do not just automatically gift split with your spouse. Be thoughtful. It may benefit you as a couple to have one spouse use up his exemption while the other retains some or all. It seems that the first dollar given away is the first exemption dollar used.
  • Review your Power of Attorney. Reconsider a springing power of attorney as they proved to be problematic during the lockdown. Make sure your agent is authorized to sign as an agent through electronic means such as DocuSign. Make sure your elderly parents or your college-aged children have a POA.
  • Review your health care power of attorney to permit for experimental treatment and intubation – these are part of COVID-19 treatment and may be prohibited in a health care power of attorney. Again, make sure elderly parents and children over 18 have a living will. 


 

Rising Gen Community Gathers to Discuss Sustainable Investing

The Rising Gen Collaborative, Pitcairn’s peer learning and networking community for rising gen client family members, ages 19-35, had a virtual gathering on Sustainable Investing on November 19, 2020. Hosted by Genine Iffla, Director of Family Learning, and Ashley Ruhling, Director of Client Portfolio Management, rising gens from across the country connected, networked, and got to know each other’s interests, hobbies, and career paths.

The interactive learning session included:

  • The historic origins of socially responsible investing and the evolution of sustainable investing over the past century
  • An open discussion of issues and causes important to the group
  • Understanding the purpose of the UN SDGs as the foundation for sustainable investing
  • An overview of how different asset classes make an impact and an example of this framework in action through a stock, bond, and private investment story
  • The importance of due diligence and a group exercise called “Spot the Greenwasher”
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About Pitcairn

Pitcairn is a true family office and leader in helping families navigate the challenges and opportunities created by the interplay of family and financial dynamics. Through Wealth Momentum®, an experience-based family office model, Pitcairn helps families achieve a more effective and complete experience. Since its inception, Pitcairn has partnered with some of the world’s wealthiest families to meet their needs and drive better outcomes – year to year, decade to decade, generation to generation. Today, Pitcairn is recognized as an innovator, guiding families through generational transitions and redefining the industry standard for family offices. The firm is located in Philadelphia, with offices in New York and Washington, DC and a network of resources around the world.