AI helps us generate these transcripts from the audio and sometimes it makes some funny mistakes.

Joey Loss  00:14

Adam, welcome back to another episode of Market chatter.

Adam Van Wie  00:17

Thanks for having me, Joe. You really appreciate it.

Joey Loss  00:19

So I don’t know. You probably heard there was an election yesterday. I don’t know.

Adam Van Wie  00:23

I must have been sleeping. I didn’t hear any news this week. I know it was

Joey Loss  00:26

in this country, believe it or not, we have a new president and some shifts in Congress,

Adam Van Wie  00:31

a new old president, I guess. Yeah, the Senate has likely flipped, and the House still up in the air, but looking like possibly Republican control. Yep.

Joey Loss  00:43

So Donald Trump is the going to be the 47th president of the United States. He was also the 45th Republicans currently have 52 confirmed seats in the Senate, giving them a majority. And what happens in the house is kind of TBD. There’s 57 seats left, but currently, Republicans have a bit of a lead there, so it’s possible this could be a sweep.

Adam Van Wie  01:06

Yeah, it’s not a done deal, but yes, it does look that way. So I thought

Joey Loss  01:10

today for this episode. You know, every month we get together, we talk about the markets, we talk about what’s going on, but this is kind of a big one. This is a chance for us to talk about what do we know so far, and what does this mean for listeners and people thinking about their finances and their portfolios out there?

Adam Van Wie  01:26

Yeah, we don’t want to talk the emotional side of politics. We really want to keep it focused on finances and what it means. I know half of you are probably extremely disappointed right now, and that’s totally understandable, and the other half of you are probably elated, so let’s just focus on the finance and see where we can make some money.

Joey Loss  01:44

Yeah, yeah. This is strictly focused on what we know and what we understand that might mean for each of us in different situations. So I thought maybe a good format for this is we just kind of talk through the different areas of our lives as they exist. So we start with the market economic impact. That’s something we’re all going to feel in a variety of ways. And we can talk about inflation. We can talk about taxes. You know, there’s going to be income tax, estate tax, ramifications to all this. So let’s kick it off with the market and economic impact. I mean, this morning, we saw what we often see after an election is concluded, regardless of the outcome. Yeah, that’s

Adam Van Wie  02:23

true. This maybe not quite to this degree on election day, but in the months following Joe Biden’s election, we saw the market run up substantially, and today we’re seeing the market absolutely jump on the news of last night. So some of that just has to do with pure enthusiasm. And obviously, a lot of people who are voters and have an opinion on these things also are investors, and so they’re placing their bets based on the outcome of that election and the news. But part of it is also that under Trump, especially pre COVID, the economy did do well, and he has promised in his campaign to do a lot of the same type of economic moves that he did under his during the 45th presidency.

Joey Loss  03:09

Yeah, that all holds true. And you know one thing, I think we should expect that markets are probably going to be pretty choppy through the end of the year. As information comes out, we start to see who’s a part of the next four years. You know, who is his team as he puts his team together and announces what does that look like, and what are his main initiatives for the first 100 days and so forth. You know, we’re going to see mixed reactions as things settle down and we get a better idea of what the next four years could look like.

Adam Van Wie  03:37

Almost certainly, that’s true. And the other big thing that’s sort of hanging out there that nobody’s talking about right now today is that the Fed is going to make a move here, or probably make a move the market was yesterday when I looked betting 98% that we’d see a quarter point rate reduction this week. But I didn’t look this morning, so I’m not sure where the percentages sit today, if the election will affect that or not, but that’s a big deal too. When the Fed is making moves the it tends to move the market. Yeah.

Joey Loss  04:09

Well, everything I read this morning, just because I had the chance to kind of dig in, was suggesting that there probably would still be a rate cut tomorrow, but after that, we might see kind of a cooling off of activity from the Fed while they take a new lay of the land.

Adam Van Wie  04:23

Yeah, that seems like a reasonable response. Changing course this late just because of an election, would be uncharacteristic of them, I would say, but not unprecedented.

Joey Loss  04:34

Yeah. As I was looking through what is going on in the markets this morning, fixed income, we saw a bit of a shift in the yield curve. I thought that was kind of interesting. Did you get a chance to see anything on that I

Adam Van Wie  04:45

did. I had a client email me about that this morning, and I responded to him the way that he was framing it was that it looked like rates were going up and the bond market was getting more worried about some economic turmoil. When I. Into it. It looked like at the short end of the curve. Yeah, little bit of uptick in the rates, but much more at the long end of the curve. And honestly, that’s what we need. We’ve been inverted for two years or more, and we really need to get back to where investors get rewarded more for taking longer term risk than they do for short term risk. That’s not the way that it’s been recently. Is not a great scenario. So I’m pleasantly optimal, or I’m sort of optimistic and pleasantly surprised that to see the yield curve sort of returning to normal. I

Joey Loss  05:35

agree with that. Yeah, I think it’s a good thing when we see the yield curve kind of get more normal. And this is one of those things that’s really hard to backstory. I think one interpretation of this is maybe that means people are feeling pretty good about the equity outlook, and what’s required of long term rates is higher, because people just aren’t going to make the trade off to holding longer bonds if that’s not what they’re paying.

Adam Van Wie  05:59

Yeah, I think that’s a very plausible scenario. I don’t understand why anyone would have bought a long bond over the last two years when you could buy an 18 month bond that paid

Joey Loss  06:10

50% more. Yeah, yeah. And so I think, you know, we’ll see again with what the Fed does tomorrow and just how things shake out over the next several weeks and months approaching inauguration, I think we’ll see a lot and learn a lot more about what the fixed income market could look like.

Adam Van Wie  06:27

Yeah, the one big unanswered question right now is, to me, when throughout history, when you’ve seen the bond yield curve invert for as long as it has, it’s always been followed by a recession, pretty much, and we haven’t seen that. Although we did see two quarters of negative growth back earlier a couple years ago, they did not count it as a recession. Was that the recession or not? And also, are we headed into another recession that’s still got to be on everyone’s mind, because the bond market has a very, very good track record of predicting recessions.

Joey Loss  07:04

Yeah, that’s just such a tricky one to plan around, both from a financial planning and a portfolio perspective, because, yeah, the word recession, the R word, has been thrown around. I mean, I can remember in 2015 they were saying, like, we’re due, we’re due, we’re due. And look what’s happened since then,

Adam Van Wie  07:20

I know it’s been pretty much outside of COVID. Really remarkable. I don’t even know if you can call that. I don’t know what you call that. That was such a man made shock to the system, I think you almost have to throw it out, except that it caused so many ripple effects downstream. So I don’t even know that we’re done with all of that yet. That’s the really crazy part. But, yeah, that’s just something that’s been on my mind is that the bond market has that perfect track record, basically, and we haven’t seen a real recession. I don’t know it’s something that you can plan on, though, or plan for even, because I just don’t know what you would even do. You can’t, you’re not going to change your portfolio around based on a potential recession that you have no idea if it’s going to arrive or when,

Joey Loss  08:04

right? Yeah, and this is probably a good part to plug what I forgotten the intro, which is, you know, obviously, everything we’re talking about here is just purely educational. We’re not given specific advice as we talk about what could be and what we think, and you know, how we do stuff for our clients. But you know, this conversation, this topic is one of the reasons why it’s so important to kind of understand the relationship between your portfolio and your cash flows. Because if your cash flows are coming from a high risk portion of your portfolio, and that’s where you’re counting on for the long term, that’s kind of a scary place to be. Once the R word starts hitting the headlines, that just feels a lot different. It’s probably less sustainable if it ends up being true that there’s a recession coming, it’s much better when those cash flows are connected to a lower risk, fixed income part of your portfolio, and that’s where the two are married, the planning and the portfolio.

Adam Van Wie  08:53

Yeah, that’s certainly true, and what you said is also exactly right. And I also want to say that I’m not expecting a recession. It certainly doesn’t feel like a recession today, but nor has it for quite some time. So Well, there still is some economic uncertainty out there, and you could make a case for a recession right now, I would say you can also make an equally valid case for not having a recession right now, and that’s been the trickiest part about what we do for the last few years.

Joey Loss  09:23

Yeah, and as kind of a part of that, I mean, right now, there’s just such an abundance of articles talking about which sectors are going to dominate over the next few years. And I just want to give a reminder that at the beginning of this year, you know, the whole story was tech, and people started piling into tech, which kind of made it a self fulfilling prophecy. But at some point, the excitement just didn’t match reality, to the point that it was continuing, and we saw a broadening of where these sources of great returns were coming from. And we look at general market information and so attaching to thoughts about specific sectors based on what articles are out today. It might be true for some period of time, or might never be true, but broadly diversifying is going to remain the best way to proceed, just given the unknowns and the way things shift so quickly in a complex system that we have.

Adam Van Wie  10:12

Yeah, a couple of things about that too. By the time the articles get out, the trade has already run it course. That’s generally true. I think a great example of that was in 2020 with the clean energy trade. If you bought on the day that Biden was elected, you probably lost a lot of money. Had you bought eight months earlier, you probably would have doubled your money. It by the time the news got out, the trade was over. So trying to trade on on events like that. It’s really not a great idea. Long term buy and hold and what’s going in your portfolio and the composition is way more important than trying to nail a timing trade. Yeah,

Joey Loss  10:53

I completely agree. Anything else in your mind as far as the markets go, I mean,

Adam Van Wie  10:58

I think that we’re looking at a situation where Trump is going to try and support businesses and try and make an economically friendly environment, cut regulations, do things that will allow businesses to prosper, hire more, pay people more, that his whole economic theory is that the better the economic environment for businesses, the more prosperous everyone is in the country. And so seeing the market react like this today is not a surprise to me, and I do think that. Well, I do think that is probably an overreaction today, and I would not be surprised if the market came back to earth a little bit tomorrow. I do think that the general consensus is that Trump will be very much pro economy and pro business.

Joey Loss  11:46

I think that’s a fair expectation, and I’ll be eager to see how it unfolds. I will as well. So moving on to the next big topic, taxes. You know, that’s been a huge headline since Trump first stepped on the stage, and during his first presidency, he enacted tcja, the tax the Trump JOBS Act. And basically what came of that was a different set of tax brackets. Generally speaking, just looking at the numbers and the way they’re set up, they were a bit wider meaning there was more income allowed before the next step in the progressive tax bracket system, and in general, the brackets were lower than they’d been, and there’s a few other footnotes on there. But given that Trump is in office, the Senate majority is now locked in at 52 possibly could go higher. There’s six seats left to be determined, and the house is still up in the air. I mean, if the house is locked in, there’s a pretty good chance this thing gets extended,

Adam Van Wie  12:41

I would say it’s almost a certainty that it would get extended under that scenario. He’s been very, very clear about that, and I don’t see a lot of opposition on the Republican side to extending that. And frankly, that’s great news for everyone who has an income out there. Whether or not you noticed that you did get a pay raise back when this thing was implemented, it really did change substantially, even at the lower brackets. I know that the media and some other constituents want you to believe it was only at the top brackets, but it certainly was not the lower brackets actually received a very favorable treatment, and I always tell my clients today, if you are a family making just under $100,000 there’s a very good chance that you are either in or just out of the 12% tax bracket. And that’s incredible. That’s not a lot of money to be paying to the federal government making a moderate income,

Joey Loss  13:40

right, right. And for people in the lower brackets, the biggest impact was the standard deduction change, which grew significantly with tcja,

Adam Van Wie  13:48

yes, and it made everything a lot easier too, because itemizing is really a tremendous pain. It requires a ton of work and documentation, and every time you make a charitable donation of goods. Instead of money, you have to take a picture and go get a value. It’s just really, it’s not a lot of fun. When that eliminated 95% of that, and you can just take this larger standard deduction and apply it, and you don’t have to worry about it.

Joey Loss  14:18

Yeah, yep. I think, like something like 90% of people now are filing with the standard deduction, which is two to three times higher than it used to be

Adam Van Wie  14:26

at the lower level. Yeah, I knew it was somewhere in that neighborhood.

Joey Loss  14:31

Another thing corporate tax rates are going to stay at 21% that probably translates to some of what we see in the market. Just a little bit of optimism there.

Adam Van Wie  14:39

Yeah, and Trump did talk during his campaign about lowering that. I’m not convinced that even if everything goes red, that will happen, or if it is, it might be more modest than what he talked about. I think 21 is a pretty competitive rate worldwide, and there’s no clear reason that we have to be the. Lowest tax rate in the world. That seems a bit ambitious, so we’ll see if that one actually comes to fruition or not.

Joey Loss  15:06

Yeah, at the very least, I think we can assume that with the rest of this, it will continue at the 21% Yeah, I think that’s fair. Some of the market activity today may be responding to the knowledge that the uncertainty is gone. I think Kamala Harris was running on a 28% corporate tax rate. So there’s some difference there. And another big piece, accountants everywhere are probably rejoicing at the idea that the qbi might stay around, considering how long it took us to learn it how that worked.

Adam Van Wie  15:33

Definitely such a huge thing if you’re a business owner, and it’s really hard to explain if you’re not, but essentially, what it does is make small business owners whose business income is taxed to them personally, basically pay the same tax rates that a C Corp would pay. So it kind of even things out. And that going away would have been a big blow to small business owners everywhere. I think actually, under a Harris administration, I think they would have convinced her to let it stay, because she was very, well, at least vocally, very pro small business. And that would have been a big blow to her constituency that owned small businesses and was had voted for her. Yeah,

Joey Loss  16:10

and there’s 30 million small businesses in America and 100 million people voted. So qbi affects a lot of people, no doubt about it. And translate that, I shouldn’t be using my own qualified business income deduction that’s qbi deduction. And in practical terms, basically, this is a very simple explanation, not completely capturing it, but if your business made about 100,000 of net income, that would be the amount you’re probably going to get taxed on with qbi. There’s a 20% deduction that’s taken off the top, and so that increases the amount that stays with business owners. And that’s the part that people have become accustomed to over the last several years of tcja. And

Adam Van Wie  16:48

the really important thing about that is that’s money that can then be reinvested in your business, in terms of buying new inputs for your business, paying another employee. There’s hundreds of reasons or things that you could do with that money, whereas, if it goes to the government, that’s it, sure, it helps reduce the deficit, but it doesn’t benefit the businesses that are really in need of that extra

Joey Loss  17:13

cash, right? And then I think that pretty much captures, at a basic level, the personal tax stuff. So anything else you can think of on the personal tax. Then

Adam Van Wie  17:21

there’s a few other things. I think it gives a general sense of just knowing what you’re going to be dealing with going forward is a very powerful thing for the market. Businesses can make money under Republicans, that can make money under Democrats, they’re going to figure out, give me a set of rules. We’ll figure out how to turn a profit. Just having this decided and sort of a general idea of what’s going to happen next, it really takes away all that anxiety and uncertainty from the market. And I think today is somewhat a reaction to that as well.

Joey Loss  17:55

Absolutely, I was looking by election at the immediate reaction. And you know, like we said at the beginning of the episode, on average, there’s an increase in the market as a result of the elimination of uncertainty that leads up to any election. But there really wasn’t a clear answer to Democrats are better for the market than Republicans in the seven days or 30 days that follow. You know, it really does vary. So I think to your point, it is about just give me a set of roles, let me figure out what I’m going to do with it, and get clear on my mission. And that creates a sense of confidence that we then see in the market over time.

Adam Van Wie  18:29

Yeah, that makes a lot of sense. I know that that’s how as a small business owner I would approach it, for sure.

Joey Loss  18:35

And then the last one, but not least, is actually one more thought on income taxes before I move on to estate tax, the width of of the income tax brackets is something that has been unusually pertinent in my practice this year, in the sense that I have a couple clients that have inherited large inherited IRAs. And with large inherited IRAs, you know, these are people in their 30s. They did not expect to inherit this money, and they have 10 years to get the money out. And so we’re being very thoughtful and strategic about how do we get all of the money out of this account at the low tax brackets we can possibly accomplish? So in that sense, it’s a big deal for a situation like that. If a tax bracket allows 80,000 more dollars of income when you’re filing jointly, then under the previous system, that’s a big deal. That’s 80,000 more dollars you can pull out of that account without jumping in tax rates. So there’s a variety of examples of situations that might see direct impact. But to me, in my practice this year, that’s been by far the most specific.

Adam Van Wie  19:39

And then when you’re planning those scenarios too. If you have working with a retired couple, this actually happened to some of our clients, you can also time around trying not to jump up in an Irma bracket, which, if you don’t know what that is, it is the most hated tax on the planet. If you make too much money in retirement, you actually pay more for Medicare and you. That is, people just really, really hate paying more for Medicare. So timing those cash flows in retirement is so important. Yeah,

Joey Loss  20:07

it’s a great point. I mean, it really does. And if you’re looking at things like Roth conversions and otherwise, those bigger brackets are just going to create more opportunity, you’ve got more latitude to figure out what’s best. All right, so estate tax, this is a big one for those with high net worths. You know, if you’re an individual person in your 60s and you’re halfway to ten million and you’ve got a good bit of a portfolio, or you got a business that you’re going to sell in the next few years, there’s a good chance that you might have an estate problem down the line. And if you’re a married couple, and you’re kind of approaching 20 million in net worth based on the exemptions. You may also have a problem at some point down the line. And so the previous situation was that the estate exemption, currently 13 point 6 million per person was going to have. The way the estate exemption works is that’s the amount the 13 point 6 million, that’s the amount of total assets you can leave to heirs with no exposure to estate tax. If you have 15 million and you’re an individual, then 1.4 million, roughly, is going to be subject to a 40% tax. So those in the higher net worth category hate this tax, right? It’s they call it the death tax. It has a bunch of nicknames, and there’s a lot of work that’s done by financial planners and attorneys and tax experts to try and figure out, how do we help people move assets to certain places so that they’re not exposed to this estate tax? And that was a big topic of discussion leading up to this point, because it was thought with it was thought that there’s a good chance that 2025, was the last year of this higher exemption. So if we see an extension to tcja and these this estate tax exemption, we’re going to have a few more years with which to figure out. How do we want to handle the possibility that this estate exemption drops at some point in the future, our deadline is not going to be so close. Yeah,

Adam Van Wie  21:59

everything you said is 100% accurate. I, with the exception of you, said that high net worth. People don’t like the estate tax. I personally don’t like the estate tax either, and I am not that high net worth. Hopefully someday, but it’s just a I think behind Irma, it might be the second most hated tax. Yeah, and

Joey Loss  22:18

people do a lot to try and figure out how to stay out of its way. And the truth is, there’s a ton of great planning that can be done. And timing is a big element when it comes to anything estate tax related. You know, you don’t want to move too soon. And sometimes people over fund strategies that are trying to avoid estate tax and end up kind of screwing up their ability to just enjoy a simple life at the household level from that point, and then if people wait too long and don’t take the right moves, they can end up just completely undershooting and still ending up with a significant estate tax bill and problem,

Adam Van Wie  22:50

yeah, and having to jump through all these hoops to try and avoid 40% of what you’ve earned during your life going to the government is just you can understand why someone would find it to be a very annoying tax. It’s it is a tremendous amount of work that the old ways of getting around it were so complicated and difficult that I think you put it very well, sometimes it would actually lower your quality of life while you were living in order to avoid paying taxes when you were dead. Yeah, in

Joey Loss  23:20

certain situations that could definitely happen. So I think, I mean, as far as topics go, we know quite a bit. And at the same time, there’s so much we don’t know about what the next four years are going to look like. And I feel like that’s probably about as good of an overview of what we see so far that we can share. Is there anything that you can think of that we left off?

Adam Van Wie  23:38

I do think that there’s a couple of other things that people were worried about that you no longer have to worry about, like taxation of unrealized gains. That would have been such an accounting nightmare. I don’t even know that it would have been possible, but that’s off the table with the Trump win. And there’s a few others like that that just that were giving people a little bit of anxiety, probably especially people who do what we do, and would have been responsible for avoiding those things. So that being gone and the estate tax planning really generally being gone, it just it makes things a lot easier. Now, if my biggest wish list item would be, please address the inherited IRA issue, because the government has bungled this more than any single issue that I can think of in finance, personal finance, it is the most complicated set of rules that have ever existed.

Joey Loss  24:30

Yeah, and what it requires, I mean, just for our seat, what it makes us put a new client through, who has an inherited IRA to know the right way we’re supposed to help them treat it. It’s just not appropriate. I mean, for us to be asking those questions as an example for listeners, if you’re listed as the beneficiary of your parents, Ira, then the timeline is 10 years. You have 10 years to get the money out if you’re not listed as the beneficiary, and it flows through the estate, kind of by default, not. Through beneficiary designation. The timeline is five years. Why that matters is beyond me, but that is where the law is.

Adam Van Wie  25:07

And also, if they were of RMD eight when they passed, then a different set of rules than if they were not. It is so complicated that it’s layers on layers of rules, and honestly, it’s such a big area that people are going to mess up going forward because no one understands it. Yeah,

Joey Loss  25:28

and we’re desperately trying to, I just want to do the right thing and and again, understand the rules so that we can operate within them as efficiently as possible.

Adam Van Wie  25:36

Yeah, just simplify it. Just make it all consistent. We can. It’s a great example of what happens when you’re given a set of rules and you will just follow it. If they just said 10 years, and every year you have to remove 10% Okay, done. That’s easy, just for every no one would mess that up. But of course, they haven’t done that. Yeah.

Joey Loss  25:54

I mean, with that said, I love that there’s some like strategy there, and we can make a big difference by not having a 10% rule. But at the same time, it would be a lot simpler for people that don’t have advisors. It’s a whole lot easier if that’s just that simple rule. Yeah,

Adam Van Wie  26:07

I just made that up on the spot. There is no proposal like that, but just something. Just give me a set of rules and I will follow it. But if you give me a set of rules, that’s so complicated that myself as a financial professional can barely understand it, that’s not a good rule. All

Joey Loss  26:21

right. Well, I think that kind of concludes what we’ve got for now. For listeners this market chatter, we do this episode every month. This just happens to be kind of a big topic this month, because we’ve got the US election behind us now, but every month we get together and we’re talking about what’s going on in the markets, if the Fed’s up to something, what does that mean? What do we think is going to happen? What sort of things do we need to be thinking about from a planning perspective, and what are we seeing with clients as we work through these changes with them? So please tune in next time, and if you have any questions for us, please don’t be shy to reach out.

Adam Van Wie  26:54

Yeah, thanks for having me on, Joe. I really appreciate it

Joey Loss  26:57

good to see you. Yeah, thanks for coming on, man. You thanks for joining us. If you enjoyed this episode, be sure to subscribe to the show and share the episode with friends or family that may find a conversation helpful or interesting. Show Notes and episode transcripts are available on my website at flow, financial.com/podcast I want to give a special thanks to Bo delicens for the music Explorer, and to the podcast man for producing the show. We’ll see you next time.

Disclaimer  27:28

The wealth unplugged podcast is sponsored by flow financial, Joey’s Registered Investment Advisory offering Financial Planning and Investment Management services to clients across the United States, The opinions voiced in this material are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual security to determine which investments may be appropriate for you consult your financial advisor prior to investing. This information is not intended to be a substitute for individualized tax advice, please consult your tax advisor regarding your specific situation. You.