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Winner Takes All (Bloomberg, 8/13/2020): If there’s one refrain for markets this year, it’s the “stock market is not the economy.” With the S&P 500 briefly popping above its record last year, it’s worth re-visiting one of the reasons why stocks aren’t a perfect picture of the overall economy—and may never have been. The combined value of stocks of the Big Five (Amazon, Apple, Facebook, Google & Microsoft) is now 23% higher than their February peak, while the rest of the market is still 7% lower.

This speaks to a disturbing lack of breadth in the market. While reminiscent of the tech bubble in 1999, it is a bit different now in that the so-called “tech firms” are not just vapor as many of them were back then. For example, Amazon is a legitimate business that sells “stuff” while using a different modality to do so. The expansion of index trackers has ignited a self-reinforcing cycle: as money flows into these funds, it mechanically puts more cash into the heavyweights; they further increase. This must be carefully observed, as any serious decline in the Big Five could create a negative feedback loop that pulls the index down disproportionately.

Where Will the Next Billion Internet Users Come From: Internet adoption has steadily increased over the years. It has more than doubled since 2010.  Despite its widespread use, a significant portion of the global population still isn’t connected to the internet. In certain areas of the world the number of disconnected people skews towards higher percentages. Using information from DataReportal, the visual below clearly highlights where the greatest number of people remain disconnected from the web.

Consumers Less Than Enthusiastic in July: US consumers spent with less enthusiasm in July as the boost for reopening started to fade and a surge in coronavirus infections renewed virus fears. While retail sales posted a softer-than-expected advance in July, they now stand above their pre-pandemic level. However, the recovery has been uneven across spending categories and remains fragile.


Inflation Genie Stays in the Bottle, For Now: Headline and core CPI (consumer price index) rose strongly in July as phased reopenings allowed conditions to continue normalizing slowly even as virus cases flared in many states. While encouraging, inflation risks are still heavily tilted to the downside amid a stagnating recovery, reduced fiscal relief, and an uncontained health crisis.

Consumer prices are rebounding from the pandemic shock, but it is still a long way to full recovery. Further, inflation cannot sustainably achieve the Fed’s 2% target until a vaccine or therapeutic is found and virus fears have faded. With a health solution still well out of reach, the Fed will likely maintain an accommodating policy stance for a considerable amount of time. We don’t anticipate Fed lift-off from the effective lower boundary of its interest rate target until mid-2024.

Stimulus Executive Orders Fall Dramatically Short: Following the collapse in stimulus talks last week, President Trump bypassed Congress and took a series of executive actions aimed at providing immediate fiscal support. However, the relief is inadequate, legally questionable, and falls dramatically short of the booster shot the economy desperately needs. In the absence of a more comprehensive stimulus package, economic activity will be constrained just as the recovery plateaus.

The four actions—one executive order and three presidential memoranda—extend the extra unemployment benefits at a reduced $400/week, defer payroll taxes, address evictions without providing an extension of the moratorium, and extend the current suspension of student loan payments and interest until the end of the year.

These orders fail to provide much-needed assistance to small businesses, struggling state and local governments and schools, and provide no additional funding to address the worsening public health crisis.

Planning Corner: The Worst Asset to Leave Behind: A non-spouse beneficiary of an annuity has few options for managing the taxes owed on an inherited annuity. The beneficiary is not eligible for a step-up in cost basis as they would be when inheriting investments outside of an annuity. There are only two options available to the heir:

  • Take a lump sum distribution in the year that the owner died, or
  • Take distributions over a 5-year period.

Both options result in ordinary income taxed to the beneficiary. The beneficiary won’t owe tax on every dollar, only on the difference between your original investment and today’s value. Ordinary income tax rates are higher than the preferable capital gains rates applied to inherited investments outside of an annuity.

If you own a complicated, opaque financial product such as an annuity, and you cannot remember the reason you originally purchased that product (this often applies to life insurance as well), it is time to review your options. Rather than allow a seemingly small, non-qualified, variable annuity to sit untouched for decades and eventually left behind for your heirs to sort out, you may find there are better options to maximize the asset.

If your tax bracket is considerably higher than your heirs, leaving the annuity behind may still be the way to go. But you are better off avoiding the purchase of annuities for the wrong reasons in the first place. Your savings will grow much faster by investing without paying the high fees associated with annuity products.