Capital Gains Taxes And Your Money

Apr 24, 2021 | Investing, Tax

On this podcast, Karl discusses the news that moved the market this week. Capital gains taxes stole the headlines. But, does it matter? Karl answers that on this episode.

Hey, good morning, everybody. Welcome to the podcast. My name is Karl Eggerss. This is Creating richer Lives. And if this is your first time, welcome aboard and thank you very much for joining us. We’re on all the podcast platforms. We even transcribe the podcast, so if you just want to read it, you just go to our website, and you can glance through some of the topics and so forth, so we do that as well. You can go to, is the web address, the telephone number, if you need our help for anything is (210) 526-0057. Just a reminder, the show is brought to you by Covenant: Lifestyle. Legacy. Philanthropy. Well, we spent the last few weeks, we had some interviews, got a lot of positive feedback, a lot of different topics with some guests, and we’re going to have some other interesting guests coming up in the next few weeks as well.

But I wanted to take a break this week from that and focus more on the market. The last few weeks I’ve been saying, “Look, there hasn’t been a ton going on. The market’s just been kind of grinding higher.” Well, this week we had a little more. Now, if you look at the indices, it wasn’t as if there was a dramatic change in the indices themselves. There was a little more volatility, but still nothing compared to a year ago, right? So we’re still not getting a tremendous amount of movement, we just have a lot of, I think, some bubbles forming and have been there for a while. And we’re certainly see a speculation across the board in a lot of different areas, but we’re also seeing a lot of people still doubting the rally and they’re doubting the market being at these levels.

And so you kind of have this tug of war a little bit, but we’re still hanging out near 34,000 on the Dow, about 14,000 on the NASDAQ, and about 4200 or so on the Standard & Poors 500. Again, huge difference between where we are today and where we were in 2020 at this time. But I did want to just stand back this week and really just give you my thoughts on a few different areas with this market right now. And then again, we’ll get back into some interviews in the next few weeks.

And probably the biggest news headline this week, of course, was on Thursday around noon or so, depending on which time zone you are listening in, but around noon, we got word that the capital gains rate that President Biden wants to put through is quite high, higher than the income tax rate, 43%. And given that the market sold off immediately, and this is one of those things that people have been concerned about, right? Well, taxes are going to be going up in some form or fashion, so surely the stock market has to go down. And I want to address that a little bit today.

Now, as it stands for the week, again, because of the movement we had, we still finished, for the most part, in the green on a lot of different areas. A little more of a mixed bag in terms of some of the extreme movements. I mean, probably the weakest was energy, probably the strongest was real estate. We continue to see interest rates pulling back down. I started to like the set-up, technically, a couple of weeks ago, and we’ve had a nice move back down in rates, but, again, just really digesting some of the big move we had on the upside.

Remember we were back here in August at around a half a percent on a 10-year treasury. And it got all the way up to about 5% one point seven five percent just a month ago. So that’s a pretty big move. And because of that, obviously, bonds sold off. But now we’ve had a little bit of a reprieve, we’ll see where they ultimately go back down to. And I don’t think they’ll plummet or anything, but they were a nice setup and a time for you to rebalance, if you had too many stocks and not enough bonds. And that’s an important discipline, if you’re investing your own money, and if you have somebody investing for you, make sure they’re doing those things, make sure they’re rebalancing and they’re basically taking profits sometimes if you’re over allocated in one area, and then rebalancing into the areas that, Hey, they’re on sale right now and you should have more of them. So make sure you’re doing that, or somebody is doing that for you, because that’s an important discipline.

We continue to see strength in the commodity markets. And again, we hear about inflation picking up. We’ve talked about that, and commodities, especially, agricultural commodities have really been going up right now. So you’re going to continue to see prices of things go up. The question is, again, is this inflation? Is it the inflation that we all think about? Or is this more just deflation or disinflation becoming inflation? And I think it’s the latter. I think we’re still seeing, this is Covenant’s view, that we’re seeing inflation pickup, but not to the extreme of what we would see in the 1970s. And that’s what most people think, they hear inflation and they immediately think, oh my gosh, everything’s going to go way up in price.

Well, the reason that it feels that way right now is because of where we were a year ago, where things were declining rapidly. So of course, we’re getting this bounce back, on a lot of things, to where we were and maybe a little higher. And so we’re certainly seeing that. But we’re seeing really this disinflation go away and inflation coming in. And remember we need some inflation, and so some inflation is a good thing and we’re seeing that. So we are seeing prices of goods and services go up. And look again at the end of the day, for those of you that are saying, “Things are going up in price, how do I protect myself?” You invest in those things. I’ve talked about that in radio interviews. You have to invest in the things that you’re trying to hedge against, right?

So we’re seeing commodity prices go up. We’re seeing bonds kind of stabilize around one and a half percent on a 10-year treasury. We’re seeing stocks still hanging out near all-time highs, but what kind of gave it a little bit of a jolt was this news about capital gains taxes going up. Now, I think we’re going to get tax hikes. I think we all know we’re going to get that in some form or fashion corporate, personal, there’s talk of the stepped-up basis going away. There’s talk of 1031 exchanges, which involves real estate transactions, that going away. There’s a lot of different things that could change in the tax realm. Capital gains is a big one, because it’s been a good stock market the last few years. And clearly there’s capital gains, unrealized gains sitting on the books. And people are saying, “Hey, maybe I’ll take it now versus next year.” There’s a lot of estate planning going on.

So that really wrench into the market a little bit, but of course, Friday, the market just bounced back and ignored it. And I think it probably should have been, and here’s why, as easy it is for us to talk about that, hey, capital gains going up, taxes going up is not a good thing, and the stock market won’t like that, investors won’t like that. That may sound true, but the data doesn’t support that view. If you look at the correlation of the market and capital gains taxes going up, there really hasn’t been one. In other words, it hasn’t seemed to have a major effect, believe it or not. And so it’s a good narrative, but the data doesn’t suggest it. And I think that’s why the market kind of came back Friday, and pretty much erased all of the losses on Thursday.

So I think for you and me, we need to focus on other things rather than just the headlines of what’s happened, and remember, these are headlines, they aren’t law. They may not happen at all. They could happen to a lesser degree. We don’t know when they will happen. All of those things play a part. So we can’t have a knee jerk reaction in our portfolios and make changes based on a news headline. There’s a lot of uncertainty right now. And it’s interesting, you always hear the market hates uncertainty. I think we have a lot of it and yet the stock market’s ignoring it. And why is that? It’s because I think there’s something that supersedes the uncertainty. It is the low interest rates and the Fed telling us they’re going to keep it that way. Stimulus checks coming out of helicopters.

I don’t know if you saw the video the other day, literally, money being dropped out of the Dallas sky. I don’t know the full story, but there was literally dollar bills… That’s what it feels like right now, right? There’s dollar bills floating down. A lot of people getting stimulus checks, unemployment checks, which has disincentivized people to go to work. It has people getting stimulus checks that may be don’t really need it, and so, maybe, they’ve invested it. But that has fueled this stock market. It has maybe even fueled business. Real estate is super hot. The hottest I’ve ever seen it. Even hotter than 2005, ’06, at least where I am, and what I see. Because what we saw in 2005 and ’06 was more… It seemed to be in Florida. It seemed to be in Arizona. It seemed to be in Las Vegas. This seems to be across the board, and its interest rate’s very low, a very quick recession and recovery and stimulus checks. And you put all that together and the market is just going bonkers in the real estate market.

So I think that, again, we need to focus on that more so than we are looking at potential tax hikes. It’s almost like the election. You remember all the talk about the election, I saw it in 2016, and I saw it in 2020, everybody worried about the election, and then it almost became a non-event in both scenarios, in both cases. And I think it’s the same thing now. First of all, you have to focus on is your situation, let’s get that right first. Don’t worry about the next month, three months, six months, worry about the next five, 10, 15 years in what your allocation should be. Whether it should be 20% towards stocks or 80% towards the stock market. Everybody’s situation is different, we can certainly help you through that.

You need to focus on that first, but in terms of allocating your dollars in the stock market, once we’ve figured out the allocation, once we look at that and we drill down to inside the equity markets, yes, we need to pay attention to what is going on and adapt to the world that we live in. For example, looking at how technology is really going to change and help us through the pandemic. That was something we did here at Covenant last year, because we felt like, yeah, technology will benefit from the pandemic. There’s things that will benefit from that. And so, yes, we have to look at that, and if taxes do indeed go up, there’s going to be investments that may benefit from that. If real estate law changes, as far as 1031s, we have to adapt to that. So it’s about adapting and modifying, not overhauling and think that you can, hey, I’m going to get out because I think taxes are going up.

So I do think taxes are going up, but how they get there and how soon and so forth, we don’t know that. And I think what’s happening as the market’s really focusing on profits, the earnings have been very good this quarter. And because of that, the market’s reflect it. And remember over the long-term, what are we buying? We’re buying profits. We’re buying companies with earnings and profits, and that’s what’s heading up. Now, because it’s been so good in that arena, it’s led to speculation and other things. We know about people that were sitting at home during quarantine and started trading for the first time, that skyrocketed and with that came speculation on a lot of things, and frankly, new investors that haven’t ever been through a real bear market. And they haven’t seen a permanent loss of capital on some of their positions.

And so we’re getting things like NFTs, which I’ve talked about. We’re getting things like cryptocurrencies. We’re getting stocks that don’t have any earnings going up, IPO’s that are all over the place. Those are concerning red flags, but they’re only red flags for people that are, I think, extended in those areas. Again, there is plenty of value in this stock market. There’s plenty of still good deals and good quality companies paying good dividends and have real earnings, plenty of those. And there’s plenty of things in the private space. They’re still real estate deals happen in, there are still businesses that need to be funded. There’s still private lending that needs to happen. And if you don’t have some of that, it may be a time for you to explore that. If you’re concerned about the stock market, instead of just sitting and going, “Oh, I’m going to get on the sidelines,” explore all the alternatives you have to you.

And so that is something that I personally believe in. I think having a real diversified portfolio is something that makes a lot of sense. And again, alternatives is one of those subjects that we’ll dive into a little deeper in the next few weeks. And again, alternative can mean a lot of different things. Let’s just call it anything other than stocks and bonds, and maybe real estate. Alternatives are something that are meant to diversify the portfolio and have different characteristics and a different path, a volatility path other than stocks and bonds. And when you put them together, it can really help your portfolio be a little smoother and still get you to where you need to be. And I think as this stock market matures and as interest rates are so low, and clearly we may have some challenges on our hands in the fixed income arena going forward, we need to be looking at other things. We need to be more creative.

And you’ve seen a little bit, really, since November when the vaccines were first announced, and that was going to happen. You started to see the economy start to open up. And the diversification started to work and commodities started to work, small caps, value, international stocks. And some of these things actually, that had been working, started to take a back seat. So I think it’s actually a healthy market and it has been healthy market for, we’ll call it, the last five or six months, but we need to pay attention to what’s going on. And as I’ve always said, for those of you that have listened to the podcasts for years, you know I’m less about the headlines. We talk about the headlines and try to put a narrative around why things were moving. Certainly, the headline that came across on Thursday regarding capital gains tax is going up significantly caused the stock market to fall. That was a knee jerk, algorithmic selloff. We know that.

But in the big picture, to me, the headlines are very distracting. What I like to focus on is, what are investors doing with their money? When we look under the hood, are people actually buying or the market’s going up just because their lack of selling, and we can see some of that data. We have very good analytics and data that we have access to. And what we’ve seen is a very healthy bull market, a lot of different areas. And as we move forward, we may see a rotation. So when I’m talking about looking at your equity allocation and really being tactical with it, what I mean is, what areas are benefiting from the current environment? What areas are starting to lag behind? Should you be adding to certain areas? I don’t think it’s going to be, I use the word, easy going forward.

What’s been easy, we’ll call it, really, the last 10 years coming out of the great recession of ’08, primarily, if you invested in the Standard & Poors 500, and you invested in just a plain Jane bond index, it’s beaten most strategies. In other words, the more diversified you were, the worse you did. That’s not a normal environment, but I think there are a lot of reasons why that happened. Indexing became very popular. You had, clearly, interest rates on a downward path and kept low for a very long period of time. And you had a natural recovery from a horrible recession. And so, we’re kind of going through a similar thing right now. The difference is we started at a much lower point with interest rates, and now we face this challenge, really, of rates going back up.

And we have stocks that are very, very expensive. The overall stock market is expensive. And so, again, you can own mutual funds. You can own exchange-traded funds. Those are all fine, but which ones you own and how they are made up, how they are constructed, I think it’s really important. And again, I will go back only as far as 2000, we had the dotcom bubble. And what’s interesting about that market was that, if you were properly diversified, you did okay through that. Not everybody lost a ton of money during the dotcom bust. And the reason why was because it was more of a rotation, there were certain areas doing okay, but it was about valuation. Things got too expensive. And guess what happened? Things got too expensive and people stopped buying those expensive things and then went down. But the cheaper things held up okay. Certain sectors held up okay. Certain industries held up okay.

Okay. That was a valuation bubble. 2008 was a financial crisis. Not much different than really what we saw in March of 2020. That was really a shutting down of the economy, and because of that, that’s why the stock market fell so much. I mean, the economy grinded to a halt. What we’re seeing today, I think, is more akin to the late ’90s. I think we’re seeing, maybe, reasons for the market to be going up, but we’re seeing some extremes in certain areas. We’re seeing some extremes in certain areas.

In fact, Howard Marks, a Wall Street pro, one of his quotes is, “The most dangerous thing is to buy something at the peak of its popularity. At that point, all favorable facts and opinions are already factored into its price, and no new buyers are left to emerge.” Let me repeat that, “The most dangerous thing is to buy something at the peak of its popularity. At that point, all favorable facts and opinions are already factored into its price, and no new buyers are left to emerge.”

So when I hear somebody say, “This stock has been doing fantastic, and I think they’re going to do this, and they’re going to do that,” more than likely everybody already knows that, and it’s already factored into the price. That’s why it is where it is. So you have to get more good news. You have to have news and information and earnings that exceed the expectations. And so when you overpay for something, you can see problems with that for decades. Again, you look at some of the biggest companies, the Microsofts, the Coca-Colas, they didn’t do anything during the 2000s, because they were working off the over valuation.

So overpaying for them really hurt investors for the next 10 or 15 years. And I don’t think this time will be any different. And remember, again, there is a lot of those types of companies in the Standard & Poors 500. That’s what you’re investing in. You’re investing in the biggest, overpriced companies when you invest in the Standard & Poors. And I want to be clear about something, extremely clear, I’m not saying to avoid the Standard & Poors 500. We have exposure to that area. I’m just saying, should it be all of your portfolio? Should you not have some value? Should you not have some small companies? Should you not have some international? I believe so. I believe in diversification. And I think when you look in a lot of people’s portfolios today, they think they’re diversified, but they’re probably not. And that came home to roost back in the dotcom bubble.

So that’s where I think we are, is that, I do believe that I think commodities will continue higher. I think prices will continue to move up, and they’ve been an under-performer. So, certainly, think that hedging yourself with some inflation protection. I think bonds, you need to be more creative, again, not to say, do not own plain Jane bonds. Totally think there’s a place for that, especially when the markets do sell off, people tend to flock to good old treasury bonds in the United States, but you have to be more creative in how you get your income. That’s why we created that free report. And again, we have a lot of uncertainty coming up. That’s what’s fascinating is, markets hate uncertainty, well they seem to be loving it right now, because we’ve got… For those of you that have income and have a reasonable size estate, there are some changes coming, right?

We’re going to have to do some more in-depth financial planning, more in-depth estate planning. Investments may be the least of the things we should be paying attention to right now. So really stand back and think about all of that. In fact, we have a few guides, if you need some help, we have some guides that are pretty interesting, and they’re kind of, yes, no. And if you want one, let me know. But, basically, it’s kind of looking at the Biden tax proposal, what’s out there right now, as best we know it, how you might be affected. And so it’s kind of a yes, no questionnaire just for yourself to kind of go through or you’re affected by some of these. And we have one for high income earners and one for not. So if you want that, let me know, and we can send it to you. It’s a really handy one page, two page guide on that.

So there’s a lot of things we’re trying to address this for you and give you information. So one of them is, ways to increase your investment income. That report’s been out there for a while, if you want that, let us know, a free report. And the other one, are some of these checklists that are a little more of a, hey, are you affected by some of these tax increases? And I think everybody will be affected by the tax increases, whatever they look like. Even if you’re a low income earner, I think you’ll be affected, because of the fact that maybe your employer is affected, and maybe they want to cut back on jobs or benefits. But to what extent you’re affected, more than likely does more have to do with income and so forth. So a lot of changes coming up, again, on the estate planning side, the income tax side, and probably the investment side, as well as we move on.

But right now, again, bull market’s intact. You can see what happens every time there’s a little sell off, there’s buyers to step up. So let’s continue to watch that. I’ll continue to report what I see underneath the hood. And what I see is still a good strong market, but we certainly have some things that are stretched and we’re always subject to a quick 10 to 15% drop in the market, always. Remember, JP Morgan piece that has been my favorite piece over the years, that’s been an average decline of about 13 to 14%. At some point during the year, that’s been an average decline, but it’s not necessarily where you are, it’s how you finish. And a lot of those years finished up on the year, but had some sort of sell off in the middle of the year, at some point. And that’s probably how this might set up, might set up.

So you guys have a wonderful weekend. I hope that was helpful to you. I hope that you stay focused, because the news headlines can certainly distract you. But if you don’t have a game plan, if you don’t have where you’re going and knowing how to get there and what volatility you’re willing to accept and maybe stress test in your portfolio to really understand, hey, if something like a March of 2020, or even a 15% drop happened, how would my portfolio be affected? And we don’t know exactly, but we can pretty much stress test it based on history. It might be helpful. So if you need us to help you with that, we’re always here to help. You guys have a great weekend and we will see you back here next week on the Creating Richer Lives podcast. Take care, everybody.

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product, including the investments and/or investment strategies recommended or undertaken by Covenant Multifamily Offices LLC, Covenant, or any non-investment related content will be profitable, equal any corresponding indicated historical performance levels be suitable for your portfolio or individual situation or prove successful. Moreover, you should not assume that any discussion or information serves as the receipt of, or as a substitute for, personalized investment advice from Covenant. To the extent that a listener has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with a professional advisor of his/her choosing. Covenant is neither a law firm nor a certified public accounting firm, and no portion of the newsletter content should be construed as legal or accounting advice. A copy of our current written disclosure brochure discussing our advisory services and fees is available upon request or at


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