General Principles

You and I are long-term, goal-focused, planning-driven equity investors. We’ve found that the best course for us is to formulate a financial plan — and to build portfolios — based not on a view of the economy or the markets, but on our most important lifetime financial goals.

Since 1960, the Standard & Poor’s 500 Stock Index has appreciated approximately 70 times; the cash dividend of the Index has gone up about 30 times. Over the same period, the Consumer Price Index has increased by a factor of nine. At least historically, then, mainstream equities have functioned as an extremely efficient hedge against long-term inflation and a generator of real wealth over time. We believe this is more likely than not to continue in the long run, hence our investment policy of owning successful companies rather than lending to them.

We believe that acting continuously on a rational plan — as distinctly opposed to reacting to current events — offers us the best chance for long-term investment success. Simply stated: unless our goals change, we see little reason to alter our financial plan. And if our portfolio is well-suited to that plan, we don’t often make significant changes to that, either.

We do not believe the economy can be consistently forecast, nor the markets consistently timed. We’re therefore convinced that the most reliable way to capture the long-term return of equities is to ride out their frequent but ultimately temporary declines.

The performance of our equity portfolios relative to their benchmark is irrelevant to investment success as we define it. (It is also a variable over which we ultimately have no control.) The only benchmark we care about is the one that indicates whether you are on track to achieve your financial goals.

Current Observations

The American economy continued its dramatic recovery in the first half of 2021, spurred by (a) the proliferation of effective vaccines against COVID-19 and the retreat of the pandemic, (b) massive monetary and fiscal accommodation, and (c) its own deep fundamental resilience, which ought never to be underestimated.

The S&P 500 ended the first half at 4,297, an increase of 14.4% from its close at the end of 2020. Coming into the year, the consensus earnings estimate for the Index in 2021 was around $165; as I write, the consensus for the next 12 months has reached $200, and is still being raised.

The economy continues to struggle with supply chain imbalances, as well as with a historic mismatch between the number of job openings available and continued high (though rapidly declining) unemployment. The chattering class of pundits and financial journalists continues to speculate on when these blockages will clear; to long-term investors like us, the key is our belief that they will, in the fullness of time.

We are still in the midst of an unprecedented experiment in both fiscal and monetary policy; the outcome remains impossible to forecast. The possibility that we’ve overstimulated the economy was highlighted this spring by a significant resurgence in inflation. But as the first half ended, statements by Fed Chair Powell and Governor Bullard indicated a keen awareness of this risk, and a readiness to act against it. The markets evidently took these gentlemen at their word, as inflation hedges like gold and oil sold off, the equity market pulled back modestly, and the yield on the bellwether 10-year U.S. Treasury note retreated to the area of 1.5%. One does not want to read too much into short-term phenomena like these; suffice to say that the Fed appears acutely cognizant that its credibility is almost existentially on the line here.

There is also the issue of the Biden administration’s fairly radical tax proposals with respect to capital gains and estates. The best that can be said on this subject is that, as the first half ended, the momentum behind these initiatives seemed to be ebbing. But the political climate remains as inimical to capital (and capitalists) as it’s been in quite a while.

Nonetheless, for investors like us, I think the most important economic report of this whole six-month period came just a few days ago. It was that household net worth in this country spiked 3.8% in the first quarter of 2021 — to $136.9 trillion — propelled by broad gains in the equity market and in home prices. Even more important, perhaps, is the fact that the ratio of household debt to assets continued to fall, and is now back down to about where it was 50 years ago.

The consumer powers this economy, and the consumer has rarely carried more manageable debt levels relative to disposable income — and has simply never been holding more cash — than he/she does today. In June, the National Retail Foundation raised its outlook yet again; it now expects retail sales to grow 10.5% to 13.5% (that is, $4.44 trillion to $4.56 trillion) year over year. Just this past month, the retail giant Target raised its dividend by a whopping 32%.

On February 19, 2020 — the market’s peak just before the pandemic took hold — the S&P 500 closed at 3,386. It then proceeded to decline 34% in 33 days, amid the worst global health crisis in a century. But if you bought the Index at that epic top, and were still holding it on June 30 of this year, your total return with reinvested dividends has been close to 28%. I’ve never seen — and don’t expect to ever see again — a more vivid demonstration of Peter Lynch’s dictum that “The real key to making money in stocks is not to get scared out of them.”

I believe I was put here for just that reason: to help you not get scared out of them.

Sincerely,
Chris

Chris Mullis, Ph.D., CDFA® NorthStar Capital Advisors 704-350-5028 chrismullis@nstarcapital.com 521 East Blvd, Charlotte, NC 28203 AskNorthStar.com Celebrating 15 Years • 2006-2021

Maybe.

After weeks of grandstanding, posturing, and wrangling, it looks like a bipartisan infrastructure deal that both parties can live with is in the works.

Good news: no tax hikes. But you’ll want to read on because we’re not out of the woods yet.

The bipartisan deal (can’t call it a bill yet) finds $579 billion of common ground from President Biden’s original $2.25 trillion American Jobs Plan.¹

It focuses on “hard” infrastructure — such as roads, bridges, rail, and public transit projects, as well as electric vehicle infrastructure and broadband internet — that both sides can agree on.

So, is it a done deal?

Not even close.

The current framework represents a compromise that makes no one happy, and there’s still a fair bit to hammer out (including how to pay for the plan).

The deal still needs to gather broad support in both parties, especially among those who think it’s too little or too much and might seek to scuttle the whole thing.

Fortunately, it doesn’t look like higher taxes are part of the deal. Though the math looks a little fuzzy from where I’m standing, it looks like funding sources could include repurposed pandemic funding, better IRS enforcement, and possibly digging through couch cushions for spare change (joking).¹

So, that means my taxes won’t go up, right?

Not so fast.

There’s another bill on the table. And it’s a $1.8 trillion doozy.²

The second bill, called the American Families Plan, focuses on so-called “human” infrastructure and contains many Democrat-backed priorities like childcare, climate change, health care, and education.³

Basically, the initiatives that couldn’t get Republican support are packaged up in a separate bill.

It looks like the Democrats are planning to pass that bill through a reconciliation process that doesn’t require Republican support to get through Congress.

Inside that bill are the tax increases we’ve been on the watch for. Higher taxes on wealthy individuals and corporations, as well as eliminating the step-up basis on inherited assets, among other tax hits.⁴

Since the bills are independent, it’s really not certain yet which (if either) will pass. Or when.

Will one pass and not the other? Will both grind to a halt this summer?

Hard to say.

What does all this mean?

That depends on where you’re standing. For industries expecting to benefit, it means an influx of tasty government cash.

For those worried about America’s crumbling infrastructure, it represents some critical moves in the right direction.

For those concerned about the spending spree the government’s been on (and how we’re going to pay for it all), it’s another brick in a looming wall of debt that will eventually come due.

Bottom line, it’s not nearly over yet. I strongly suspect the coming weeks will be full of more politicking, more grandstanding, and more arm twisting.

I’ll reach out when I know more.

Now, go enjoy your summer. You deserve it.

Infrastructurally yours,
Chris

Chris Mullis, Ph.D., CDFA® Founding Partner & Financial Planner Reduce Taxes. Invest Smarter. Optimize Income AskNorthStar.com       (704) 350-5028

¹_{https://news.bloomberglaw.com/environment-and-energy/a-win-for-roads-and-no-tax-hikes-infrastructure-deal-takeaways}
² _{https://www.cnbc.com/2021/04/28/biden-american-families-plan-whats-in-it.html}
³_{https://www.cnbc.com/2021/06/27/infrastructure-gop-senators-say-deal-can-go-forward-after-biden-walkback-.html}
⁴_{https://taxfoundation.org/american-families-plan/
Chart source: https://news.bloomberglaw.com/environment-and-energy/a-win-for-roads-and-no-tax-hikes-infrastructure-deal-takeaways}

Is it time to panic?

Is it time to ditch our strategy?

It’s a fascinating question because it cuts right down to the question of what it means to live in an uncertain world.

Humans are wired to dislike uncertainty.¹

And we’re used to a fair amount of (often unwarranted) certainty in the models and paradigms we use to make sense of the world around us.

We’re so attracted to certainty that when economic forecasts and reports come back with “surprises” (also known as being wrong) we tend to freak out.

Especially when the news trumpets every weird bit of data like it’s a huge deal.

Over the last few weeks and months, we’ve had a lot of “surprise” reports.

Inflation surprises.

Job market surprises.

Housing market surprises.

Economic growth surprises.

Why are we so surprised?

In a year like 2021, the margin for error is greater than ever.

Predictions, forecasts, and expectations that are based on averages, trends, and other backward-looking methods are ill-equipped to handle the outliers and oddities of a year that’s unlike anything that has come before.

When in history has an entire global economy simply come to a halt?

And then arthritically restarted with many creaks and groans.

To my knowledge, it’s never happened before.

Of course the data is going to have surprises.

We’re probably going to get a lot of things wrong.

I can’t wait for the best-sellers written about all the ways we could have done things better.

So. What does that mean for you and me?

Crystal balls are out of commission.

Surprise is the order of the day, the week, and the year.

The models haven’t caught up yet (though that’s not stopping anyone from issuing very confident predictions).

So we’re being careful and looking out for the opportunities (as well as the hidden pitfalls) in these uncharted waters.

We’re cultivating patience, gratitude, and our ability to make good decisions with incomplete information.

To staying frosty,
Chris

Chris Mullis, Ph.D., CDFA® Founding Partner & Financial Planner Reduce Taxes. Invest Smarter. Optimize Income AskNorthStar.com       (704) 350-5028

¹_{https://www.psychologytoday.com/us/blog/the-right-mindset/202002/why-uncertainty-freaks-you-out}

Let’s dive in.

The light at the end of the tunnel is getting closer and brighter.

• The economy is booming and we’re getting much closer to pre-pandemic levels of economic growth.¹
• COVID-19 cases are declining, as the math starts to work for us (instead of against us as it did at the beginning of the pandemic).² As more folks gain immunity, there are fewer ways for the virus to spread.
• All U.S. adults are now eligible for a vaccine.³
• Yesterday the first shot was approved in the U.S. for children paving the way for inoculations before summer camps and the start of the next school year.⁴
• Restrictions are easing and areas are opening up for travel, meaning we can start planning those missed vacations and seeing loved ones again.

After over a year of uncertainty and dread, the future is looking up.

How are you feeling?

Do you share my optimism? Email me at chrismullis@nstarcapital.com and let me know your thoughts.

Things aren’t completely rosy, of course.

Major COVID-19 surges in India and Brazil mean millions are still suffering.⁵

Viral variants mean the pandemic may not be “over” for a long time and we still need to be careful not to undo all our gains.

Many folks are not experiencing the economic recovery and may need years to recover what they have lost.

However, let’s not let the work ahead take away from the progress we’ve made.

Let’s take a deep breath and appreciate how far we’ve come since March 2020.

… Deep Breath …

Now, let’s talk about taxes.

President Biden just unveiled a plan to increase taxes on high earners to pay for economic reforms as part of the American Families Plan.⁶

What’s on the table is likely to change as political wrangling continues, but here are a few things we’ve got to consider so far:

A higher top income tax rate of 39.6% (though it’s not clear yet who falls into that top tax bracket).

Raising the top tax rate on long-term capital gains to 39.6%. With the 3.8% Medicare surtax, that means the highest earners could pay a 43.4% rate on gains.

The elimination of the step-up basis for estates, meaning heirs could get stuck paying taxes on capital gains over $1 million (even if nothing has been sold) when they inherit.

This change could impact folks who, for example, inherit family homes that have appreciated in value. They might want to keep the home, but may not be able to afford the tax bill.

So, should I be worried?

Alert and informed, definitely. Anxious and worried, no.

Here’s why:

This is a proposal. It’s got a long way to go before becoming law and the details may change.

It’s still unclear how much impact these proposed changes will actually have. There are many advanced strategies that can help mitigate the impact of higher taxes. That’s why tax and estate strategies matter so much.

A study done by Wharton Business School suggests that tax mitigation strategies could help avoid 90% of the proposed tax increases on capital gains.⁷

Bottom line, the proposed changes are concerning, especially with so many details left to be determined, but it’s not time to panic.

We’re paying close attention to the process and will be in touch if we feel changes to your strategies are needed.

Be well,
Chris

Chris Mullis, Ph.D., CDFA® Founding Partner & Financial Planner Reduce Taxes. Invest Smarter. Optimize Income AskNorthStar.com       (704) 350-5028

P.S. Have questions? I’m always here. Email me at chrismullis@nstarcapital.com or call me at (704) 350-5028.

¹https://www.bbc.com/news/business-56932023
²https://www.cnbc.com/2021/05/02/covid-gottlieb-says-cases-will-decline-vaccinations-monumental-achievement.html
³https://www.nytimes.com/interactive/2021/us/covid-19-vaccine-eligibility.html
⁴https://www.wsj.com/articles/fda-authorizes-pfizer-biontech-covid-19-vaccine-for-12-to-15-year-olds-11620681785
⁵https://www.cnn.com/world/live-news/coronavirus-pandemic-vaccine-updates-05-03-21/h_a0cbff31cf1168c6b850625a05a195b7
⁶https://www.cnbc.com/2021/04/29/how-biden-tax-plan-would-hit-the-wealthy.html
⁷https://www.cbsnews.com/news/biden-capital-gains-tax-wealthy/