Looking Ahead: Policy Changes, Inflation, & Consumer Confidence

We mentioned before that September is historically considered to be the worst month for the stock market, but this September took a toll on consumer confidence across the board. The Conference Board announced on September 28th that its Consumer Confidence Index declined that month, following the same downward trend that started in July and August. The Consumer Confidence Index is a survey that measures how optimistic or pessimistic people are about their financial situation based on 5 questions about the present economic situation and the expected financial future. The current Index number is 109.3, which is down from 115.2 in August. The scoring is comparative, based on a score of 100 in 1985. So, while consumers are more optimistic than they were in 1985, their confidence has been steadily declining as 2021 wears on. Only 19% of consumers believe that business conditions are “good”, while 25% believe they are “bad” (“neutral” is also an option). The press release from the Conference Board stated, “Concerns about the state of the economy and short-term growth prospects deepened, while spending intentions for homes, autos, and major appliances all retreated again. Short-term inflation concerns eased somewhat, but remain elevated.” 

Causes for Uncertainty

We discussed what to do about inflation back in our June NEST Edge, and flagged it as something to look out for even earlier in March. That doesn’t change the fact that the rising prices are making consumers anxious, even though in some cases inflation can help the economy recover in the long-term. Speaking of things that are a mixed bag, another cause for consumer concern might be the impending start of the tapering process. We covered that in last month’s September EDGE, and explained how the most direct result of tapering - an increase in interest rates - affects businesses and consumers, possibly reducing inflation but causing less hiring and spending in the interim.  The Debt Ceiling has also been hanging over everyone’s heads (we have to make that joke whenever we can). Like tapering, this can cause interest rate spikes, stock price plunges, and could be the match igniting the bomb that is the current bonds market. Decisions about the debt ceiling have been delayed, and luckily the limit has been suspended until the end of 2021, but it’s understandable looking at these factors that consumers might be feeling a little “pessimistic”, to use the Consumer Confidence Index’s word.

Policy Changes

A running theme in these economic events, especially tapering and the debt ceiling, are policy changes. Biden’s $3.5 trillion social safety net and climate change bill was passed by the House Budget Committee recently, sending it to the House floor where amendments can still be made. The House Ways and Means Committee approved legislation from House Democrats that would prohibit use of the mega-backdoor Roth conversion starting in January 2022 (only a few months away, now) to help fund Biden’s bill.  These are the details of the proposals related to Roth conversions, according to a Sept 24th brief from Katten Muchin Rosenman LLP: 

• All taxpayers regardless of income would not be able to convert any after-tax contributions made to qualified retirement plans or IRAs to a Roth account or Roth IRA (effective Jan 1 2022) 
• Taxpayers earning more than $400,000 with a combined traditional IRA, Roth IRA and defined contribution retirement account balance exceeding $10million would be required to withdraw 50% of the balance over $10 million 
• For aggregate traditional IRA, Roth IRA, and defined contribution retirement plans with balances over $20 million, 100% of the excess over $20 million must be withdrawn from Roth accounts up to the lesser of the amount needed to bring the total of the accounts below $20 million or the aggregate balance of the taxpayer’s Roth accounts. 
• The taxpayer will also have to pay income tax on such withdrawn amounts on an annual basis and for high-income taxpayers, the new provisions would prohibit any additional contributions to traditional / Roth IRAs if the aggregate balance of a taxpayer’s retirement accounts exceeds $10 million. 

These proposals are in keeping with recent criticisms from lawmakers about how some ultra-wealthy individuals have amassed large fortunes in tax-sheltered individual retirement accounts. Many lawmakers cite ProPublica’s recent report about PayPal co-founder Peter Thiel who owns a Roth IRA that grew from $2000 in 1999 to $5 billion in 2019, explaining that these tax-sheltered individual accounts were intended to provide retirement security to middle-class families. The proposals would result in significant changes to the estate planning landscape for high-net-worth individuals, including the termination of multiple estate planning methods that advisors have traditionally recommended. 

Taking Action 

Phew - there’s a lot going on in the world. The good news is, that’s always been true, and as Austin's wealth management experts, we’re here to help get you through these kinds of current events. Our financial planning process includes a comprehensive perspective of your wants and needs as well as the current state of the economy and policy. Our investment management strategies take a holistic, data-dependent approach to strive for our return rate goals regardless of what’s happening in the headlines. Reach out by emailing the partners at info@nestfinancial.com so you can stay optimistic, no matter what the Consumer Confidence Index says. 

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