Has the pandemic impacted investing?
The answer is not clear, yet.
By W. Creighton Stuckart
The Covid pandemic has had a major impact on many aspects of our lives, there is no doubt about this. But, when it comes to its effect on our investments, that is not such a clear and easy answer.
Because of lockdowns, our daily routines have been disrupted. Vacations and travel declined, dry cleaning declined, and eating out declined. As a result, we have seen the savings rate in the country grow dramatically. The savings rate, as a percentage of personal disposable income, jumped from 7.2 percent in December 2019, to 33.7 percent in April 2020. As of February 2021, it was still at 13.7 percent. With the savings rate where it is, we believe that an economic recovery has the fuel it needs to evolve.
The need to withdraw from investments also declined. Clients were not forced to take IRA Required Minimum Distributions (RMD) in 2020, allowing those funds to remain invested. And with reduced outlets for consumption, many added to investments, rather than increasing withdrawal.
Concerns beginning to surface are centered around inflation and taxation. Because the government acted aggressively to blunt the impact of the shutdown, the United States has incurred a great deal of additional debt. In addition, it’s possible that even more government debt will be needed to repair infrastructure. This increased debt will need to be paid for. There is a strong consensus that our tax code will need to be changed. But how will it be changed and will those changes have an impact on the financial markets is a big question. Capital gains tax rates, stepped-up cost basis at death and estate tax rates are but a few of the possible changes being discussed. It is much too early to focus on a clear path regarding taxes, but it is of great concern and bears focus.
Additionally, there is renewed concern about inflation. On one hand, rising interest rates can benefit savers and those on a fixed income. But rising rates can hamper economic growth and corporate earnings. Increased rates also cost the government more to service the increased debt levels.
As is typically the case, the economic markets are never static. There are always several factors to consider when dealing with your finances. Because of this, many see the value of having a financial advisor help with their decisions.
W. Creighton Stuckart, CFP, is managing partner of Atlantic Investment Advisory Group.