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By Washington Trust / February 10, 2021

Caregivers and loved ones of individuals on the spectrum often find it difficult to plan for their future. Many function as de facto DIY caregiver, and have to be hyper-focused on the immediate present, dealing with day-to-day issues and trying to avoid or handle crises and flare-ups. It also can be difficult to predict what might be necessary for the future, since the impact of ASD can change over time, and the range of needs and challenges vary widely.

With all that in mind:

  • Why would folks on the spectrum require/benefit from special planning? 
  • How can special needs trusts meet that need?

This webinar features Kimberly I. McCarthy, Esq., Senior Vice President, Chief Tax & Benefits Officer, Head of Client Services, Washington Trust Wealth Management, Lauren K. Drury, J.D., Vice President, Chief Wealth Management Fiduciary Officer, Washington Trust Wealth Management, Anna Johnson, Head of School at The Wolf School and Lisa M. Cukier, Esq. Partner, Burns & Levinson.

Watch the video now: https://washtrust.wistia.com/medias/pq2wud5a7w.


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By Washington Trust / January 20, 2021

Economic & Financial Market Outlook - Winter 2021

2020 is now, thankfully, history. While the human toll from COVID-19 has been staggering, the economic damage has not been as great as initially feared. The Federal Reserve now forecasts that full year 2020 GDP will have declined by 2.4% from 2019 , less than the drop in 2008 during the Great Recession. The initial estimate at the start of the pandemic was for a decrease closer to 5%. Of course, to keep things in perspective, a deeper slump was only averted by an increase in Federal government spending of approximately 40% accompanied by the Federal Reserve adding trillions into the financial system.

2020 GDP gyrated wildly from quarter to quarter. GDP plummeted at an annualized 31% rate in Q2 on the shutdown, only to roar back at a 34% pace in Q3 . As for Q4, growth has obviously slowed. The resurgence of COVID-19 cases put a damper on activity. Additionally, a follow-on relief package did not materialize until year-end after many support programs had already expired. A wide range of estimates exist for Q4 GDP. The well-regarded GDP tracker, produced by the Atlanta Fed, pegs Q4 GDP at a still blistering 9%, but most estimates are considerably lower, coalescing at 4.5% , which is impressive all the same given the headwinds.

The outlook for 2021 is encouraging. The Federal Reserve upgraded its projection to 4.2% in December from 4.0% in September. Q1 GDP will continue to be hampered by the burgeoning rate of COVID-19 infections, but the additional $900 billion in additional COVID-19 relief should ensure that GDP remains in the plus column with the consensus at 2.5% . Widespread vaccination over the course of the first half of 2021 should result in a reacceleration of growth. The incoming Biden Administration is likely to seek additional stimulus, as well.

A continuation of easy monetary policy for 2021, however, seems a near certainty. We have noted previously that the Federal Reserve’s top priority is restoring lost jobs. While the recovery in the labor market has been impressive, unemployment sat at 6.7% in December versus 3.5% pre-COVID-19 . Fed projections place the long-term rate of unemployment at 4.1%, while the 2021 year-end rate is forecasted at 5.0% . There is still considerable room before concern mounts at the Fed over inflation from labor shortages. Financial conditions are thus likely to remain supportive of growth throughout the year.

The composition of growth in 2021 is less clear. Residential construction proved to be a boon in 2020, as were consumer durables, generally. Housing affordability is now somewhat stretched. There is some expectation that consumer spending could shift towards experiential services, such as travel and dining out, as opposed to the purchases of goods. Municipalities are also clamoring for additional Federal assistance. Without it, government layoffs at the local level could persist. The acceleration of trends including work from home, online commerce, and robotics may be irreversible. While all may help achieve greater productivity, their impact on the labor market and real estate sector remains to be seen.

Overall, the U.S. economy demonstrated considerable resilience in 2020. We expect it will cope well with these shifts in 2021. Given that a synchronized global recovery is likely after a rare outright decline in global GDP, our base case is that the U.S. should enjoy solid growth in the year ahead and return to a stable growth path.

2020 financial markets were a rare bright spot in a generally depressing year. The late Winter COVID-19 induced bear market was the shortest on record as governments and central banks responded forcefully to blunt the economic impact of the pandemic. In the U.S., Congress swiftly passed a $2.2 trillion relief package; the CARES Act, which provided assistance to businesses and individuals. Personal income was not just supported but boosted as $1,200 checks were sent to most taxpayers and generous unemployment benefits were instituted temporarily. The Federal Reserve cut the overnight rate to the zero-lower bound, reinstituted quantitative easing on a massive scale, and took unprecedented steps to shore up credit markets.

Investors responded enthusiastically, driving outsized returns in both stock and bond markets. For the year-ended December 31, 2020, the S&P 500 Index returned 18.4% while the Bloomberg Barclays Aggregate Index tacked on 7.5% . As the year progressed, an “everything rally” took shape, with the vast majority of asset classes including commodities and currencies participating.

While we are optimistic on prospects for a return to sustainable economic growth by the second half of 2021, the financial market outlook is somewhat murkier. As noted above, Federal Reserve actions were key in reassuring investors. The Fed engineered a decline in rates and bond yields to record lows which served to push investors further out on the risk spectrum. Equities and lower quality debt were snapped up as government securities no longer provided a meaningful return.

As a result, valuations for both stocks and bonds are extremely elevated. S&P 500 Index earnings decreased by 17% in 2020 to an estimated $135 per share. We forecast that earnings will snap back 22% in 2021 to $165 per share, roughly the same level as 2019 . However, the S&P 500 Index ended 2020 at a price of $3,756, 16% higher than at year-end 2019 and 50% above the level at December 31, 2018 which is perhaps a more relevant date for comparison since we are looking at forward not trailing earnings. The benchmark’s current price/earnings ratio on 2021 earnings is a lofty 22.6x versus a historical average of 16x forward earnings.

The intent of the above discussion is not to declare equities wildly overvalued but to emphasize the importance of interest rates in driving returns. During the same two-year period as stocks surged while earnings sagged, the yield on the 10-year Treasury note declined 66% from 2.69% at year-end 2018 to 0.92% on December 31, 2020 . In short, falling interest rates were the lever to push stocks higher on the expansion of the price/earnings multiple rather than the lever of earnings growth.

In fact, we continue to find stocks relatively attractive compared to bonds. For now, at least, the Federal Reserve appears to have investors’ backs. The overnight Federal Funds rate will remain anchored near zero for a period of years, not months. Our expectation is that the Fed will continue to aggressively inject liquidity into the system via purchases of longer-term Treasury and mortgage-backed securities at least for the duration of 2021 before dialing back. This activity will restrain bond yields despite potential blips in inflation as a result of supply bottlenecks due to the full reopening of the economy.

In order to pursue its full employment mandate, we suspect the Fed will attempt to maintain negative inflation-adjusted (or real) interest rates across the yield curve. For that reason, investors may wish to adopt a multi-asset class approach to generate income. Shares of companies that can grow both earnings and dividends may offer part of the solution.

Financial market returns along the lines of 2019 and 2020 are unlikely in 2021. Bond yields have already seen the bottom, which will inhibit fixed income returns. A very small subset of mega-cap tech stocks led the equity market for the past two years which could leave the major indexes vulnerable to correction. Therefore, diversification may be increasingly important. Irrespective of market returns, 2021 should a much better year and we wish our clients a prosperous and, more importantly, healthy New Year.

The views expressed here are those of Washington Trust Wealth Management and are subject to change based on market and other conditions. Investment recommendations and opinions expressed in these reports may change without prior notice. All material has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. Investing entails risk, including the possible loss of principal. Stock markets and investments in individual stocks are volatile and can decline significantly in response to issuer, market, economic, political, regulatory, geopolitical, and other conditions.

Investments in foreign markets through issuers or currencies can involve greater risk and volatility than U.S. investments because of adverse market, economic, political, regulatory, geopolitical, or other conditions. Emerging markets can have less market structure, depth, and regulatory oversight and greater political, social, and economic instability than developed markets. Fixed Income investments, including floating rate bonds, involve risks such as interest rate risk, credit risk and market risk, including the possible loss of principal. Interest rate risk is the risk that interest rates will rise, causing bond prices to fall. Past performance does not guarantee future results and the opinions presented cannot be viewed as an indicator of future performance. The S&P 500 Index is an unmanaged index and is widely regarded as the standard for measuring large-cap U.S. stock-market performance. In addition, the S&P 500 Index cannot be invested in directly and does not reflect any fees, expenses or sales charges. Further, such index includes 400 industrial firms, 40 financial stocks, 40 utilities and 20 transportation stocks. The information we provide does not constitute investment or tax advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell any security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. Please consult with your Portfolio Manager, Financial Counselor, attorney or tax professional regarding your specific investment, legal or tax situation.

2021-02 (01/19/20)


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By Washington Trust / January 20, 2021

The Pandemic Isn’t Over, but Most COVID-19 Tax Relief Is – At Least For Now

Though vaccines have been approved and are being distributed, the pandemic seems far from over. Businesses remain closed or restricted, social distancing and stay-at-home mandates are still in place, and the numbers continue to rise into 2021.

Legislation signed into law on New Year’s Eve included some COVID-19 related provisions. But despite the fact that the pandemic is not over, most of the pandemic-related tax provisions that benefited our clients last year have ended. For example:

• RMDs must be taken in 2021; the waiver was for 2020 only.

o The new RMD rules – for individuals born on and after 7/1/1949 – are now in effect.
o Luckily, we treat 2020 as if it didn’t exist for RMD purposes in 2021.
o You do not have to “double up” on your distributions, and 2020 does not count against the 10-year distribution period.

• Income taxes must be paid on the regular schedule; the extensions were for 2020 only.

• COVID-19 related distributions cannot be taken from your retirement plan this year; the special rules were for 2020 only.

o However, you still can benefit from tax relief on those distributions. 
o The distributions are taxable, but you can split the tax into three installments.
o You do not have to pay the 10% additional tax.
o You can put some or all the money back into your retirement plan any time within the next three years.
o Please note: these provisions were optional, and only apply if the employer/sponsor adopted them for 2020.

The most recent legislation did include two new or extended non-COVID-19 tax benefits that could benefit our clients, however:

• Enhanced deductions for cash charitable contributions.

o In response to the pandemic, the limit on cash charitable contributions to a public charity was waived for individuals who itemize deductions. (The usual limit is 60% of Adjusted Gross Income (AGI).) The new legislation extends that waiver through 2021.
o In 2020, non-itemizers could claim a write-off of up to $300 (total, for single or married filing jointly) of cash gifts to public charities. For 2021, the tax break is extended and expanded to $600 for married filing jointly.

• Eliminate the 10% threshold for deducting medical expenses.
o The threshold for deducting medical expenses was scheduled to jump up to 10% of AGI for 2021 forward.
o The new legislation made the current threshold (7.5%) permanent.

Of course, the pandemic-related relief we saw last year – or new and different relief – could be passed after the inauguration of a new Administration. While the actual legislation for President Elect Biden’s “American Rescue Plan” has yet to be written, it appears that it will not include any noteworthy IRA or retirement plan provisions. We will be monitoring the situation closely and update you with developments as they occur. In the meantime, if you have questions, please feel free to reach out to your relationship manager.


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By Washington Trust / January 7, 2021

By: Peter R. Phillips, CFA, CAIA, Senior Vice President and Chief Investment Officer, Washington Trust Wealth Management

Democrats will control the White House, U.S. Senate and House of Representatives for at least the next two years following victories in Georgia’s Senate runoff elections. Although the Democratic majority is thin, a substantial portion of President-Elect Biden’s and the Democratic Party’s political agenda has the potential for implementation. We would not be surprised to see large-scale infrastructure, climate, healthcare, and COVID-19 related stimulus spending, along with regulatory and tax increases; however, management of the current COVID-19 crisis may also impose some limitations on just how much can be realistically accomplished in 2021. On balance, we expect a positive near-term impact to U.S. economic growth.

Additional stimulus and spending should support the economy and, in turn, corporate earnings (assuming some offset to potential tax increases) and stock prices. However, we remain cognizant of potential downside risks to the overall stock market’s valuation and stock prices. Aggressive government spending may result in an unexpected uptick in inflation, which could negatively impact stock valuation multiples. While overall stock prices may appear expensive, certain segments of the market may benefit from changes in Washington – and in some cases appear undervalued. For example, Industrial stocks exposed to infrastructure spending, Energy stocks exposed to clean energy, Healthcare stocks exposed to Medicare spending, and Consumer stocks exposed to stimulus spending may see renewed investor interest at the expense of large-cap Information Technology stocks, the stock market’s recent performance leaders that are susceptible to increased regulatory scrutiny.

Changes in Washington are also likely to impact interest rates. As mentioned, aggressive government spending may result in an unexpected uptick in inflation which would likely put upward pressure on long-term interest rates. Further, a sustained uptick in inflation could force the U.S. Federal Reserve to reverse its current monetary policy stance and begin a tightening cycle sooner than the market is expecting. Higher interest rates (yields) would negatively impact fixed income returns in the short-term, but eventually lead to more attractive fixed income investment opportunities.

In summary, an exhaustive analysis of the potential implications on the economy and financial markets resulting from Democratic control of the White House, U.S. Senate and House of Representatives is beyond the scope of this note; however, our expectation is that it is a net positive for economic growth in the near-term. Regardless of the politics in Washington, continued economic recovery and financial market stabilization will depend on the distribution and effectiveness of COVID-19 vaccines.

We encourage you to reach out to your investment team with any concerns or questions.

The views expressed here are those of Washington Trust Wealth Management and are subject to change based on market and other conditions. Investment recommendations and opinions expressed in these reports may change without prior notice. All material has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. Investing entails risk, including the possible loss of principal. Stock markets and investments in individual stocks are volatile and can decline significantly in response to issuer, market, economic, political, regulatory, geopolitical, and other conditions. Past performance does not guarantee future results and the opinions presented cannot be viewed as an indicator of future performance. The information we provide does not constitute investment or tax advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell any security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. Please consult with your Portfolio Manager, Financial Counselor, attorney or tax professional regarding your specific investment, legal or tax situation.


By Washington Trust / December 10, 2020

Things to Consider Prior to the End of 2020

As seen on The Rhode Show

As we approach the end of the year, it's a great time to do a financial check-up and review your investment portfolio while there is still time to make adjustments, if needed. 

It is important that you have strategies in place to plan for your investments, retirement and tax impact to avoid any tax bill surprises, penalties or liabilities. Now is a great time to evaluate your own financial situation to see if there are adjustments you can make to improve your financial standing.

  • Harvest tax losses. If you have losing stock positions, consider selling them to offset gains and reduce taxable income (to the extent permissible). Or, on the flip side, if you have some losses due to trading earlier in 2020, it may be a good time to not only lock in some gains to offset those losses, but to use this opportunity to rebalance an entire portfolio from a risk perspective. 
  • Finalize charitable giving. This year may not be a good one for a qualified charitable distribution from your IRA (because Required Minimum Distributions, commonly called “RMDs,” are waived due to the CARES Act). However, you can prepay/bundle charitable gifts to exceed the tax deduction threshold. For 2020 only, the CARES Act allows itemizers to deduct contributions up to 100% of their Adjusted Gross Income, or “AGI.” Thus, for example, if your AGI is $100,000, you may deduct $100,000 in charitable contributions and wipe out your income tax liability entirely. 
  • Use up the annual gift exemption. The annual gift exemption is $15k per person, per year. The annual gift exclusion amount for 2021 stays the same at $15,000, according to the IRS announcement. What that means is that you can give away $15,000 every year to as many individuals—your kids, grandkids, their spouses—as you’d like with no federal gift tax consequences. A married couple can each make $15,000 gifts, doubling the impact to $30,000. 
  • Max out 401(k), 403(b), 457 plans and IRA contributions. Hitting the maximum annual deferral amount for 401(k), 403(b) and most 457 plans, which is $19,500, and is $6,000 for an IRA, allows you to take advantage of both tax deductions and employer matching contributions. For those over age 50, do not forget to include your additional catch-up contributions, worth $6,500 for a 401(k), 403(b) or most 457 plans, totaling $26,000 or $1,000 for an IRA, totaling $7,000 for the year. 
  • Consider a Roth conversion. This is when you convert your pre-tax income funded 401(k) account or Traditional IRA account to an after-tax ROTH IRA account, which requires a tax payment to the government (not allowed from the retirement account in question) at the time of the conversion. Both a traditional conversion, depending on your tax brackets and the account’s level of unrealized gains, and a “back door conversion” (if you don’t qualify for direct Roth IRA contributions) can be good planning options. Consult with your tax professional. 
  • Update your financial planning documents and double-check your beneficiaries. Ensure that your financial plans fit your current financial goals and circumstances. It is very important to update your financial planning documents and to double-check your beneficiaries every few years, or earlier if a major life event happens, such as: retirement, loss of a loved one, marriage, divorce, or new additions to the family. Documents would include your will, trusts, power of attorney, health care power of attorney, retirement accounts and insurance policies. It’s all too common to leave an ex-spouse, for example, listed as a beneficiary who then accidentally receives benefits.

 

This overview provides general information based on currently available data. All material has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. This information does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. Please consult with a financial advisor, attorney or tax professional regarding your specific investment, legal or tax situation as this is not intended as legal or tax advice.


By Washington Trust / November 9, 2020

It was not unexpected to have the final results of the Presidential Election delayed until sometime following election day; however, this was not necessarily the case with the U.S. Senate. As of this morning, it appears Senate control will remain with Republicans, but we will not know until the run-off election for the two Senate seats in Georgia, which will occur in early January. Democratic control would increase the chances of more significant policy changes out of Washington. It appears post-election financial market performance to this point might have been incorporating a status-quo, divided government type scenario; therefore, election results may continue to present a risk factor for the financial markets through early 2021.

Regardless of election results, the management and resolution of the current COVID-19 pandemic will likely have the biggest impact on our economy, and ultimately the financial markets, through at least 2021 – and on this front there is some positive news to report. This morning Pfizer and partner BioNTech announced that interim results from an ongoing Phase III clinical trial on their SARS-CoV-2 vaccine candidate (BNT162b2) was found to be more than 90% effective in preventing COVID-19 infection . This favorable result increases the odds of emergency approval by the FDA by the end of this year and may allay some of the skepticism that exists regarding COVID-19 vaccine development and acceptance. This is extremely positive news especially as we face rising infection rates and social distancing restrictions across the globe. Financial markets are responding in kind, with early equity market activity suggesting large gains for the day.

In summary, while election and COVID-19 uncertainty remain, we continue to be constructive on economic recovery across the globe – and today’s vaccine news is supportive of that viewpoint. We encourage you to reach out to your investment team if you have any questions or concerns.

1 - Pfizer Press Release, November 9, 2020 “Pfizer and BioNTech Announce Vaccine Candidate Against COVID-19 Achieved Success in First Interim Analysis From Phase 3 Study”

The views expressed here are those of Washington Trust Wealth Management and are subject to change based on market and other conditions. Investment recommendations and opinions expressed in these reports may change without prior notice. All material has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. Investing entails risk, including the possible loss of principal. Stock markets and investments in individual stocks are volatile and can decline significantly in response to issuer, market, economic, political, regulatory, geopolitical, and other conditions. Past performance does not guarantee future results. The information we provide does not constitute investment or tax advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell any security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. Please consult with your Portfolio Manager, attorney or tax professional regarding your specific investment, legal or tax situation.


By Washington Trust / November 3, 2020

Caring for someone on the autism spectrum can be a significant challenge, one which most of us are not equipped to handle alone. We are lucky to live in a time where awareness, acceptance, and the availability of public and private resources for those on the spectrum are at an all-time high, so that we can help our loved ones to live a full and fulfilling life. But what happens when we are no longer able to assist due to age, incapacity/disability, or after we are gone?

This one-of-a-kind webinar is designed for attorneys and families to gain a better understanding of how a special needs trust (SNT) can help support loved ones/clients on the spectrum throughout their entire life.

This webinar features Kimberly I. McCarthy, Esq., Senior Vice President, Chief Tax & Benefits Officer, Head of Client Services, Washington Trust Wealth Management, Lauren K. Drury, J.D., Vice President, Chief Wealth Management Fiduciary Officer, Washington Trust Wealth Management, Anna Johnson, Head of School at The Wolf School and Nancy Fisher Chudacoff, Of Counsel at Cameron & Mittleman LLP.


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By Washington Trust / October 27, 2020

At the risk of sounding somewhat cliché, one of the most important election days in our country’s history is quickly approaching. While still a week away to the election, approximately 66.8 million votes have already been cast through the mail and early in-person voting, representing 48% of the total votes counted in the 2016 election1.

Along with an increase in voting interest, is an increase in the level of anxiety related to the potential outcome and its impact on our daily lives, finances and investments. The chasm between the major political parties’ platforms and policies seems as wide as ever; and the potential of a contested, drawn-out election is real. But history suggests that the long-term impact to the economy and financial markets based on the political party in control of the White House or Congress is somewhat muted. Surely, some segments of our economy benefit more than others based on political policies (and we will likely have more to say about this post-election), but in aggregate, over the long-term the U.S. economy and stock prices have followed an upward trajectory.

With this in mind, we would like to offer a few thoughts:

  1. In the event of a contested and/or drawn-out election result, there is the risk of a short-term spike in financial market volatility. However, we would expect such a scenario to be resolved in a reasonable amount of time.
  2. Regardless of which party controls the White House and Congress, we expect the economy to continue its recovery from the COVID pandemic.
    • In general, Trump/Republicans will favor perceived pro-growth policies, such as lower taxes and reduced regulation offset somewhat by the impact of foreign trade negotiations.
    • In general, Biden/Democrats will favor perceived pro-growth policies, such as fiscal spending offset somewhat by corporate and personal tax increases.
  3. While the election is very important, management and resolution of the current COVID pandemic will likely have the biggest impact on our economy, and ultimately the financial markets, through at least 2021. The development of effective COVID therapeutics and vaccines is crucial.
  4. We continue to suggest clients evaluate their near-term liquidity needs but stay focused on their long-term investment goals and objectives and limit the temptation to make any major asset allocation changes based on near-term events.

The combination of the COVID pandemic and a polarized political environment can be unsettling and presents many challenges, including the management of investments. Washington Trust encourages you to reach out to your investment team if you have any questions or concerns.

Source: United States Elections Project (https://electproject.github.io/Early-Vote-2020G/index.html) – October 27, 2020


By Washington Trust / October 15, 2020

Can the IRS Lift the Spirits of Pandemic Parents? How about a “Kiddie Tax” Refund?

The so-called “Kiddie Tax” is a tax imposed on a child’s unearned income. Generally, a “child” means someone under 17 years old (or under 24 if certain criteria are met) and “unearned income” means income derived from sources not related to employment, including investments.

For many years, the Kiddie Tax was the greater of two calculations: the tax on the child's income as if the Kiddie Tax did not exist, and a far more complicated calculation using the parent’s marginal tax rates.

In 2018, Congress passed the Tax Cuts and Jobs Act (TCJA), which (among other things) attempted to simplify the Kiddie Tax. The TCJA taxed a child’s net unearned income at the same rates that applied to trusts and estates. This calculation was simpler, but the simplification came with a cost, since the tax rates for trusts and estates are quite unfavorable when compared to the tax rates for individuals. For example, for 2020, the trust tax bracket applies the rate (37%) once taxable income exceeds $12,950; for married filing jointly, that level is not hit until $622,050.

In 2020, Congress un-did their simplification, reverting to the pre-TCJA rules, as part of the SECURE Act. This means that, for 2020, a child’s income can be based on the parent’s marginal tax rates, rather than be subject to the higher tax rates for trusts and estates.

Most importantly, Congress made this fix retroactive to tax year 2018. As a result, anyone that paid “Kiddie Tax” at the trust tax rate may be able to obtain significant tax savings for the prior tax years.

We are examining the issue for clients who have their trusts with us here at Washington Trust Wealth Management. However, anyone subject to the Kiddie Tax should consult with their tax advisor to see if they may be able take advantage of this potential refund opportunity.


By Washington Trust / October 15, 2020

Economic Review Fall 2020

We will join the chorus and state the obvious. Unless you survived the flu epidemic of 1918, 2020 is a year unlike any experienced in our lifetime. The U.S. economy suffered its steepest downturn on record due to the COVID-19 pandemic when Q2 GDP plummeted at a 31.4% annualized rate, following a Q1 decline of 5%. Consumer spending plunged 33% during the second quarter.1 Except for government spending, other economic sectors shrank drastically as well.

The good news, such as it is, is that despite the speed and severity of the downturn, the economy bottomed in April and began to turn up in May with the partial reopening of the economy. The rebound has extended through the Summer and GDP is estimated to have bounced back in excess of 25% in the third quarter. Employment, which cratered in early Spring, has recovered well ahead of expectations with over half of the jobs lost now regained. The unemployment rate which peaked at 14.7% in April was expected to sit at 8.4% in December 2020. It has already declined to 7.9%.2

Before we get carried away, there were still well over 10 million fewer people working in September than in February. There are 6.5 million job openings in the U.S., an excellent number by the way, but more than 13 million people looking for work. Back in February, jobs openings exceeded job seekers by over a million.3 Some sectors, such as residential construction, are in the midst of a V-shaped recovery. Manufacturing and capital spending are also showing signs of life as technology prospers. Unfortunately, labor intensive industries including hospitality and travel continue to struggle.

The Federal Reserve revised its economic outlook in mid-September and upgraded its forecast for 2020 U.S. GDP to decline by 3.7% from a prior estimate of a sharper 5% contraction. The rapidity of the U.S. turnaround has been due in large part to massive government support. Between fiscal stimulus passed by Congress and lending facilities instituted by the Fed, an estimated $4 trillion was committed to revive the economy.

Many of these Federal Programs have now lapsed. Another round of stimulus, however, was thought to be forthcoming and deemed necessary by Federal Reserve Chief Powell to keep the recovery on track. With supplemental unemployment benefits curtailed and additional aid to states and municipalities now on hold, there is concern that the Fed may have been overly optimistic in changing its outlook. Furthermore, the recent surge in new Coronavirus cases is also an issue. Worries are mounting that long-term “scarring” of the economy will be inevitable due to the shuttering of so many small businesses.

Financial markets, however, continue to look past the pandemic and remained buoyant in the third quarter. COVID-19 treatments continue to improve, and several vaccines are already in Phase 3 testing, although widespread distribution of a successful vaccine is unlikely before the spring of 2021. U.S. stocks as measured by the S&P 500 Index turned positive in the third quarter and have posted a gain of 5.6% as of 09/30/20, an astonishing achievement after the first quarter’s 20% shellacking. However, smaller capitalization shares remain mired in the red at quarter-end as were international stocks. Fixed income markets have also generated solid results (the Bloomberg Barclays US Aggregate has advanced 6.8% as of 09/30/20) due to the dramatic fall in interest rates.4

Given the pandemic-induced 25% collapse in 2020 earnings, U.S. stocks now seem expensive. Even anticipating a solid 34% for 2021 earnings recovery to $164 per share, stocks still appear fully valued, trading at 21.4x Washington Trust’s estimate.5 In our view, the Federal Reserve deserves much of the credit for the stock market’s surge to record levels.

Not only did the Fed lower the overnight interest rate to the zero lower bound and resumed quantitative easing back in March, it has provided guidance suggesting the rate will remain anchored there potentially into 2023 or beyond. Furthermore, the Fed which has a dual mandate of ensuring price stability and full employment, has put inflation fighting on the back burner and declared the priority of restoring lost jobs. To that end, the Fed has altered its approach in assessing inflationary conditions and will use inflation “averaging” rather than a single point in time to determine policy. Using this method, the Fed will allow the economy to run “hot” before taking action to bring down the inflation rate.

If stocks appear rich, Fed policy has sent bond prices soaring. As of September 30th, a 10-year Treasury note and a 30-year Treasury bond yielded just 0.68% and 1.46%, respectively. However, expansionary Fed policy has revived both inflation and inflationary expectations. A 10-year market derived inflation forecast stood at 1.64% per year.6 This implies that bond yields adjusted for inflation are negative across the yield curve. Government bonds are viewed as a safe investment but if this inflation forecast pans out, an investor purchasing a bond today will suffer an economic loss over the life of the investment.

Another consideration for investors is, of course, the pending Presidential election. The Trump Administration is generally viewed as pro-business and investor friendly. The stock market has performed well under its watch. Biden and the Democrats are proposing tax hikes and re-regulation, but the market continues to rise even as they solidify their lead in the polls. While sector leadership may be affected by the Presidential Election’s outcome, our conclusion is to focus on the fundamentals of the economy and earnings and, without fail, on the Fed in trying to assess the direction of the broad market.

At this juncture, we continue to favor equities over bonds given the meager returns available in the fixed income market. However, some caution is warranted and paring back equity exposure to maintain alignment with portfolio objectives is the sensible course. Pre-election rallies can, of course, result in post-election pullbacks. We also anticipate a potential shift in leadership, but time will tell. In the fixed income market, we believe a modest further steepening of the yield curve may provide a better entry point, and some exposure to credit risk is necessary to generate a positive real return.

The views expressed here are those of Washington Trust Wealth Management and are subject to change based on market and other conditions. Investment recommendations and opinions expressed in these reports may change without prior notice. All material has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. Investing entails risk, including the possible loss of principal. Stock markets and investments in individual stocks are volatile and can decline significantly in response to issuer, market, economic, political, regulatory, geopolitical, and other conditions.

Investments in foreign markets through issuers or currencies can involve greater risk and volatility than U.S. investments because of adverse market, economic, political, regulatory, geopolitical, or other conditions. Emerging markets can have less market structure, depth, and regulatory oversight and greater political, social, and economic instability than developed markets. Fixed Income investments, including floating rate bonds, involve risks such as interest rate risk, credit risk and market risk, including the possible loss of principal. Interest rate risk is the risk that interest rates will rise, causing bond prices to fall. Past performance does not guarantee future results. The S&P 500 Index is an unmanaged index and is widely regarded as the standard for measuring large-cap U.S. stock-market performance. In addition, the S&P 500 Index cannot be invested in directly and does not reflect any fees, expenses or sales charges. Further, such index includes 400 industrial firms, 40 financial stocks, 40 utilities and 20 transportation stocks. The information we provide does not constitute investment or tax advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell any security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. Please consult with your Portfolio Manager, Financial Counselor, attorney or tax professional regarding your specific investment, legal or tax situation.

1 U.S. Bureau of Economic Analysis
2 U.S. Bureau of Labor Statistics 2 U.S. Bureau of Labor Statistics
4 Bloomberg
5 Washington Trust Wealth Management
6 Bloomberg


The opinions expressed in this blog are those of the author and may not reflect those of Washington Trust Wealth Management. The information in this report has been obtained from sources believed to be reliable, but its accuracy and completeness are not guaranteed. Any opinions expressed herein are subject to change at any time without notice. Any person relying upon this information shall be solely responsible for the consequences of such reliance. Performance is historical and does not guarantee future results.

Such information does not constitute legal or professional advice as all situations are unique and are based on individual facts and circumstances.

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