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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


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By Kimberly I. McCarthy, Esq. / August 13, 2020

The biggest legislative change to retirement plans in more than a decade happened just before 12/31/19. The SECURE Act, among other things, eliminated the “stretch”, a core of estate plans for decades.

The first quarter of 2020 saw a global pandemic with a major unanticipated impact on the market. The IRS reacted with a waiver or relaxing of many 2020 requirements for IRAs and 401(k)s.

So what should people be doing in 2020, and beyond 2020, to incorporate their IRAs and 401(k) plan assets into their retirement and estate planning? In this webinar, Kimberly I. McCarthy, Esq., Senior Vice President and Chief Tax and Benefits Officer, Wealth Management Client Services, discusses an overview of key changes (and what stayed the same) under the new legislation and guidance, including contributions, RMDs, and elimination of the “stretch”. There is also a discussion of the key issues, concerns, and fixes to be considered for retirement and trust planning under the new rules.


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By Washington Trust / July 20, 2020

The U.S. is suffering its worst economic downturn since the Great Depression with GDP estimated to have plunged at an annualized pace in excess of 30% in the most recent quarter after a 5% drop in Q1.1 The velocity of the decline is as stunning as its magnitude. This recession was, of course, self-imposed as much of the economy was shutdown beginning in March to halt the spread of COVID-19.

With the partial reopening of the economy in May, data indicate that the economy did, in fact trough in April with a material increase in the employment numbers in May and June. That being said, the June unemployment rate stood at 11.1%, which was down significantly from the April peak of 14.7%, but still higher than during the depths of the Great Recession of 2008-2009. Weekly jobless claims have also steadily declined but remain very elevated with permanent job losses climbing, which is evidence of a significant churn in the labor market. All told, approximately 14 million fewer people are working in the U.S. than in February.2

The recent surge in COVID-19 cases is, of course, of concern. Some of the most important data including monthly employment and consumer confidence are based on mid-month surveys. Consumer confidence also rebounded smartly in June. Business sentiment indicators including the ISM manufacturing and service sector surveys also exceeded expectations. Could this reverse?

The consensus view is for growth to snap back at a 20% rate in the summer quarter.3 The disturbing increase in COVID-19 cases across the South and West, and the resulting mitigation efforts suggests that the recovery will be bumpier than initially thought. However, such measures are unlikely to be as drastic as what transpired in the spring and the increase in economic activity should still be quite substantial. Growth should moderate in the following quarter and continue into 2021 but a complete recovery in output to peak levels and a return to full employment is unlikely to occur before 2022 or beyond. While the descent from steady growth into a severe recession was virtually instantaneous. It is clear the road ahead to recovery will be long and arduous given the massive disruption from the virus and the challenges it poses to our way of life, and the way of doing business. While the reopening thus far indicates huge pent up demand from consumers to get back to restaurants and to travel, some changes are likely to become more or less permanent. The trend towards a digital economy has obviously accelerated. Major elements of our health care system will need to be reassessed. Many consumers have experienced a shock unlike anything felt previously.

In this environment, one would expect investors to exercise great caution. In reality, risk aversion lasted for a little more than a month, if that. While the U.S. was in the deepest recession of a lifetime during the June quarter, financial market returns were nothing short of spectacular. The S&P 500 Index, with a gain of 21%, turned in its best quarterly performance in more than two decades while bonds posted solid gains with the riskiest sectors outperforming their benchmarks.3

The positive response of the markets is not without precedent. Financial markets are forward looking, discounting mechanisms. The stock market will typically decline as the economy peaks and monetary conditions tighten while bull markets often begin in recession as monetary and fiscal stimulus is applied. What was unprecedented was the massive scale and scope of the Federal Reserve and the Federal Government’s response to the economic shock from the Coronavirus pandemic. The Wall Street adage of “Never fight the Fed (Federal Reserve)” was never better illustrated.

During March, the Fed cut the Federal Funds (overnight) interest rate to near zero and resumed quantitative easing via the purchase of long-term bonds. In addition, it announced a broad array of facilities to shore up nearly every segment of the credit market including municipal bonds, corporate debt, and even junk bonds. The programs were expanded and refined during the recent quarter and include direct lending in addition to secondary market purchases. Congress enacted a $2.5 trillion support package which included a small business lending program, cash payments to low- and middle-income taxpayers, supplemental unemployment benefits, in addition to aid to state and local governments and loans to severely impacted industries.

These programs have been essential in keeping many consumers and businesses afloat and will need to be extended if the U.S. is able to return to sustainable growth in a relatively short time frame. The Fed, for its part, has indicated that its commitment to provide stimulus is open ended. In his June press conference, Fed Chairman Powell emphasized that the Central Bank’s priority is to restore lost jobs. Additionally, the Fed insists that it will continue to strive to boost inflation to its 2% target. It will be at least two years, or more likely, even longer before the Fed scales back its support for the economy. Congress and the Administration still need to agree on additional aid. The small business lending program was extended until early August and is likely to be renewed through year-end. However, the supplemental unemployment benefits will expire at the end of July and their extension has been more controversial. Additional support for state and local government is also needed to avoid layoffs of government workers. All told, an additional $1 - $2 trillion will need to be appropriated to prevent further economic damage.

Our assumption is that additional fiscal support for the economy will be approved. Another important factor is containment of the disease and recent trends have not been favorable. Investors are looking past this recent spike and we are optimistic that progress on treatment will continue as well as on the development of an effective vaccine to be widely available in 2021. Of course, there are no guarantees.

While we are reasonably confident that a return to sustainable growth will occur by 2021, the strength of the rally has made the market outlook more challenging. Stocks are not cheap. Investors are clearly looking past a 2020 earnings disaster with a probable decline for the S&P 500 Index of at least 25% to $122 per share. Should 2021 earnings recover to our single point estimate of $155 per share, the S&P 500 Index is trading at a lofty P/E ratio of 20x next year’s earnings compared to a historical average of 16x.5

Washington Trust’s valuation work for stocks currently employs a price/earnings multiple range of 15x to 19x. The high-end of our “normal” valuation range has now been exceeded in a period of great uncertainty. Are stocks overvalued or is it different this time? The Federal Reserve has investors’ backs as never before by clearly signaling that they will hold interest rates near zero through 2022. Fed policy is also suppressing longer-term rates across the yield curve and will keep markets awash in liquidity. The Central Bank is effectively encouraging investors to move out on the risk spectrum. While monetary policy risk appears off the table, other risks still abound. Our banking system is well capitalized compared to past crises, but questions remain. While central banks can ensure liquidity, they cannot ensure solvency and a distressing number of bankruptcies are in the news. Additional fiscal support from the Federal Government is still needed near term. Medical progress against COVID-19 is required but not assured. Finally, the litany of geopolitical risks moved to the back burner due to COVID-19, but has only intensified.

Three months ago, coming off a 20% loss in the first quarter, we recommended investors take a long-term view regarding asset allocation and to maintain equity exposure. We had no expectation of a 21% rally in the subsequent quarter. The same advice still holds. At this time, however, investors may want to be sure they have sufficient liquidity looking ahead and, perhaps, trim equities if they are at the high-end or have exceeded targets.

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.

Sources:
1 Bloomberg, Bureau of Economic Analysis
2 Bureau of Labor Statistics
3 Bloomberg
4 Washington Trust Wealth Management


By Kimberly I. McCarthy, Esq. / June 24, 2020

There have been a lot of changes regarding Required Minimum Distributions (“RMDs”) in the past 6 months! For anyone that wants to hit the pause button on this chaotic state of affairs and get an RMD “do over”, June 23rd was a good day.

On Tuesday, June 23, 2020, the IRS released formal guidance expanding relief for participants in 401(k)/403(b) plans, IRAs, and their beneficiaries. Specifically, the new guidance extends existing relief backwards (to distributions taken as far back as 1/1/20); extends existing relief forward (by moving the deadline to “reverse” or “undo” an RMD from 7/15/20 to 8/31/20); and by providing a new category of relief (allowing inheritance beneficiaries to re-contribute their RMDs).

The landscape for 2020 RMDs – combining the SECURE Act, the CARES Act, and all of the IRS guidance to date - is explained in the following FAQs.

Q: Who has to take an RMD from their 401(k)/403(b)/IRA during 2020?
A: No one; RMDs are waived for 2020.

Q: Does that include first year RMDs?
A: Yes, first year RMDs (e.g. 2019 RMDs) for those who turned 70.5 during 2019 are waived for 2020. In addition, IRA owners who were younger than 70.5 on 12/31/19 are subject to the new SECURE Act rules: Their first year RMDs don’t start until age 72.

Q: Does that include RMDs for inheritance beneficiaries?
A: Yes, all RMDs are waived for 2020, so beneficiaries who inherited IRAs or 401(k)/403(b) plan accounts are also exempt from RMDs for 2020.

Q: If I choose not to take an RMD this year, do I have to take 2 RMDs next year?
A: No. RMDs are waived for 2020, not delayed. For inheritance beneficiaries, if the new 10-year payout rules apply, the beneficiary will still receive the full 10 years starting next year: 2020 will not count against them.

Q: What if I took some or all of my 2020 RMD already? Can I “undo” the distribution and put the money back?
A: Yes! There is relief for any 2020 RMD distribution made on or after 1/1/20 that is corrected by 8/31/20.

Anyone can put their RMD back into the IRA/401(k)/403(b) from which it was taken, as long as it is done by 08/31/20. Note: this includes inheritance beneficiaries, even though rollovers and contributions to inherited IRAs are generally prohibited.

In addition, plan participants/IRA owners (but not inheritance beneficiaries) can “roll over” RMDs they have taken during 2020 into any tax-deferred account IF the rollover rules apply AND the roll over is completed by 08/31/20.

Q: Is the CARES Act relief all-or-nothing, or can I take/return some (but not all) of my RMD?
A: It is not an all-or nothing proposition. You can elect to take none, some, or all of your 2020 RMD, and you can elect to return none/some/ or all of your 2020 RMD.

Q: What if I made a qualified charitable distribution (a “QCD”). Can I undo that?
A: Generally, no. A QCD is a charitable donation, and charitable gifts are irrevocable and cannot be unilaterally unwound.

Q: If I took my entire 2020 RMD, does the CARES Act relief provide for additional IRA withdrawals tax-free?
A: No. There is some additional retirement plan relief – like a waiver of the 10% early withdrawal penalty for coronavirus distributions and expanded plan loan provisions – but not additional tax-free IRA distributions.

If you have any questions, please contact Washington Trust Wealth Management at 800-582-1076 or by email at info@washtrustwealth.com.

This overview provides general information based on currently available data and takes into account the IRS’ guidance to date. All material has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. This FAQ 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.


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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