The Week on Wall Street
Markets remained exceptionally volatile, buffeted by the spreading impact of coronavirus, uncertain responses from federal policymakers, and the sudden drop in oil prices.
FACT OF THE WEEK
On this day in 1830, the New York Stock Exchange set a record for its slowest trading day in history, with only 31 shares sold. (Perspective: there hasn't been a day since 1953 that fewer than a million shares were traded, and since 1997, never fewer than 1 billion.)
Markets Grapple with Uncertainty
A dispute between Saudi Arabia and Russia over oil production cuts, mounting fears of the coronavirus, the declaration of the COVID-19 as a global pandemic by the World Health Organization, and the news of a travel ban from Europe unsettled markets throughout the week.
Stock trading was halted twice by circuit breakers, which are designed to briefly stop trading when losses in the S&P 500 reach 7%. Stocks sold off sharply Thursday before ending a tumultuous week with a strong rebound on Friday.
Troubles in the Oil Patch
The failure of Russia to join Saudi Arabia in supporting lower oil production targets left Saudi Arabia fuming. In response, Saudi Arabia announced its intention to raise oil output.
Oil prices plummeted on the news, contributing to the stock market’s drop on Monday. While lower oil prices may represent a boon to consumers in the form of lower gasoline prices and relief to companies with high energy consumption (e.g., airlines, chemical), they also pose a risk to the American energy industry.
If low oil prices persist, it may lead to lower capital expenditures and potential issues in the credit markets, as less-well-capitalized companies struggle to manage their debt obligations.
The world’s central bankers have already taken several steps to combat the economic impact of the coronavirus, including lowering short-term interest rates. The financial markets are now looking for a response from the U.S. government. In evaluating any actions from the federal government, investors may focus on the size and timing of policy proposals to determine if they can reduce current levels of economic uncertainty.
FINANCIAL STRATEGY OF THE WEEK
REVISING ESTATE STRATEGY ASSUMPTIONS
When the rules of the game change, tactics should follow in response to the new landscape. While estate tax exemptions have ridden an uncertain roller coaster in recent years, the rules appear to be stabilizing with the passing of the Tax Cuts and Jobs Act, prompting many to reconsider estate strategies.
In 2017, Congress raised the estate and gift tax exemption to $11.2 million, doubling the $5.6 million that previously existed.
This exemption increase means that potentially hundreds of additional American households may be able to pass on their assets free of estate taxes. It also means that individuals may want to revisit their current approach to estate management.
Changes in Gift Strategies
One of the objectives of gifting assets is to manage taxation on an estate's future growth. However, this strategy comes at the cost of losing the tax advantage of the step-up in cost basis attached to inherited assets. Since estate tax has more asset exclusions, the need to gift assets for tax purposes may no longer be necessary.
For many estates, there may be very little reason to gift assets over the span of a lifetime, unless there is a present need with a particular family member.
Joint Ownership of Assets
An individual may want to consider re-titling assets to joint ownership with a spouse to take advantage of the step-up when the first spouse dies, which may save capital gains taxes when the surviving spouse subsequently sells the asset.
Rethinking Trust Strategies
Spouses no longer need to create or maintain a trust for full eligibility of both spousal exemptions, since the surviving spouse is now able to claim the deceased spouse's exemption. Indeed, previously established trusts may actually raise tax bills by missing out on the step-up.
Creating an estate strategy is complex and should be done with the assistance of a tax or legal professional. Suffice it to say that these recent changes represent a good reason to revisit your existing approach to estate management.