Second Quarter 2021 Newsletter

INVESTMENT QUARTERLY

STOCKFLATION

Stockflation, the new word in investment jargon, is simply inflation in the price of stocks. It is caused by too much money (liquidity) being pumped into the market by the Federal Reserve. In the current environment, despite the weak economy during the pandemic and a 50% reduction in the number of common stocks over the last ten years, coupled with an outlandish 24% annual growth in the U.S. monetary base has led to significant inflation in stock prices. The weak economy offered little incentive to invest in productive capital, so the money ended up in the stock market, resulting in too much money chasing too few stocks.

If current administration proposals for huge stimulus programs continue, it is likely that stockflation will continue to the bubble stage. In the bubble stage speculation takes on the appearance of being reasonable investment. There are a number of examples of crazy speculation going on right now with Bitcoin, GameStop, AMC, and the Robinhood trading platform, SPACs, the extended price earnings ratio of stocks, and now the trading of NFT’s (Non-Fungible Tokens) at unbelievable prices. The nonsense of NFT’s is shown in a painting by an artist, self-named Beeple, who sold an NFT of his digital collage for $69 million. Supposedly he was paid in Bitcoin but immediately converted the Bitcoin to US currency. Copies, including digital ones, of the work already exist so there is no uniqueness to the work of art, and hard, as well as digital, copies already exist. If this makes sense to you then you are probably one of the few who understand this market. You can search Beeple and the buyer Metakovan on-line if you want to learn more. And for those who want to buy Bitcoin, it is now available at the kiosks in your local Stop and Shop Market.

The “i” word (inflation) is the new word according to a recent Barron’s issue. Because of shortages resulting from production slowdowns, lower orders, and broken supply chains during the COVID pandemic, there are shortages in everything from computer chips for cars to lumber for home construction. The result is higher prices on almost everything we buy as demand has surged with the rebound resulting from the success of the vaccination program. It is likely that the price increases will settle down once the surge is over and supply chains will get back to normal according to many economists. Some, however, believe that this is the start of a longer-term inflationary period. If it is short term, there should not be a lot of economic disruption; but if it truly is long lasting it would signify an over-heated economy and likely result in a change in Fed policy that would not be for the better.

Historically inflation has been brought on by either cost-push or demand-pull, not at the same time. Cost-push, as it is called, results from rising costs, particularly of labor, but also from raw materials used in the production process. Demand-pull is caused by demand exceeding supply so prices are raised in the face of excess demand because the market will bear the increases. The current situation reflects both of these influences, as well as the impact of disrupted supply chains. When demand fell off the table during the pandemic, manufacturers cut back on production. This cutback worked its way through the economic system as transportation systems cut back on unneeded employees and equipment. Now that demand is back production and delivery systems are still struggling. With unemployment benefits as lucrative as they have been, many unemployed are not ready to give up their benefits for a job that might not pay them more than they are earning on unemployment. This is particularly significant in bringing back truck drivers, many of whom have taken different jobs, and service people for restaurants and bars. So, the pandemic has created an unintended shortage of products and services. This is causing inflation that is not being fully recorded in government statistics. If we can get the supply issues resolved, we should see a reduction in inflationary pressures and an improvement in employment as more people are back to work.

In earlier Quarterlies we talked about the Biden administration’s plans for tax increases, particularly the one with the broadest impact, the end to the step-up cost basis on assets a person holds at death. So far nothing definite has come out of the administration but, if the huge deficits are to be minimally dealt with, there will have to be some revenue increasing proposals. The concern is that Biden’s apparent wishes will dramatically change the tax culture of the country and may only be the first step in further erosion of the tax system we have endured, or enjoyed, for many years. Step-up basis has been part of the code for about 100 years. If it is changed it is likely that any exemption amount will be lowered by future administrations to justify additional government expenditures and thus bring higher taxes to the middle class.

Capital gains tax proposals are calling for a rate of 43.8% for those making a million dollars a year. While this may not impact the middle class, it could have a big impact on the markets as the habits of investors may change. Generally, the more you tax something, the less you get of it. Unless this change is made retroactive, there could be a significant amount of profit taking at the current 23.8% rather than wait for tax rates to go up. Defensive moves by investors could be a trigger for a market correction. Don’t be surprised if you see more volatility in the markets as talk on the tax proposals continue.

In an earlier quarterly we looked at future performance over 10 years starting at various price earnings ratios. The chart showed that high current P/E ratios resulted in lower future growth rates. This makes sense as current high prices tend to steal value from future normalized earnings. Low P/E’s, on the contrary, leave plenty of room for upside surprises and are likely to have better than expected performance. This is the over-riding influence of psychology on the market.

Robert B. Needham, CFA

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8 Financial Steps to Finish 2024 Strong with Needham Advisory

September 16, 2024

As we enter the final 100 days of 2024, there's still plenty of time to make this year count. At Needham Advisory, we've compiled a list of eight essential steps to help you finish strong and set yourself up for success in the new year. These actions can provide a financial cushion, streamline your investments, and give you a head start on your 2025 financial goals. 1. Save $1,000 with Daily Contributions By setting aside just $10 every day for the rest of the year, you can save $1,000. This simple strategy creates a financial cushion or helps you reach a specific savings goal with minimal daily effort. 2. Max Out Your Retirement Accounts Make the most of your retirement accounts by contributing the maximum allowable amounts. In 2024, the contribution limit for a 401(k) is $23,000 (or $30,500 if you're 50 or older). For Roth IRAs, the limit is $7,000 (or $8,000 if you're 50 or older). Maximizing these contributions not only boosts your retirement savings but also takes advantage of potential tax benefits. 3. Roll Over Old 401(k)s If you have any old 401(k) accounts from previous employers, now is the perfect time to track them down and consider rolling them over into a current retirement account. This can streamline your investments and potentially reduce fees. However, keep in mind that rolling a 401(k) into a post-tax account like a Roth IRA means you will have to pay taxes on the 401(k) balance. 4. Research High-Yield Savings Accounts Consider moving some cash from your checking or savings account into a high-yield savings account (HYSA). HYSAs typically offer higher interest rates, which can help your savings grow faster, maximizing the returns on your emergency fund or other cash reserves. 5. Take Advantage of Gift Exclusions This year, you can give up to $18,000 per person without incurring any gift tax. Consider giving financial gifts to family members as a way to help them financially while also reducing your taxable estate. 6. Review Your Budget Take a fresh look at your budget to identify areas where you can cut back or reallocate funds. Even small adjustments can lead to significant improvements in your financial health. If you anticipate receiving end-of-the-year bonuses, plan now for how you will use those funds wisely. 7. Start Preparing for the Holiday Season Early Set aside a little money each week for holiday expenses. Consider affordable gift options, such as homemade gifts or experiences, and start organizing any travel plans to secure better deals and ensure a smoother season. 8. Check in with a Financial Advisor Schedule a quick call or meeting with a financial advisor to enter 2025 with a clear, up-to-date plan and some financial planning momentum. Whether it’s refining your budget or optimizing your investment strategy, getting expert advice now can set the tone for a successful new year. These steps can significantly impact your financial stability and preparedness as we approach the end of the year. If you need help with any of these strategies, we at Needham Advisory are here to assist you. Let’s make the most of the remaining days of 2024 together!

Understanding the Massachusetts Wage Act: Protecting Workers' Rights

By duda • August 17, 2023

In the realm of labor laws, ensuring fair compensation for employees is a cornerstone of workers' rights. The Massachusetts Wage Act, consisting of Massachusetts General Laws Chapter 149, sections 148, 149, and 150, stands as a crucial piece of legislation that safeguards the rights of workers in the Commonwealth. Enacted to address wage-related issues and promote fair employment practices, the Massachusetts Wage Act plays a pivotal role in creating a just and equitable work environment for employees across various industries. The Basics of the Massachusetts Wage Act The Massachusetts Wage Act encompasses three key sections: 148, 149, and 150. Each section addresses specific aspects of wages, penalties, and legal recourse for employees facing wage-related violations. Section 148: This section focuses on timely payment of wages. It mandates that employers must pay their employees all earned wages within a certain timeframe, often weekly or bi-weekly. In the case of involuntary separation, employers are required to pay all wages due to the employee on the day of termination. If an employer fails to meet these requirements, they may be held liable for treble damages, which could amount to three times the unpaid wages. Section 149: Section 149 pertains to minimum wage regulations. It establishes the minimum hourly wage that employers must pay to their employees. This provision ensures that workers receive a fair wage that aligns with the cost of living and prevailing economic conditions. Employers are obliged to adhere to the minimum wage requirement, and failure to do so can result in penalties. Section 150: Section 150 deals with legal actions and remedies available to employees in cases of wage violations. If an employer unlawfully withholds wages, an employee has the right to file a complaint or bring a civil action to recover the unpaid wages. Moreover, employees who prevail in their legal claims under this section can recover not only the unpaid wages but also reasonable attorneys' fees and costs. Significance and Impact The Massachusetts Wage Act serves as a powerful deterrent against wage-related abuses and unfair labor practices. By establishing strict guidelines for payment of wages, minimum wage standards, and legal remedies, the Act empowers workers to seek recourse when their rights are violated. This legislation not only supports individual employees but also contributes to a more equitable labor market and promotes a healthier employer-employee relationship. Challenges and Controversies While the Massachusetts Wage Act is a commendable effort to protect workers' rights, challenges and controversies have emerged. One area of contention is the determination of what constitutes "wages." Some employers might argue that certain forms of compensation, such as bonuses or certain benefits, are not covered by the Act, leading to disputes over what is legally owed to employees. Additionally, enforcement and compliance can pose challenges, especially for small businesses with limited resources for administrative tasks. The Massachusetts Wage Act stands as a testament to the Commonwealth's commitment to ensuring fair and just compensation for its workforce. By outlining clear guidelines for payment of wages, setting minimum wage standards, and providing legal remedies for violations, this legislation bolsters employee rights and contributes to a more equitable workplace. As workers continue to play a pivotal role in the state's economic growth, the Massachusetts Wage Act remains a cornerstone of labor law, championing the rights of employees and fostering a more balanced employer-employee relationship.

Understanding the Massachusetts Independent Contractor Statute

By duda • August 17, 2023

In the modern gig economy, the classification of workers as either employees or independent contractors has become a significant legal and economic concern. In Massachusetts, the issue is addressed through the Massachusetts Independent Contractor Statute, found under Mass. Gen. L. c. 149, s 148B. This statute plays a pivotal role in determining a worker's classification, affecting their rights, benefits, and the obligations of employers. In this blog post, we will delve into the key aspects of the Massachusetts Independent Contractor Statute, exploring its implications for both businesses and workers. Understanding the Massachusetts Independent Contractor Statute The Massachusetts Independent Contractor Statute, often referred to simply as Section 148B, was enacted to prevent worker misclassification and protect individuals by ensuring proper classification and fair treatment. Under this statute, individuals are presumed to be employees unless all three prongs of the "ABC Test" are met: A: The worker is free from control and direction in performing the service, both under the contract for the performance of service and in fact. B: The worker performs services that are outside the usual course of the business of the employer. C: The worker is customarily engaged in an independently established trade, occupation, profession, or business of the same nature as that involved in the service performed. Implications for Businesses For businesses operating in Massachusetts, correctly classifying workers as employees or independent contractors is essential. Misclassification can lead to legal consequences, including back payment of wages, taxes, and potential fines. By adhering to the requirements outlined in the ABC Test, businesses can ensure compliance with the law and avoid potential liabilities. Additionally, businesses must be cautious about reclassifying employees as independent contractors without substantial changes in the working relationship, as this may be seen as an attempt to evade employment-related responsibilities. Implications for Workers Workers in Massachusetts who are classified as employees enjoy various legal protections and benefits, including minimum wage guarantees, overtime pay, workers' compensation coverage, and access to unemployment benefits. On the other hand, independent contractors may not be entitled to these benefits, but they have the advantage of greater flexibility and control over their work. It's crucial for workers to understand their classification accurately, as misclassification can lead to them being denied their rightful benefits and protections. Challenges and Controversies The Massachusetts Independent Contractor Statute has been the subject of debates and challenges, particularly regarding its potential impact on businesses and the gig economy. Critics argue that the ABC Test can be too restrictive, making it difficult for some businesses to classify workers as independent contractors even if the working relationship genuinely aligns with such a classification. Proponents, however, emphasize the importance of protecting workers' rights and preventing exploitation through misclassification. The Massachusetts Independent Contractor Statute, Mass. Gen. L. c. 149, s 148B, plays a vital role in defining the working relationship between businesses and workers in the state. Its implementation through the ABC Test ensures that workers are correctly classified, granting them the appropriate benefits and protections. Businesses must be diligent in understanding and adhering to the statute's requirements to avoid legal consequences, while workers should be aware of their classification to assert their rights effectively. As the world of work continues to evolve, the statute's significance remains undeniable in maintaining a fair and balanced labor landscape.