Investment profits drift as individual securities in your portfolio appreciate or depreciate and veer away from their original allocations over time. A combination of things will lead to this scenario. Most recently, the delayed tax filing date and unexpected tax gain payments may be one of the culprits as it is linked to market activity.
Knowing the Tax Implications
Investment strategies should evaluate the amount of tax owed on financial gains. Capital gains on long-term equities are taxed at lower rates of 15% to 20% to provide more incentive to invest in companies that build the economy rather than trying to generate quick profits by speculating on stocks. Short-term profits are taxed at regular income rates, which are significantly higher. You’ll want to see the impact the new tax deadlines made to companies across industry sectors before making investment decisions.
Economic Changes put a spotlight on SPAC Mergers
Given the uneven economic data and varying global openings experienced from the pandemic’s impact, the government monetary policy support may cushion an economic decline, but it is still unclear how much growth it will spur outside of the restaurant and travel industries. The market may have been propelled higher recently by retail investors using stimulus payments and savings on COVID sequestered behavior to purchase tech stocks. You may be following the trend.
However, be aware of the potential for a dramatic drop in SPAC values that could factor into investment decisions. These attractive opportunities to merge with promising technology create hurdles for finance executives preparing for valuations. They have to set up internal controls within a short time, and U.S. regulators are ramping up financial scrutiny. Over 380 U.S. SPACs are currently looking for a merger and have a two-year deadline from their launch to find a partner. If you are considering a merger with a SPAC, prepare for accounting challenges that are less common in other deals.
SPACs tend to make financial restatements early on that can increase liabilities, so the Securities and Exchange Commission (SEC) has urged companies and SPACs to grasp and follow accounting and reporting rules. The SEC will be clamping down on potential wrongdoing.
Remember that companies trading on a public exchange abroad have to adapt to U.S. corporate governance rules. It is necessary for executives to hire external auditors to go over financial statements and do a complete valuation.
Executives must know the number of investors a SPAC has to determine the ratio for translating their holdings, or warrants, into shares of the new entity. Shareholder dilution after the transaction will determine whether people choose to invest in a SPAC. In certain cases, warrants should be classified as liabilities instead of equity, requiring the company to periodically account for changes in value.
Understanding the Weakened Supply Chains
Part of the supply chain disruption affecting prices is that companies can choose where inventory is sent to get the greatest profit margin. It is the basic tenet of capitalism. Demand drives prices, and the cure for high prices always seems to be higher prices.
Between the U.S.-China trade war and the supply and demand problems brought on by Covid-19, manufacturers everywhere are forced to reassess their supply chains. They face pressure to increase domestic production, keep employment at home, reduce their dependence on vendors based on location, and rethink inventory and replenishment strategies, further crippling product shortages.
Such is the case with the auto industry supply chain. It continues to struggle with ongoing issues due to a shortage of parts and supplies such as semiconductors. Several auto plants across North America are temporarily closed as companies like General Motors and Ford deal with ongoing shortages of computer chips. Semiconductor companies had trouble adjusting to the quick recovery of demand for cars after pandemic lows. General Motors is pausing two more plants, and Ford is down by four. Plants that are still open have cut production.
The shortage of parts and supplies in various industries is global, but it doesn’t affect everyone equally or at the same time. Many are scrambling for goods that are in short supply. Prices will push up, and fewer options will be available. Investments need to be made in domestic supply chains, but it’s a long-term project, not a quick solution.
Focusing on the Positive
In the meantime, there may be no shortage or price gouging for low mileage, used cars. A 2010 Jeep Liberty with 105,000 miles on it is now very desirable. But what is important is understanding how the low level of driving and slightly higher amortized value of leased cars have increasingly tightened asset-backed securities.
We see many factors at play in the market. For each downside is an upside. A friend said something yesterday we found interesting. “Never let a good market crisis go to waste.” When evaluating equity drift, look at the many market and economic influences that interact with each other, from taxes and SPACs to supply chain issues. We need to remember who did and did not make changes last year and make adjustments based on what we find. At Clearbrook, we have an eye on the many colors of global and domestic markets. Contact us to discover how it relates to your investment portfolio.
Sources:
Pinsent, W., 2021. What You Need to Know About Capital Gains and Taxes, https://www.investopedia.com/articles/tax/09/tax-effects-capital-gains.asp
Maurer, M., 2021. Companies Merging With SPACs Face Challenges Around Valuations, Controls
Shih, W., 2021. Global Supply Chains in a Post-Pandemic World, https://hbr.org/2020/09/global-supply-chains-in-a-post-pandemic-world
Domonoske, C., 2021. Auto Industry Continues To Struggle With Supply Chain Issues