|
Here are 6 money moves to consider making so you can enjoy your holidays and set your finances up well for the new year:
1. Money left in your FSA may be lost if not used by year-end 2. Are you considering a Roth conversion? 3. Make sure you've contributed to tax-advantaged accounts 4. Could charitable contributions lower your tax bill this year? 5. Remember RMDs if you are 73 or older 6. Think about harvesting investment losses It's never too late to start planning! If you don't make this year's deadline for some of the things you hoped to accomplish, you may have a chance to do it next year. If you need help getting started, consider reading the full article here or contact us at [email protected] or 979-694-9100.
0 Comments
I do like cars. What I don't like is the process of buying a car—because there are a lot of car-buying mistakes you can make. I know from experience. I've owned at least 10 cars since my dad bought me my first one, a '91 Chevy Corsica, when I was in high school. Since then, of course, I've had to buy my own vehicles, and I've learned a lot—sometimes the hard way.
For instance, when I was in my 30s, I bought a used sports car from a family friend. I fell in love with it (a 2002 black Porsche 911 Targa). Because I trusted the friend and assumed the car had been well cared for, I didn't do the research I normally would have done. I bought the car purely on emotion, and it turned out to be nothing but a money pit. Plus, it was totally impractical for a new dad. There was no room for a car seat! Buying on emotion is just one potential car-buying mistake. Here are seven other common ones and what you can do to avoid them. Mistake #1: Not considering your budget and savings plan. Don't be misled by recent news about the price of cars coming down. Buying a car today, whether new or used, is a big financial investment that takes planning. According to online car-shopping guide Edmunds, the average price for a new car in the first quarter of 2024 was $46,992, and the average price for a used car was $27,113. If you jump into the luxury market, you're looking at nearly $61,000 for a new car, according to Kelley Blue Book. While these numbers may be down from post-pandemic highs, it's still a lot of money. So here are two important questions:
Mistake #2: Overspending on a car at the expense of other goals. Good money management starts with prioritizing your goals. Where does a car fit into yours? Will buying the car you have your heart set on keep you from saving for another, maybe more important goal? It's a balancing act. On the one hand, we know a car is a bad investment because it's a depreciating asset. On the other, many people feel a car represents our personal brand. It's part of our identity and we get attached to it. That's why we might overspend on a car rather than putting that money toward something else. Consider what type of car will represent your personal image without putting you in a financial bind. Here's something to think about: 61% of people who earn more than $250,000 a year are more likely to be driving Hondas, Fords, and Toyotas, according to an Experian Automotive Study. Bottom line: Don't spend money to look wealthy. Save money to be wealthy. Mistake #3: Not doing your financing homework. Know your financing options before you talk to a dealer. Comparison shop at banks, finance companies, and credit unions. Ask about interest rates, loan terms, and financing charges. Explore how a larger down payment or a shorter loan term might bring down financing costs. Car loan calculator. The SchwabMoneywise.com car loan calculator can help you explore different payment scenarios. Use this car loan calculator to figure out the total purchase price with interest payments. Get the numbers before you shop, so you know what you can really afford. With this information in hand, explore dealer financing. Some dealerships may offer special rates and terms on certain vehicles, but you won't know if it's a good deal if you haven't researched what other lenders are offering. In fact, don't settle on one dealer. Comparison shop here, too, for the best financing rates and terms, as well as car prices. This will help you avoid the next mistake. Mistake #4: Focusing only on the monthly payment. Pay attention. This is an important one. Let's say you're at the dealer, negotiating a price and talking about the monthly payment. If you are asked, "What can you afford to pay each month?" stop right there. Because when you negotiate you want to look at the total cost of the car. The monthly payment is important, but focusing on that alone can distract you from negotiating down. A dealer knows this. You may get to the monthly number you want but end up paying more for the car over time. Instead, find out what the dealer paid for the vehicle—not the sticker price—and start from there. Then discuss financing options. Remember too, that there are taxes and title fees. Ideally, you want to pay cash for those and not wrap them into your financing. That will save you on interest and lower your payment. Mistake #5: Not considering a used car. We all like the look and smell of a new car, but remember a new car could lose up to 20% of its value in your first year of ownership. Buying used might get you a better car, or more car for the money. My best car purchase was a 3-year-old 2008 Infiniti G35 with 29,000 miles on it. I drove that car for seven years and never had any major problems. It looked good. And I got a lot of compliments on it. But more importantly, I did my research and knew it was reliable. There are lots of used car options—a former lease or loaner car, a certified pre-owned car, a 1-year-old car with low mileage. Any of these could be a good move. But like I did with my Infinity, (and not the Porsche!) do your research before you buy. Mistake #6: Ignoring insurance and maintenance costs. Auto insurance, like everything else these days, is going up. In fact, auto insurance premiums increased over 20% from '23 to '24, according to the Bureau of Labor Statistics. Rates vary by state and by car type, so again, do your research before you buy. And don't forget maintenance. Consumer Affairs estimates that maintenance and repairs average around $900/year. That too varies by car make and model. The annual average to maintain an Acura is around $680 while an Audi might set you back over $1,300/year. With these costs in mind, you'll definitely want to avoid the next mistake. Mistake #7: Not planning how you'll cover repairs. You may be okay handling routine maintenance, but what about a major repair? Some cars today have a 4-year or 50,000-mile warranty. But if you plan to keep the car long term or if you buy used, you might consider purchasing an extended warranty. Having an emergency fund is always something I recommend. But I like to keep that for other major emergencies and cover car costs separately. However you do it, make sure that when you have a car problem, you're not stuck on the side of the road. One last piece of advice from my father. If you're going to trade in a car as part of your purchase, know its value before you make a deal. Here's where Kelley Blue Book is your friend and can give you a starting point for negotiating. It's a lot to think about and, like me, you've probably made some of these mistakes. But live and learn. Knowing how to get a good deal on your next car can make driving it even more fun. Voters have re-elected Donald Trump in great part out of dissatisfaction with the economy under President Biden and nostalgia for the low inflation and prepandemic conditions of the former president’s first term. To fulfill those voters’ hopes, Trump’s main economic tools will be the same as in that first term: tariffs and tax cuts. But there’s a difference. The tariffs he’s planning will be broader and higher, and the tax cuts more narrowly targeted. The consensus of economists and investors is that tariffs will put upward pressure on inflation while tax cuts could spur growth and add to deficits, together tending to nudge interest rates higher. And indeed, long-term Treasury bond yields had risen recently on strong economic data and Trump’s improved polling, and shot up early Wednesday, along with stock-index futures, as Trump’s victory became apparent. The first years of Trump’s first term were better for the economy than many expected on election night in 2016, and expectations could be similarly miscalibrated now. For one thing, he inherits a relatively benign outlook. Growth has been surprisingly strong while inflation has fallen substantially from its peaks, although prices are still high. The Federal Reserve is set to trim interest rates Thursday for the second time this year. This should keep recession risks to a minimum. As for Trump’s own plans, he may not raise tariffs as much as threatened, opting for negotiations over trade war. Congress may water down his tax plans. Finally, presidents are seldom the main driver of economic performance. Trump’s policies may have less to do with how the economy performs over the next four years than larger forces and unexpected events, such as a crisis, a war or a boom driven by new technology. Trade comes first His first opportunity to make a mark will likely be on tariffs, where he can act without asking Congress’s permission. Even so, administrative procedures and negotiations could delay implementation. In his first term, 11 months elapsed between initiation of the case against China and imposition of tariffs. Tariffs may also be rolled into broader negotiations on extending the 2017 tax cut. Trump’s first-term tariffs had no noticeable effect on inflation because they were relatively modest, and globally subdued demand and investment and slack labor markets were pushing in the opposite direction. On the eve of his election, wages were rising just 2.4% a year. Bond investors expected future inflation to average 1.8%, below the Fed’s 2% target.  This time Trump has proposed much higher tariffs—at least 60% on China, and 10% to 20% on everyone else. Such a combination would lift U.S. tariff rates to their highest since the 1930s. And it would come when demand is brisk, supply chains are vulnerable to geopolitical conflict, and memories of inflation are fresh. Wages are growing 3.8% a year, and bonds see future inflation at 2.3%. This suggests tariffs could pose more of an inflation risk than in his first term. Morgan Stanley estimates Trump’s 60% and 10% plan would raise U.S. consumer prices 0.9%. That’s a one-off effect: Eventually, inflation should fall back to its underlying trend. But other factors could result in a smaller impact. Importers could absorb more of the tariff into their margins. The dollar could rise, offsetting higher import prices. Most important, some advisers say Trump is using tariffs as a negotiating tactic to lower other countries’ trade barriers, so actual tariff increases will be less than he has threatened. And if Trump sees tariff fears hurting stocks or pushing up interest rates, he may compromise. Goldman Sachs economists think Trump would raise tariffs on China by 20, not 60, percentage points, and will not impose an across-the-board tariff on other countries. In that scenario they think inflation excluding food and energy, using the Fed’s preferred price index, would fall from 2.7% now to 2.3% in a year, instead of 2% in their baseline forecast. That difference won’t stop the Fed from cutting interest rates, they conclude. Inflation at that level would still be lower than for most of the past three years. Then come taxes
Portions of the tax law that Trump and congressional Republicans passed in 2017, such as for lower rates for individuals and businesses who pay their taxes on their individual returns, expire at the end of 2025 and they have given priority to extending the law. That would cost about $5 trillion over 10 years, the Committee for a Responsible Federal Budget estimates. The process is likely to consume a lot of next year. Full extension shouldn’t have much effect on growth or interest rates because that’s already built into the behavior of investors and the public. Not so with Trump's other proposals, which have at times included lower corporate tax rates; exempting tips, Social Security benefits and overtime pay from taxes; and deductions for car loan interest and state and local taxes. These proposals would, the CRFB estimates, add about $4 trillion to the deficit over 10 years. Tariff revenue would reduce that cost somewhat as would spending cuts, though Trump also plans some spending increases. The 2017 tax law was good for long-term growth because it simplified the tax system by lowering rates on income, profits and investment and narrowing tax breaks, said Kyle Pomerleau, an economist at the American Enterprise Institute. Trump’s new proposals won’t have the same benefit because they add back complexity via new tax breaks, he said. Still, lower taxes should provide some boost. Deutsche Bank estimates that a unified Republican government would boost growth by 0.5 percentage point in 2025 and 0.4 in 2026 without higher tariffs. With a 60% tariff on China and 10% on everyone else, Deutsche estimates the net effect on growth becomes negative. Tax cuts would also add to the deficit and put upward pressure on interest rates. John Barry, rates strategist at JP Morgan, estimates Treasury’s current schedule of debt auctions is enough to fund next year’s deficit, but would fall $3.3 trillion short from 2026 through 2029, without extension of the 2017 tax cut. The shortfall would be even larger if the tax cut is extended and Trump’s plans are enacted. If the Treasury starts upping auction sizes to finance larger deficits, that is likely to put upward pressure on yields. Barry estimates a unified Republican government would raise 10-year yields by 0.4 percentage point, of which the market had already built in 0.15 point through Friday. But with the last fiscal year’s budget deficit at $1.8 trillion, triple the level of eight years earlier, even a Republican Congress may not give Trump all he wants. “A Republican Congress is not going to bend over backward to exempt Social Security benefits or overtime pay from tax, both on the merits of those ideas, and the cost,” said Don Schneider, a former Republican congressional aide now at Piper Sandler. “There simply are not the votes to do that.” Still, Trump’s sway over Republican legislators has grown since his first term, and he has shown he can muscle through his priorities. Regulations Trump has proposed lighter regulation, for example of mergers and of the oil-and-gas industry. These ought to boost growth and business confidence and hold down inflation. But economists think the effects are too difficult to identify in the broader economy. For example, U.S. oil production and gasoline prices are driven mostly by global prices, which are in turn heavily influenced by OPEC, sanctions, Middle East conflict and Chinese economic growth. Similarly, while Trump’s plan to deport unauthorized migrants could, at the margin, raise wage and price pressure, the impact may not be noticeable given the size of the U.S. labor market. Trump’s economic agenda isn’t just about growth but also trying to restore the good jobs and healthy communities manufacturing once made possible while reducing dependence on China, a geopolitical adversary. “Yes, there’s a cost. In many cases, I think it is worth it,” said Scott Paul, president of the Alliance for American Manufacturing. “Globalization produces disruption, dislocation, and destruction,” Robert Lighthizer, who was trade ambassador in Trump’s first term and will likely return in some role in the second, wrote last year. “Conservatives by contrast seek to defend traditional values and institutions, preserve the social fabric, and ensure the conditions for families and communities to flourish.” Unlike GDP or inflation, these benchmarks for a Trump economy defy easy measurement. They are no less important. Source: Wall Street Journal by Greg IP https://www.wsj.com/economy/what-a-trump-win-means-for-the-economy-50de4670?st=2VEWZT&reflink=article_email_share Traditions Wealth Advisors Greysen Golgert/Brien L. Smith CFP® Economic Analyst Intern/Chief Investment Officer November 19, 2024 Now that the election season is over and the dust has settled, it’s worth remembering that this political outcome is only a small piece of the economy puzzle. Fiscal policy and spending is certainly the prerogative of the federal government, but overspending the country into a pile of debt has been a bipartisan effort, creating an untenable situation that the incoming administration alone simply cannot change in four years. If we run a 2-trillion dollar a year deficit for the next decade as projections suggest, that will drive-up inflation and come back to bite us in a big way. Without extreme cost-cutting at the federal level and a consistent attempt to reduce the current debt ($36 trillion), this problem won’t go away any time soon. On a slightly more optimistic note, the Federal Reserve can use restrictive monetary policy to counteract the inflationary effects of overspending, but it could be painful for the economy. The past few years of Fed monetary policy have been restrictive and rampant post-Covid inflation has been largely reined in. Despite the extended period of high interest rates, growth persisted, and a recession never materialized. However, that may not be the case when it comes time for the Fed to address inflation caused by federal spending. The broader economy, not considering the debt issue, is performing well. Financial markets gave back some of their election day gains but equities continue to trend upwards. A BEA (Bureau of Economic Analysis) advance estimate of the Q3 2024 GDP growth rate was 2.8%, slightly lower than the expected 3.1% growth, but still very strong. The Atlanta Fed’s GDPNow estimate of GDP growth is now projecting a robust 2.5% GDP growth rate for the current quarter. Since softening over the summer, the U.S. labor market has remained relatively consistent. However, Hurricane Helene, Hurricane Milton, and the Boeing strike muddied up the most recent employment situation report from the BLS (Bureau of Labor Statistics). As a result, only 12,000 jobs were added in October, and the unemployment rate remained unchanged at 4.1%. A wait-and-see approach is necessary to assess potential weakness in the labor market that cannot be explained by those three anomalous events. The current inflation situation is concerning, but clearly not surprising, as CPI and PPI readings for the previous month came in as expected. The Consumer Price Index, while not the measure preferred by the Fed, is still the most widely used gauge for inflation in the US. Core CPI—not including volatile food and energy prices—and headline CPI were both unchanged from their previous monthly increases of 0.3% and 0.2% respectively. However, year-over-year CPI is now at 2.6% and moving away from the Fed’s target year-over-year inflation rate of 2%. The current data is beginning to suggest that another 25-bps cut is unnecessary, and that the Fed reduced interest rates by too much too soon. In a speech to Dallas business leaders on November 14th, Jerome Powell surprised some by saying that the Fed was in no hurry to lower interest rates further. The implications of that statement are contradictory to the dovish attitude that FOMC members have exuded since June. Powell’s speech demonstrated a keen desire to pursue the Fed’s dual mandate of maximum employment and stable prices with a balanced focus. In previous months, the Fed prioritized the labor market, but their decision in December will indicate whether they feel the current environment is too restrictive or just right. As the holiday season approaches and 2024 comes to a close, Powell will be keeping his eyes on the economic horizon and hopefully leading us to a soft landing. Sources:
https://www.crossmarkglobal.com/wp-content/uploads/Dolls-Deliberations-Weekly-Investment-Commentary_111824_FINAL.pdf https://www.linkedin.com/pulse/politics-central-banks-what-matters-most-markets-kristina-hooper-8agye/ https://www.mauldineconomics.com/frontlinethoughts/the-trump-inflation-problem https://www.bls.gov/news.release/cpi.nr0.htm https://www.yardeniquicktakes.com/market-call-35 Greysen Golgert/Brien L. Smith CFP®
Economic Analyst Intern/Chief Investment Officer A surprising Federal Open Market Committee decision to cut rates by fifty basis points in late September has U.S. financial markets booming a month later. Unfazed by a turbulent start to October that included port strikes, hurricanes, and an Iran-Israel conflict escalation, investors are optimistic about the direction of this surging U.S. economy. Initial worries that the Fed acted too soon have been drowned out by a great jobs report and stable inflation. According to a quarterly Wall Street Journal survey of sixty-six economists, the probability of a recession occurring in the next 12 months is down to about 25%. For context, this same WSJ survey of economists in October 2023 predicted about a 50% chance that a recession would occur this past year. Whether we simply dodged a 50/50 bullet in the last 12 months or not, economists are beginning to lean toward the likelihood that Fed strategy will cause a soft landing instead of a hard one. A recent Bureau of Labor Statistics employment report shows that 254,000 jobs were added in September, while the July and August jobs reports were revised upward by 55,000 and 17,000, respectively. Most of these employment gains have been made in food services and drinking places, health care, government, social assistance, and construction. The overall unemployment rate ticked down to 4.1%, still well below the U.S. long term average unemployment rate of 5.69%. The BLS also releases a monthly Consumer Price Index report, the most widely used measure for inflation. The report for September showed that the all-items price index increased by 0.2%, which was the same as in August and July. For the 12 months ending in September, prices have risen by 2.4% in the all-items index. This is good news for a Fed that is hoping to see inflation slowly wind its way down to an annual target rate of 2%. Energy and medical care commodities were the only sectors that experienced deflation, but sectors that have experienced notoriously high inflation this year cooled off a little last month. The shelter price index only rose 0.2%, compared to a 0.5% increase in August. In the 12 months ended September 2024, Shelter (4.9% increase) and transportation services (8.5% increase) have been the largest drivers of upside inflation this year. According to the Atlanta Fed’s GDPNow model, estimates for Q3 2024 GDP growth are reading in at approximately 3.4%. The advance estimate and most reliable measurement of Q3 GDP growth will be released on October 30th by the Bureau of Economic Analysis, but even the lowest forecasts from private economists suggest that the recent trend of stable GDP growth (since Q3 2022) will continue through the end of the year. Growth appears to be defying economists’ expectations once more, but this could result in more upside risk for an inflation figure that is currently under control. There are several areas to consider when making investment decisions in this new interest rate environment. SMID-cap companies (market capitalization of $20 billion or lower) should have more breathing room to spend and grow because the cost of borrowing will fall as rates do. This has certainly been reflected in the breakout performance of the Russell 2000 small cap index over the past month. However, investors should be selective when analyzing small or mid-cap companies and their valuations. Rate cuts have also created a favorable environment for the traditional 60-40 (stocks and bonds) portfolio allocation. Stocks and bonds are both attractive avenues for investment right now because of soft-landing expectations. If the soft landing scenario occurs and the economy does cool down without a recession, both asset classes will benefit. Sources: https://www.bls.gov https://www.capitalgroup.com/advisor/insights/articles/where-consider-investing-interest-rates-fall.html? https://www.atlantafed.org/cqer/research/gdpnow https://www.wsj.com/economy/economists-predictions-survey-charts-68ba82d6?mod=central-banking_more_article_pos11 A will is an important way to distribute your assets, financial and otherwise. One major limitation of a will is that you have to die before it can become effective; in other words, if you're incapacitated, a will has no legal effect, so any health care proxies or durable powers of attorney you might have will guide any decisions made on your behalf. This could create problems if you need to complete financial transactions with outside parties who have trouble accepting or even refuse to accept a power of attorney.
A will also has to be probated in each state where you have assets — a process that can be lengthy and potentially costly. Further, a will is a public document that can be scrutinized or contested, giving the public access to information you might want to keep private. A trust is a fiduciary arrangement specifying how your assets will be distributed, usually without involvement of a probate court. Additionally, trusts can be structured to take effect before or after death, or in the case of incapacitation. They can be very specific about how, when and to whom your assets will be distributed. Depending on the type of trust, assets held in a trust will be managed by you while you are alive and/or by a disinterested trustee. After your death, your successor trustee will be appointed by the trust in a manner more private than the typical probate proceeding. The following are among trusts' features:
Paying an attorney to set up a trust represents additional front-end costs but may save your heirs significant money on the back end by avoiding probate. Some attorneys offer a basic trust package for a flat fee. Let your family and friends know the trust exists and share the thinking behind its creation to cultivate stewardship around the bequest. You've worked years to build a legacy, so make sure you optimize the legacy you leave to the people and causes you care about. Questions? Please reach out to Laurie at [email protected] Source: Seidel Schroeder https://newsletter.homeactions.net/archive/full_article/14869/10338713/5162414/200504 #1 – Understand what your retirement needs may be.
This first step is to think about and write down what your ideal life after your earning years looks like. Without an idea of what your retirement goals are, it can be difficult to know if you have enough assets to achieve them. That’s why it’s important to take time to understand and articulate your vision for retirement. Are you hoping to travel the world? Spend time with family and friends? Take up a new hobby? Support charitable causes? Purchase a second home? Talk with your spouse about your shared and individual retirement goals, and determine how much you might need each month to live comfortably. This figure can help you determine if your current savings is enough to fund your ideal retirement lifestyle. #2 – Consider what expenses may increase in retirement. A general rule of thumb is to plan on spending between 70% and 80% of your current income while living in retirement. While it’s true some expenses decrease once you leave the workforce, others actually increase. For example, healthcare is a major expense for most retirees, and healthcare expenses typically increase as you age and encounter more medical issues. Similarly, you may find that you spend more on hobbies and traveling now that you have more time to do the things you enjoy. That’s why it’s wise to consider both the expenses that will decrease in retirement (e.g., commuting to work) and the expenses that are likely to increase (e.g., healthcare). #3 – Develop a financial plan. The best way to help ensure your savings will last throughout retirement is by having a financial plan in place to guide your saving, investing, and retirement income strategies. A comprehensive financial plan puts you in control of all aspects of your financial life and can help you identify specific actions to address the challenges you face. More than anything, a financial plan can help you articulate and remain accountable to your goals, as it clearly highlights where you stand today versus where you hope to be in the future. Questions about your financial plan or how to get started? Reach out to [email protected] #4 – Establish a long-term investment allocation. Once you’ve created a strong financial plan, you need to create an investment plan that gives you the best shot of making your plan come to life. A common mistake made by many retirees is maintaining an asset allocation that’s too conservative. While it’s important to protect your retirement fund, it’s also important to continue growing your assets for the future. After all, you could end up living in retirement for 20 to 30 years — or even longer. You’ll need your assets to continue growing in order to keep up with both inflation and your daily living expenses. In order to continue growing your assets at an appropriate rate, it’s important to maintain a diversified investment portfolio. While stocks are typically more volatile than bonds, they provide the potential for greater growth within your portfolio, which is vital in helping you keep up with inflation. On the flip side, an allocation to bonds and other conservative investments can help protect your assets during periods of market volatility. The financial markets are unpredictable. In order to take advantage of this fact and extend the longevity of your portfolio, it’s critical to withdraw from stocks when markets are up and from bonds when markets are down. We typically recommend our clients have five to seven years of expenses invested in safer assets, such as bonds. This way, when the markets are down, you have the ability to withdraw from less-volatile investments without realizing a loss in your stock portfolio. Once the markets have recovered, we can sell some stocks at a profit to replenish your bond portfolio in preparation for the next bear market. This approach allows us to continue growing your assets for the long term while also protecting the money needed to cover your daily living expenses. #5 – Model a systematic withdrawal plan. Once you have a solid financial plan and an investment allocation that supports it, the final step is developing a systematic withdrawal plan for your assets. This is simply a scheduled withdrawal from your invested assets based on a reasonable withdrawal rate. Retirees in their mid-sixties typically begin by withdrawing no more than 4% of their retirement savings their first year and adjusting that dollar amount for inflation each year thereafter to maintain their spending power. Of course, the exact withdrawal percentage should depend on how much you have, your lifestyle goals, your life expectancy, your desire for passing on a legacy, etc. Your wealth manager can help you model a systematic withdrawal plan that makes sense given your personal financial situation and retirement goals. Could you use help determining whether you have enough retirement savings to achieve your goals? Creative Planning can help. Our experienced professionals help clients make smart financial decisions that take into account a wide range of personal and economic factors. We’d be happy to help you determine a retirement strategy that makes sense for your personal financial situation. To get started, please e-mail or call us at [email protected] or 979-694-9100 Source: Kratz, AJ. Creative Planning, 6 June 2024. Financial Planning. Will Your Savings Last in Retirement? https://creativeplanning.com/insights/financial-planning/savings-last-retirement/?utm_source=pardot&utm_medium=email&utm_campaign=stw September Monthly Economic Market Update
Traditions Wealth Advisors Greysen Golgert/Brien L. Smith CFP® Economic Analyst Intern/Chief Investment Officer September 27, 2024 Federal Open Market Committee (FOMC) members elected to cut the federal funds rate by 50 basis points during their September meeting. After the cut, the official rate range is 4.75 to 5%, but this does not mean interest rates—the costs associated with borrowing—are within that range for all loans. The Federal Reserve sets this rate to dictate the interest rate that banks must pay when they borrow from other banks on an overnight basis. This rate on overnight lending between banks has significant downstream effects that change the interest rates on commercial loans, auto loans, mortgages, and more. Money will essentially become cheaper to borrow for businesses and individuals as a result of the FOMC decision to slash rates. Growth, inflation, and the unemployment rate are all affected by this decision because it will change the amount of borrowing and investment that occurs in the economy. Rates are typically hiked to keep inflation low and lowered to keep employment at maximum sustainable levels by fostering economic growth. The central bank’s September decision was a pleasant surprise for financial markets, with major indices rising to new heights (record highs for the DJIA and S&P 500). The FOMC had kept the fed funds rate at its previous level of 5.25 to 5.5% for well over a year, and this rate cut shows that the Fed is no longer committed to restrictive policy, which is a major green light for investors. Most economists agreed that it was time for the cutting cycle to begin, with some prominent economists even arguing that it should have begun at the FOMC’s last meeting in July. All of the FOMC members saw the need for cuts too, but there was a surprising point of dissent not seen during Jerome Powell’s tenure as chair of the Fed. Taking issue with the size of the cut, Federal Reserve Governor Michelle Bowman was the first governor to dissent from an interest rate decision since 2005. Understandably, Bowman does not want to risk reinflation when inflation is finally close to the target rate of 2% and the economy has been robust despite a weakening labor market. On the other side of the discussion, proponents of the 50-point cut argue that inflation is under control and the Fed should seek to be proactive instead of reactive. As a data-driven entity, the Federal Reserve is often backward-looking, meaning that they primarily rely on trends in past data instead of forecasts to make decisions. This has led to situations in the past where the Fed waited too long for more data and got burned as a result (most recently during the inflation episode of 2021-2022). As the bold rate decision suggests, this Fed seems to be learning from previous mistakes. We have yet to see what the broader impact of looser monetary policy will be at this time, but optimism for a soft landing and continued growth is high. At his press conference following the FOMC meeting, Jerome Powell expressed optimism and confidence in this US economy where GDP grew by 3.0% in Q2, and projections have Q3 growth at 2.5%. He acknowledged that the Fed’s “intention is really to maintain the strength that we currently see in the US economy.” As for inflation concerns, recent PCE—Personal Consumption Expenditures—index readings certainly support the Fed’s decision to loosen monetary policy by cutting interest rates. For the month of August, PCE and Core PCE—excluding volatile food and gas prices—prices rose by 0.1%, bringing the year-over-year increases to 2.2% and 2.7%, respectively. We need more data to determine the effect this cut will have on inflation in the coming months, but those numbers are remarkably close to the Fed’s target year-over-year inflation rate of 2%. Ideally, inflation will continue cooling in 2024 and hold steady between 2 and 2.5% for 2025. In the meantime, all eyes will be watching how the Fed’s outlook evolves, and what federal funds rate they plan on targeting as this cycle gets underway. Sources: https://www.capitalgroup.com/advisor/insights/articles/fed-just-cut-interest-rates-now-what.html https://www.wsj.com/economy/central-banking/the-fed-aims-to-repeat-greenspans-1990s-masterpiece-69613b85 https://www.crossmarkglobal.com/wp-content/uploads/Dolls-Deliberations-Weekly-Investment-Commentary_092324_FINAL.pdf Traditions Wealth Advisors
Greysen Golgert/Brien L. Smith CFP® Economic Analyst Intern/Chief Investment Officer Is a recession on the way? Or is this economy primed for a soft-landing scenario? Investment professionals are certainly optimistic that the global economy will manage to avoid a recession. According to an August Bank of America survey, 76% of global fund managers expect a soft-landing outcome in the next 12 months, 13% expect a recession, and ~8% expect the economy to keep chugging along without landing. While the results of this survey are encouraging, sentiment and expectations a year out will never be a reliable predictor. We only need compare the results of 2023 global fund manager surveys to the economic situation of today to find unmistakable evidence of sentiment’s inconstancy. However, the data informing these expectations is worth considering seriously. Correctly interpreting that data is a difficult and imperfect science, but consistently falling inflation and rising unemployment provide support for the soft-landing optimism. A recession—defined by the National Bureau for Economic Research (NBER) as “a significant decline in economic activity that is spread across the economy and lasts more than a few months”— remains a distinct possibility but seems to be in a state of perpetual postponement. Financial markets endured a tough first week of August when the Sahm rule—an unemployment-related recession indicator—barely triggered, bringing recessionary fears to a fever pitch and the volatility index (VIX) to its highest peak since 2020. As those fears abated, the following weeks saw the longest rally of the year, with each major index regaining all of those losses. Markets recovered from that mini crash because the past data and future projections do not suggest an impending recession. GDP growth, perhaps the most relevant indicator for the NBER’s recession definition, has continued to demonstrate the resilience of a truly exceptional US economy. With 2.8% growth in Q2 and forecasts predicting 2% growth for Q3, there would have to be an extreme demand or supply shock to bring this economy into a recession. Another thing to consider is that retail sales surged upward 1% in the month of July, indicating the strength of the US consumer and propelling growth further. Despite the positive outlook, there are several points to touch on that may put a damper on the wave of optimism. For starters, unemployment is rising month over month, but this is not necessarily a bad thing. Even an exceptional US economy cannot sit above maximum employment for too long, and what we are seeing is a steady correction from historically low unemployment levels to a long-run average that will likely hover around 5%. Unfortunately, inflation is not at the Fed’s target rate of 2%. The PCE level, the Fed’s preferred gauge of inflation, has slowly ticked down to 2.5% year over year and it should continue to fall. However, with a September rate cut on the horizon we may see what John Mauldin of Mauldin Economics calls a “head fake.” Recently, there have been several times in this rate environment where inflation began trending downward only to fake us out by suddenly reversing course. Worries remain that excess demand caused by a rate cut may result in a head fake that pops inflation up to an undesired level. Businesses of all kinds are likely to jump on the opportunity to borrow at a lower cost, and the Fed is certainly considering the adverse effects on inflation that might bring. The Fed will almost certainly cut in September, and the debate now is between a 25 or 50 basis point cut. In his speech at the Jackson Hole Symposium, Fed Chair Jerome Powell signaled his acknowledgement of the need for change to combat a softening labor market. The Fed’s rate decision should lay the groundwork for the coming year, and hopefully set the economy up for a soft landing. Sources: Global markets weekly update | T. Rowe Price (troweprice.com) A Head Fake, Maybe - Mauldin Economics Dolls-Deliberations-Weekly-Investment-Commentary_081924_FINAL.pdf (crossmarkglobal.com) https://www.nber.org/research/business-cycle-dating https://finance.yahoo.com/news/investors-more-confident-in-soft-landing-as-fed-rate-cut-expectations-rise-bofa-survey Traditions Wealth Advisors Greysen Golgert/Brien L. Smith CFP® Economic Analyst Intern/Chief Investment Officer July 28, 2024 This month has seen events occur in the US political sphere that have changed the election cycle from relatively predictable to wildly unpredictable in a short amount of time. In the past week we have seen an ever-changing slew of predictions, polls, and headlines that prove this race has been flipped on its head. With that being said, history has repeatedly shown that political turnover has little to no effect on the overall performance of a diversified investment portfolio. There will likely be short-term ripples in the months leading up to the race, but these occurred time and time again as Election Day approached during previous cycles. It is only natural for investors to get the jitters when either candidate proposes a policy change or espouses a desired geopolitical stance, but the long-run reality is that the impact of these ripples fades away in the wake of an election year. In fact, since 1950, stocks have averaged 9.1% returns during an election year and 8.3% returns in the year after an election. Regardless of who wins the presidency or which party controls Congress, financial markets will not be affected by the various potential outcomes. As seen below, the average annual S&P 500 returns from 1933-2022 have been positive under each partisan combination.  One of the common lines of thought when politics intersects with investment is that policy change (or continuity) will have a significant impact on individual sectors. While it is certainly true that policy can and will affect certain sectors in diverse ways, betting on the perceived effect of policy positions at this stage is extremely risky. Even if it is possible to anticipate the effect of each party’s current policy objectives, making investment decisions now based off of that is a gamble within a gamble. First, elections are not predictable, and this one recently became less predictable by a significant margin. Second, party policy on a variety of subjects can and often does shift while candidates are on the campaign trail or elected to office. Third, it can be extremely difficult for elected officials to implement policy when they take office, and thus certain policy goals take priority over others. Also, sector performance in election years has not produced much in the way of discernible patterns. Betting on sector returns relative to political outcomes can backfire in many ways, but the safe bet that produces consistent returns is to stick with the fundamentals and a consistent investment strategy.
Investors may also be concerned about the potential for newly elected officials to completely alter the fabric of the economy. Worries especially tend to arise when a single party gains control of Congress and the presidency in one fell swoop. In truth, sweeps have happened before and they are going to happen again, but the makeup of our economy has remained consistent for decades. In past years where one party dominated the legislative and executive branches of our government, the percentage of bills that are defined as having real-world impact on spending and policy has not risen when compared to years in which the government was divided. The quasi-public Federal Reserve and its monetary policy have a far more relevant impact than our elected officials do. Whatever the political situation come November, this US economy will continue chugging along. Apple, NVIDIA, Amazon, and hundreds of other American companies will continue to innovate and grow. In other news, progress on the inflation front and a higher than expected GDP growth reading for Q2 (2.8%) are positive signs for the Fed, the economy, and investors as they provide more optimism for a soft landing. Sources: https://www.invesco.com/us/en/insights/market-performance-2024-presidential-election.html https://www.fountainheadam.com/wp-content/uploads/2024/06/Market-Commentary-2024.5-1.pdf https://www.fidelity.com/learning-center/trading-investing/election-market-impact |
Let our team work for you. Call 979-694-9100 or
email [email protected]
|
TRADITIONS WEALTH ADVISORS
2700 Earl Rudder Frwy South, Ste. 2600 College Station, TX 77845 |
VISIT OUR BLOG: Stay current with industry news and tips.
|
