Fed Pauses Interest Rate Hikes
Earlier this week, the Federal Reserve paused the constant interest rate increases that have occurred since March 2022. The markets fully expected this pause. Chairman Jerome Powell made clear at the press conference that this was a pause, and the Fed is prepared to move forward with more hikes, if needed, to bring inflation down to the Fed’s target rate of 2%. While the CPI number was down nicely earlier this week, the core inflation rate remained stubbornly high. These numbers gave the Fed a little room to examine the ongoing effects of the past interest rate increases. While good news, it remains to be seen if the Fed is finished or if one or two more increases will follow. Unless the economy slips into a recession later this year, don’t look for any pullback in rates until sometime next year.
Debt Ceiling Crisis Avoided – But are the Ongoing Concerns?
Congress and the White House virtually took America to the brink of a major financial crisis before compromising so that the U.S. did not default on its debts, bills, and promises. What is really in the bill, and was it much ado about nothing? Let’s review so you can judge. Yes, we lowered the future debt by about $1 trillion, but the country still spends above its means. Going forward, we will add significant debt to the current $25.8 trillion deficit. Two solutions exist: to tax more and/or to spend less. Neither option appeals to Congress.
Demographics are working against us as the Baby Boomers reach a peak of retirement, putting further strain on Medicare and Social Security. Add in the other entitlements and it constitutes up to 14% of GDP, so any cut in these programs will have negative personal and financial implications. So don’t look for much help stemming the deficit from these programs.
The more we borrow, the more interest that the government pays on a mandatory basis, and with interest rates higher than they were 15 months ago, it is a double whammy. The more we pay in interest, the less there is for other priorities like defense. Like any debtor, when you borrow above your ability to repay the debt, you will eventually have to pay the piper, and the economic toll will be devastating. Fortunately, it is probably about 20 years away, so there is still time to recover, but the longer we wait the harder it will be. Truth be told – the debt ceiling crisis compromise didn’t do much except kick the can down the road. Ugh!
Health Savings Account (HSA) Adjusted for Inflation
Thanks to an inflation adjustment, HSA plans will see a significant increase in the amount that can be contributed in 2024. Individuals will be able to contribute $4,150, while a family will be able to contribute $8,300. Those that were born before 1970 can put in an extra $1,000. An HSA plan is only available to those with a high-deductible insurance policy with a minimum of $1,600 for singles and $3,200 for families. If the money in the plan is not used, it is left to accumulate on a tax-deferred basis, and if used later in life for qualified medical purposes, it comes out tax-free. These plans are a great way to accumulate additional money for retirement. Unfortunately, those with Medicare or Medicare Advantage plans cannot set up an HSA because neither plan has a high-deductible option.
Connecticut Gets It
Following a wave of higher taxes, Connecticut cut its tax rates for up to 60% of all taxpayers. Get this, the legislature is controlled by the Democrats, who historically want higher taxes and more and bigger spending. What an “about face.” It cuts taxes to 2% on the first $20,000 and 4.5% on the next $80,000 from 3% and 5%, respectively. These new rates will apply to a couple with less than $300,000 and $150,000 of income. It is estimated to reduce taxes by almost $500 million.
Bipartisanship May Be Catching
Last week the House unanimously (how did that happen?) passed a bill to expand the accredited investor opportunity to a great number of people. Traditionally, to be an accredited investor one had to meet at least one of three criteria: 1) a consistent income of at least $200,000, or $300,000 when combining that of a spouse; 2) hold a securities registration for Series 7, 65 or 82 or be a knowledgeable employee of an investment fund; or 3) have a net worth exclusive of the home of at least $1 million. This criterion has been in place for a long time and obviously excludes a lot of potential investors. The current rules were designed to protect supposedly less sophisticated investors or those who could not sustain a loss.
Now, the House of Representatives wants to broaden the definition, allowing more people to participate in private placements, private equity, etc. The Equal Opportunities All Investors Act forces the SEC to create a test to determine one’s investor acumen. If an investor can pass the test, then he/she can declare to be an accredited investor. This will broaden the pool of investment capital, especially for small companies. This is a good thing. The worry is that even though the investor may have passed the test, many will still be defrauded. Only time will tell.
Australia Isn’t the Only Place for Boomerangs
Given the high price for a place to live after college, more former students are boomeranging back home to live with mom, dad, and siblings. Across the country, whether renting or buying, the price of residential real estate has gone through the roof. Of course, you are going to try to help your child, but there is a price, and often a big one. In “Boomerang Kids Survey,” Thrivent Financial states that 41% of the parents surveyed said they had to pull back on financial support going forward. Given this statistic, what is even more amazing is that 75% are not discussing money management, 80% are not setting financial expectations, and no timeline to move out for 92%. Nobody is talking about money, but parents have a high expectation that the boomerang kids should pay for groceries and rent to cover a few of the extra expenses.
Shifting Tides: The Ever-Changing Landscape of the S&P 500
In a significant shift within the financial landscape, Palo Alto Networks, a cybersecurity company, has taken the spotlight by replacing Dish Network on the prestigious S&P 500 list. The process of replacing one company with another on the S&P 500 list involves a thorough evaluation and selection process conducted by the S&P Dow Jones Indices. To be considered for inclusion, a company must meet specific eligibility criteria, including minimum market capitalization, liquidity, and financial viability requirements. As more disruptive companies have entered the market, we’ve seen the list updated more frequently. From 1965 to 2020, the average tenure of a company on the S&P500 has decreased from around 33 years to 21 years.
The replacement of Dish Network reflects the dynamic nature of the market and the need for companies to innovate. This gives investors both opportunities and challenges when navigating the vast realm of investments.
What company do you think we will see listed on the S&P500 next?
Tech Sector Gets a Lift from Artificial Intelligence
Technology has been the best-performing sector this year, carrying the S&P 500 up more than 20% off the October lows and technically entering a new bull market. Coming just one year after its worst annual performance since the Great Financial Crisis, the tech sector has been the beneficiary of lofty hopes surrounding artificial intelligence (AI) breakthroughs and the potential catalyst it can be for everything from logistics for manufacturing companies to clinical trial data analysis in healthcare.
Generative AI has been a buzzword for many years. However, recent developments and product releases such as ChatGPT are bringing the nascent technology to the forefront of investors’ minds. While it is too early to tell who the eventual winners and losers will be in the AI race, it has the potential to impact (or even disrupt) large parts of the economy. Regulators would be remiss not to get in front of these developments and get stuck playing catch up, as they have with cryptocurrency. We shy away from thematic investing, which usually ends up being more hype than substance. However, any technology that increases efficiency and productivity is good for all companies and in turn, investors.