Are Interest Rate Cuts Coming?
The Federal Reserve Board will meet from September 17th – September 18th and the world eagerly anticipates they will cut interest rates for the first time since March 2020. We expect the Fed will cut interest rates by 25-basis points, as a 50-basis point cut would potentially signal that the Fed was once again behind the curve and that the economy was in more trouble than expected. The Fed has scheduled two more meetings in 2024, and we anticipate one to two more rate cuts of 25 basis points.
The stock market’s excellent performance in August resulted in new highs. Can the party continue? Yes, but do not expect it to continue moving straight up. First, the market is forward looking as evidenced by the upturn during August. While there might be an initial boost following the cut, it may not last long. As is often the case, the market is ahead of itself, so one of four things could happen.
- The market could retreat perhaps as much as 10%, a normal and healthy correction.
- The market could tread water for six to eight months, letting earnings catch up with the market and lowering the price-to-earnings ratio.
- The market’s euphoria could continue, and while it will feel good on the way up, it will feel awful on the way back down, especially if it is more than a correction.
- Lastly, the market has taken a big tumble, probably because of some geopolitical event rather than because the economy is in bad shape. While a recession will come again, it isn’t apparent in the near term.
We are rooting for either of the first two events.
When Will You Retire?
As you look ahead to your golden years, what factors impact your timeline on when to retire? You have so many questions to ask and answer. Would you consider retiring at 62 when you are first eligible to collect Social Security? Would you consider retiring at age 65 when you can purchase medical coverage from Medicare? What about waiting until your Full Retirement Age (FRA) to start collecting Social Security or until age 70 when you get your maximum Social Security benefit? When must you start taking Required Minimum Distributions (RMDs) if you have retirement plans?
According to a recent Equitable Life survey, 47% of those polled said they must continue working at least to age 74 because of inflation, inadequate retirement savings, and lack of guaranteed income. The survey also found that 64% would prefer guaranteed versus variable income. Naturally, Equitable Life is in the business of selling annuities for a commission. This could be an excellent product for the right person, but the consumer must consider the product’s costs and lack of flexibility. The problem is not the product but those that sell this type of product to everyone they talk to regardless of the product’s suitability for that particular financial situation. We strongly encourage you to seek a second opinion if a salesperson, bank teller, or someone else recommends that you purchase an annuity.
Does America Have a Revenue or Spending Issue?
The simple answer is “Yes”. We keep writing about both issues, and over the next seven weeks leading into the election, we will continue hearing about both problems, but mostly about revenue. The Republicans can talk all they want about “the liberal spending Democrats,” but when you look behind the curtain, the Republicans are almost as bad. During Donald Trump’s four years as President, the national debt increased by $7.2 trillion, according to the Heritage Foundation, which is a conservative-leaning organization. Based on a Fox Business News story, $6.5 trillion was achieved through bipartisan voting, the most significant part of which was in response to the COVID pandemic. According to the same report, under President Joe Biden, the national debt increased by $4.3 trillion through the end of June, with only $1.3 trillion resulting from bipartisan voting. Let’s face it: both parties are culpable of spending.
What about revenue? Former President Trump wants to renew the expiring provisions of the 2017 Tax Act, which was estimated to reduce revenue by $1.7 trillion over ten years, according to the non-partisan Congressional Budget Office (CBO). It is not likely that the number will be that small going forward should the provisions be renewed. While the 2017 Act lowered taxes for most Americans, it favored those with higher incomes. If the provisions revert to existing law by January 1, 2026, it becomes a tax increase.
Conversely, not only does Vice President Harris want the 2017 tax cuts to go away, but her plan also calls for a significant tax increase on all those making over $400,000. Furthermore, she claims it will reduce the income tax burden for most taxpayers under this amount. On the personal side, she seems to have adopted the proposals put forth by President Biden in his most recent budget, which is estimated to raise revenues over ten years by $5 trillion, according to the CBO.
As for capital gains, currently, long-term capital gains are taxed on a progressive basis from 0% to 20%, with an additional 3.8% for Obamacare for those over $200,000 of net investment income for singles and $250,000 for married filing jointly. Short-term gains for assets held less than one year are taxed at ordinary income tax rates. Harris has proposed reducing the tax advantage of capital gains by increasing them to 28% at certain thresholds. She backed off President Biden’s proposal to tax capital gains at ordinary tax rates with a top tax of 39.7% for some taxpayers. Although not at the federal level, those who live in a state with an income tax will find the impact even greater.
Perhaps the most controversial part of her proposal is a tax on unearned income for those with wealth greater than $100 million. In short, these folks would pay capital gains taxes even though they never sold the asset. It seems unfair, but in the most recent session, the Supreme Court agreed that a couple who invested in India owed taxes on the investment even though they had not received any income. Many speculate that this ruling might open the door for the Democratic proposal.
The aim of the proposal is to eliminate the loophole whereby people with a large quantity of low-cost stock simply borrow against it rather than sell it and pay the tax. When they die, they receive a step up in basis, and the capital gains disappear. The estate can then sell the stock to pay off the loan. We could see where eliminating the ability to use this approach seems “fair.”
So, is it a revenue or spending issue? We vote for both. If tax increases were used to reduce the deficit and the debt that would be one thing, but we are skeptical and suspect that politicians would use the additional revenue as a way to spend more.
The Dangers of Hunting High Dividends
High-yielding dividend funds have become increasingly popular among investors seeking regular income and potential capital appreciation. However, like any investment strategy, they come with potential drawbacks that investors should consider.
- High yields may be a red flag. If a company’s dividend yield is unusually high (6%+), it may indicate that the market expects a dividend cut in the future. Since the yield is the primary attraction to investors, a cut in the dividend will also drive down the price of the stock as investors look to move on quickly to other opportunities. Thus, cuts can lead to both decline in a fund’s income and share price.
- Companies that pay high dividends often reinvest less money into their businesses. This can potentially limit their growth prospects compared to companies that retain more of their earnings.
- Dividends are typically taxable, which can be a disadvantage for investors in higher tax brackets. While some dividends may qualify for lower tax rates, the frequent distributions from high-yield funds can create a higher tax burden.
- High-yield dividend funds often have significant exposure to specific sectors, such as utilities, real estate, and consumer staples. This concentration can lead to underperformance if these sectors fall out of favor.
Dividend-paying stocks can be sensitive to interest rate changes. When rates rise, these stocks may become less attractive compared to fixed-income investments, potentially leading to price declines. In conclusion, high-yielding dividend funds can offer attractive income and potential stability but also come with risks, such as dividend cuts and limited growth. Investors should carefully evaluate their financial goals, risk tolerance, and overall portfolio strategy before allocating significant assets to these funds. A balanced approach is our best advice.
The Market Does Not Like Disappointment
Earnings season is again upon us. With most of the S&P 500 having reported earnings for the second quarter, 81% reported positive EPS surprises. According to YCharts, the average price return of those stocks was 0.3% the day after the earnings release. Meanwhile, the average price return for stocks with negative earnings surprises was – 1.79%. In other words, the market has punished stocks with negative earnings surprises more than it has rewarded stocks with positive earnings surprises. This dynamic reflects the markets’ bullish sentiment in which a high bar is set during bull markets and economic expansions. The opposite is true during times of market stress.
Where Do You Want To Live In Retirement?
For those lucky enough to live, work, and play in Tampa Bay, we are not sure there is anywhere else we want to retire. We have many beautiful destinations within proximity, including Clearwater Beach on the west and Disney World to the east, as well as Venice and Naples to the south and Brooksville to the north. So, it didn’t surprise us to have two cities in the Tampa Bay area recognized and five Florida cities on the list.
Nonetheless, not everyone wants to be here. WalletHub recently scoured over 183 cities for the best places to retire based on affordability, activities, quality of life, and healthcare. Here are the top ten:
10) Atlanta, GA
9) Casper, WY
8) St. Petersburg, FL
7) Cincinnati, OH
6) Scottsdale, AZ
5) Ft. Lauderdale, FL
4) Tampa, FL
3) Minneapolis, MN
2) Miami, FL
1) Orlando, FL
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