What You Must Know About the Tax Return Deadline

March 31, 2024 — Sam H. Fawaz

It’s that time of year, folks, and I wish I were talking about spring. The federal income tax filing deadline for individuals is fast approaching—generally Monday, April 15, 2024. For taxpayers living in Maine or Massachusetts, you get a couple of extra days to procrastinate—your deadline is April 17, 2024.

The IRS has also postponed the deadline for certain disaster-area taxpayers to file federal income tax returns and make tax payments. The current list of eligible localities and other details for each disaster are always available on the IRS website’s Tax Relief in Disaster Situations page. Interest and penalties are suspended until the postponed deadline for affected taxpayers.

If I refer to the April 15 deadline in this article, you can assume I also mean any other postponed original deadline that applies to you.

Need More Time?

If you cannot file your federal income tax return by the April (or other) due date, you can file for an extension by the April 15 due date using IRS Form 4868, “Application for Automatic Extension of Time to File U.S. Individual Income Tax Return.” Most software packages can electronically file this form for you and, if necessary, remit a payment.

Filing this extension gives you until October 15, 2024, to file your federal income tax return. You don’t have to explain why you’re asking for the extension, and the IRS will contact you only if your extension is denied and explain the reason(s). There are no allowable extensions beyond October 15 unless extended by law, or you’re affected by a federally declared disaster area.

Assuming you owe a payment on April 15, you can file for an automatic extension electronically without filing Form 4868. Suppose you make an extension payment electronically via IRS Direct Pay or the Electronic Federal Tax Payment System (EFTPS) by April 15. In that case, no extension form has to be filed (see Pay What You Owe below for more information).

An extension of time to file your 2023 calendar year income tax return also extends the time to file Form 709, “Gift and generation-skipping transfer (GST) tax returns” for 2023.

Special rules apply if you’re a U.S. citizen or resident living outside the country or serving in the military outside the country on the regular due date of your federal income tax return. If so, you’re allowed two extra months to file your return and pay any amount due without requesting an extension. Interest, currently at 8% (but not penalties), will still be charged on payments made after the regular due date without regard to the extended due date.

You can pay the tax and file your return or Form 4868 for additional filing time by June 17, 2024. If you request an extension because you were out of the country, check the box on line 8 of the form.

If you file for an extension, you can file your tax return any time before the extension expires. And there’s no need to attach a copy of Form 4868 to your filed income tax return.

Tip #1: By statute, certain federal elections must be made with a timely filed return or extension and cannot be made after the original due date has passed. For example, if you’re a trader and want to elect trader tax status for the current tax year (2024), it must be made by April 15, 2024, with your timely filed return or attached to your extension. Once April 15 has passed, you are barred from making the election until the following tax year. Some elections may be permanently barred after the regular due date, so check with your tax advisor to see if you need a timely filed election with your return or extension.

Tip #2: For proof of a timely snail-mailed extension, especially for those with a relatively large payment, be sure to mail it by certified mail, return receipt requested (always request proof of delivery regardless of the method of transportation.)

Caveat: Generally, the IRS has three years from the original due date of your return to examine it and assess additional taxes (six years if fraud is suspected). If you extend your return, the three (or six) year “clock” does not start ticking until you file it, so essentially, by extending your return, you are extending the statute of limitations. But contrary to popular belief, requesting an extension does NOT increase your odds of an examination.

Pay What You Owe

One of the biggest mistakes you can make is not filing your return because you owe money. If the bottom line on your return shows that you owe tax, file and pay the amount due in full by the due date if possible. If you cannot pay what you owe, file the return (or extension) and pay as much as you can afford. You’ll owe interest and possibly penalties on the unpaid tax, but you will limit the penalties assessed by filing your return on time. You may be able to work with the IRS to pay the unpaid balance via an installment payment agreement (interest applies.)

It’s important to understand that filing for an automatic extension to file your return does not provide additional time to pay your taxes. When you file for an extension, you must estimate the amount of tax you will owe; you should pay this amount (or as much as you can) by the April 15 (or other) filing due date.  If you don’t, you will owe interest, and you may owe penalties as well. If the IRS believes that your estimate of taxes was not reasonable, it may void your extension, potentially causing you to owe failure to file penalties and late payment penalties as well.

There are several alternative ways to pay your taxes besides via check. You can pay online directly from your bank account using Direct Pay or EFTPS, a digital wallet such as Click to Pay, PayPal, Venmo, or cash using a debit or credit card (additional processing fees may apply). You can also pay by phone using the EFTPS or debit or credit card. For more information, go to Make a Payment.

Tax Refunds

The IRS encourages taxpayers seeking tax refunds to file their tax returns as soon as possible. The IRS anticipates most tax refunds being issued within 21 days of the IRS receiving a tax return if 1) the return is filed electronically, 2) the tax refund is delivered via direct deposit, and 3) there are no issues with the tax return. To help minimize delays in processing, the IRS encourages people to avoid paper tax returns whenever possible.

To check on your federal income tax refund status, wait five business days after electronic filing and go to the IRS page: Where’s My Refund? Your state may provide a similar page to look up state refund status.

State and Local Income Tax Returns

Most states and localities have the same April 15 deadline and will conform with postponed federal deadlines due to federally declared disasters or legal holidays. Accordingly, most states and localities will accept your federal extension automatically (to extend your state return) without filing any state extension forms, assuming you don’t owe a balance on the regular due date. Otherwise, your state or locality may have its own extension form you can use to send in with your payment. Most states also now accept electronic payments online instead of a filed extension form with payment. Never assume that a federal extension will extend your state return; some do not. Always check to be sure.

Tip: If you want to cover all your bases, if your federal extension is lost or invalidated for any reason, you may want to file a state paper or online extension to extend the return correctly. It rarely happens, but sometimes, it is better to be safe than sorry.

IRA Contributions

Contributions to an individual retirement account (IRA) for 2023 can be made up to the April 15 due date for filing the 2023 federal income tax return (this deadline cannot be extended except by statute). However, certain disaster-area taxpayers granted relief may have additional time to contribute.

If you had earned income last year, you may be able to contribute up to $6,500 for 2023 ($7,500 for those age 50 or older by December 31, 2023) up until your tax return due date, excluding extensions. For most people, that date is Monday, April 15, 2024.

You can contribute to a traditional IRA, a Roth IRA, or both. Total contributions cannot exceed the annual limit or 100% of your taxable compensation, whichever is less. You may also be able to contribute to an IRA for your spouse for 2023, even if your spouse had no earned income.

Making a last-minute contribution to an IRA may help reduce your 2023 tax bill. In addition to the potential for tax-deductible contributions to a traditional IRA, you may also be able to claim the Saver’s Credit for contributions to a traditional or Roth IRA, depending on your income.

Even if your traditional IRA contribution is not deductible, and you are ineligible for a Roth IRA contribution (because of income limitations), the investment income generated by the contribution becomes tax-deferred, possibly for years, and the contribution builds cost basis in your IRA, making future distributions a little less taxing.

If you make a nondeductible contribution to a traditional IRA and shortly after that convert that contribution to a Roth IRA, you can get around the income limitation of making Roth contributions. This is sometimes called a backdoor Roth IRA. Remember, however, that you’ll need to aggregate all traditional IRAs and SEP/SIMPLE IRAs you own — other than IRAs you’ve inherited — when you calculate the taxable portion of your conversion. If your traditional IRA balance before the non-deductible contribution is zero, then you’ll owe no tax on the conversion, and voila! You have just made a legal Roth IRA contribution.

Making a last-minute contribution to an IRA may help reduce your 2023 tax bill. In addition to the potential for tax-deductible contributions to a traditional IRA, you may also be able to claim the Saver’s Credit for contributions to a traditional or Roth IRA, depending on your income.

If you would like to review your current investment portfolio or discuss any other retirement, tax, or financial planning matters, please don’t hesitate to contact us at 734-447-5305 or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first. If you are not a client, an initial consultation is complimentary, and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so are your financial plan and investment objectives.

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New Retirement Options Starting in 2024

January 31, 2024 — Sam H. Fawaz

The SECURE 2.0 Act, passed in December 2022, made wide-ranging changes to U.S. tax laws related to retirement savings. While some provisions were effective in 2023, others did not take effect until 2024. Here is an overview of some important changes for this year:

Matching student loan payments

Employees who make student loan repayments may receive matching employer contributions to a workplace retirement plan as if the repayments were employee contributions to the plan. This applies to 401(k), 403(b), and government 457(b) plans and SIMPLE IRAs. Employers are not required to make matching contributions in any situation, but this provision allows them to offer student loan repayment matching as an additional benefit to help address the fact that people paying off student loans may struggle to save for retirement.

New early withdrawal exceptions

Withdrawals before age 59½ from tax-deferred accounts, such as IRAs and 401(k) plans, may be subject to a 10% early distribution penalty on top of ordinary income tax. There is a long list of exceptions to this penalty, including two new ones for 2024.

Emergency expenses — one penalty-free distribution of up to $1,000 is allowed in a calendar year for personal or family emergency expenses; no further emergency distributions are allowed during a three-year period unless funds are repaid or new contributions are made that are at least equal to the withdrawal.

Domestic abuse — a penalty-free withdrawal equal to the lesser of $10,000 (indexed for inflation) or 50% of the account value is allowed for an account holder who certifies that he or she has been the victim of domestic abuse during the preceding one-year period.

Emergency savings accounts

Employers can create an emergency savings account linked to a workplace retirement plan for non-highly compensated employees.  Employee contributions are after-tax and can be no more than 3% of salary, up to an account cap of $2,500  (or lower as set by the employer). Employers can match contributions up to the cap, but any matching funds go into the employee’s workplace retirement account.

Clarification for RMD ages

SECURE 2.0 raised the initial age for required minimum distributions (RMDs) from traditional IRAs and most workplace plans from 72 to 73 beginning in 2023 and 75 beginning in 2033. However, the language of the law was confusing. Congress has clarified that age 73 initial RMDs apply to those born from 1951 to 1959, and age 75 applies to those born in 1960 or later. This clarification will be made official in a law correcting a number of technical errors, expected to be passed in early 2024.

No more RMDs from Roth workplace accounts

Under previous law, RMDs did not apply to original owners of Roth IRAs, but they were required from designated Roth accounts in workplace retirement plans. This requirement will be eliminated beginning in 2024.

Transfers from a 529 college savings account to a Roth IRA

Beneficiaries of 529 college savings accounts are sometimes “stuck” with excess funds that they did not use for qualified education expenses. Beginning in 2024, a beneficiary can execute a direct trustee-to-trustee transfer from any 529 account in the beneficiary’s name to a Roth IRA, up to a lifetime limit of $35,000. The 529 account must have been open for more than 15 years. These transfers are subject to Roth IRA annual contribution limits, requiring multiple transfers to use the $35,000 limit. The IRS is still working on specific guidance on this law change, so it might pay to wait a few months before making this type of transfer.

Increased limits for SIMPLE plans

Employers with SIMPLE IRA or SIMPLE 401(k) plans can now make additional nonelective contributions up to the lesser of $5,000 or 10% of an employee’s compensation, provided the contributions are made to each eligible employee in a uniform manner. The limits for elective deferrals and catch-up contributions, which are $16,000 and $3,500, respectively, in 2024, may be increased by an additional 10% for a plan offered by an employer with no more than 25 employees. An employer with 26 to 100 employees may allow higher limits if it provides either a 4% match or a 3% nonelective contribution.

Inflation indexing for QCDs

Qualified charitable distributions (QCDs) allow a taxpayer who is age 70½ or older to distribute up to $100,000 annually from a traditional IRA to a qualified public charity. Such a distribution is not taxable and can be used in lieu of all or part of an RMD. Beginning in 2024, the QCD amount is indexed for inflation, and the 2024 limit is $105,000.

SECURE 2.0 created an opportunity (effective 2023) to use up to $50,000 of one year’s QCD (i.e., one time only) to fund a charitable gift annuity or charitable remainder trust. This amount is also indexed to inflation beginning in 2024, and the limit is $53,000.

Catch-up contributions: indexing, delay, and correction

Beginning in 2024, the limit for catch-up contributions to an IRA for people ages 50 and older will be indexed to inflation, which could provide additional saving opportunities in future years. However, the limit did not change for 2024 and remains $1,000. (The catch-up contribution limit for 401(k)s and similar employer plans was already indexed and is $7,500 in 2024.)

The SECURE 2.0 Act includes a provision — originally effective in 2024 — requiring that catch-up contributions to workplace plans for employees earning more than $145,000 annually must be made on a Roth basis. In August 2023, the IRS announced a two-year “administrative transition period” that effectively delays this provision until 2026. In the same announcement, the IRS affirmed that catch-up contributions in general will be allowed in 2024, despite a change related to this provision that could be interpreted to disallow such contributions. The error will be corrected in the 2024 technical legislation.

If you would like to review your current investment portfolio or discuss any other retirement, tax, or financial planning matters, please don’t hesitate to contact us at 734-447-5305 or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first. If you are not a client yet, an initial consultation is complimentary, and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so are your financial plan and investment objectives.

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Last Minute Year-End Tax Planning for 2023

December 18, 2023 — Sam H. Fawaz

The window of opportunity for many year-end tax-saving moves closes on December 31, so it’s important to evaluate your tax situation now, while there’s still time to affect your bottom line for the 2023 tax year.

Timing is Everything

Consider any opportunities you may have to defer income to 2024. Doing so may allow you to postpone paying tax on the income until next year. If there’s a chance that you’ll be in a lower income tax bracket next year, deferring income could mean paying less tax on the income as well.

Some examples:

·       Check with your employer to see if there is an opportunity to defer year-end bonuses.

·       Defer the sale of capital gain property (or take installment payments rather than a lump-sum payment)

·       Postpone receipt of distributions (other than required minimum distributions) from retirement accounts.

Similarly, consider ways to accelerate deductions into 2023. If you itemize deductions, you might accelerate some deductible expenses by making payments before year-end.

Some examples:

·       Consider paying medical expenses or bills in December rather than January, if doing so will allow you to qualify for the medical expense deduction (must be more than 7.5% of your income).

·       Prepay deductible interest by accelerating your January mortgage payment into December.

·       Make January alimony payments in December

·       Make next year’s charitable contributions in December

·       Pay state and local taxes (income taxes, property taxes, use taxes, etc.) if you’re below the $10,000 maximum allowed itemized deduction for state and local taxes

·       Purchase that piece of equipment or vehicle needed in your business and place it in service by year-end

Sometimes, however, it may make sense to take the opposite approach — accelerating income into 2023 and postponing deductible expenses to 2024. That might be the case, for example, if you can project that you’ll be in a higher tax bracket in 2024; paying taxes this year instead of next might be outweighed by the fact that the income would be taxed at a higher rate next year.

Factor in the Alternative Minimum Tax (AMT)

Although the number of taxpayers subject to the AMT is much lower than in prior years, make sure that you factor in the alternative minimum tax when deciding to accelerate any deductions. If you’re subject to the AMT, traditional year-end maneuvers, like deferring income and accelerating deductions, can have a potentially negative effect. That’s because the AMT — essentially a separate, parallel income tax with its own rates and rules — effectively disallows several itemized deductions. For example, if you’re subject to the AMT in 2023, prepaying 2024 state and local taxes won’t help your 2023 tax situation but could potentially hurt your 2024 bottom line.

Special Concerns for Higher-Income Individuals

The top marginal tax rate (37%) applies if your taxable income exceeds $578,125 in 2023 ($692,750 if married filing jointly, $346,875 if married filing separately, $578,100 if head of household). Your long-term capital gains and qualifying dividends could be taxed at a maximum 20% tax rate if your taxable income exceeds $492,300 in 2023 ($553,850 if married filing jointly, $276,900 if married filing separately, $523,050 if head of household).

Additionally, a 3.8% net investment income tax (unearned income Medicare contribution tax) may apply to some or all of your net investment income if your modified AGI exceeds $200,000 ($250,000 if married filing jointly, $125,000 if married filing separately).

High-income individuals are subject to an additional 0.9% Medicare (hospital insurance) payroll tax on wages exceeding $200,000 ($250,000 if married filing jointly or $125,000 if married filing separately).

Charitable Contribution Planning

If you are planning to donate to a charity, it’s likely better to make your contribution before the end of the year to potentially save on taxes. There are many tax planning strategies surrounding charitable giving:

·       Consider donating appreciated property (such as securities, real estate, or artwork) that has been held for more than one year, rather than cash. Note that an appraisal may be needed for certain properties. Not only do you get a deduction for the fair market value (FMV) of your appreciated stock, but you save on taxes by not recognizing the capital gains on the appreciation.

·       Opening and funding a donor-advised fund (DAF) is appealing to many as it allows for a fully tax-deductible gift in the current year and the ability to dole out those funds to charities over multiple years. Again, if you donate appreciated securities to a DAF, not only do you get a deduction for the FMV of your appreciated stock, but you save on taxes by not recognizing the capital gains on appreciation.

·       Qualified charitable distributions (QCDs) up to $100,000 are another option for certain older taxpayers (age 70-1/2 or older) who don’t typically itemize on their tax returns. If you don’t have a required minimum distribution (RMD) from your retirement accounts (see below), this will help reduce future RMDs and taxable income. If you do have an RMD requirement from your retirement accounts, this could be an even better strategy for you to reduce your current taxable income.

Note that it’s important to have adequate documentation of all claimed donations, including a letter from the charity for donations of $250 or more.

Required Minimum Distributions (RMDs)

Unfortunately, you cannot keep retirement funds in your account indefinitely. RMDs are the minimum amount you must annually withdraw from your retirement accounts once you reach a certain age (generally now age 73). Failure to do so can result in significant penalties (special rules apply if you’re still working and participating in your employer’s retirement plan). You must make the withdrawals by the date required — the end of the year for most individuals.

As described above, there are also opportunities to distribute retirement funds to a qualified charity to satisfy the RMD without incurring taxes. Missed RMDs are subject to steep excise tax penalties (25%), although recent rules greatly reduce the penalty (to 10%) if the missed RMD is taken within two years.

Digital Assets and Virtual Currency

Digital assets are defined under the U.S. income tax rules as any digital representation of value that may function as a medium of exchange, a unit of account, or a store of value. Digital assets may include virtual currencies such as Bitcoin and Ether, Stablecoins such as Tether and USD Coin (USDC), and non-fungible tokens (NFTs).

The sale or exchange of virtual currencies, the use of such currencies to pay for goods or services, or holding such currencies as an investment, generally have tax impacts –– and the IRS continues to increase its scrutiny in this area. The trading and use of digital assets must be disclosed on your tax returns and, since they are considered property rather than investments, different tax rules apply to their sales and exchanges.

Energy tax credits

From electric vehicles to home car chargers to solar panels, “going green” continues to provide tax incentives. The Inflation Reduction Act of 2022 included new and newly expanded tax credits for solar panels, electric vehicles (EV), and energy-efficient home improvements. The rules are complex but there is still time for these credits to be beneficial in the current and next year. The most notable change to the EV credits is the requirement that the vehicle has final assembly in North America. If you are planning an EV purchase, please ask the dealer whether the vehicle you’re eyeing is on the list of qualifying vehicles, which has changed significantly in the past years. See if they can advance the credit to you as an offset to the vehicle purchase price (you’ll have to sign a form to assign the credit to the dealer.)

Bump Up Withholding to Avoid 2024 Underpayment

If it looks as though you will owe federal income tax for the year, consider increasing your withholding on Form W-4 for 2024 with your employer (also consider doing the same on the appropriate state withholding forms). The biggest advantage in doing so is that withholding is considered as having been paid evenly throughout the year instead of when the dollars are taken from your paycheck. This strategy can be used instead of making quarterly estimated tax payments.

If you’re collecting social security, a pension, or taxable IRA distributions, update your Form W-4P with the appropriate payor to ensure you’ve paid in enough to avoid underpayment penalties.

Beneficial Ownership Interest (BOI) Reporting

The Corporate Transparency Act (CTA) requires the disclosure of the beneficial ownership information of certain entities to the Financial Crimes Enforcement Network (FinCEN) starting in 2024. This is not a tax filing requirement, but an online report to be completed if applicable to FinCEN. There are severe penalties for businesses who willingly do not comply with the requirements. The details of this reporting requirement are still being written, so it’s best to get in touch with your business attorney to determine whether your corporation, partnership, or LLC must file this report.

Additional Tax and Financial Planning Considerations

We recommend you review your retirement plans at least annually. That includes making the most of tax-advantaged retirement saving options, such as traditional individual retirement accounts (IRAs), Roth IRAs, and company retirement plans. It’s also advisable to take advantage of health savings accounts (HSAs) that can help you reduce your taxes and save for medical-related expenses. Once you become eligible or sign up for Medicare, you are no longer entitled to make HSA contributions.

IRAs and Retirement Plans

Make sure you’re taking full advantage of tax-advantaged retirement savings vehicles. Traditional IRAs and employer-sponsored retirement plans such as 401(k) plans allow you to contribute funds on a deductible (if you qualify) or pre-tax basis, reducing your 2023 taxable income. Contributions to a Roth IRA (assuming you meet the income requirements) or a Roth 401(k) aren’t deductible since they are made with post-tax dollars, so there’s no tax benefit for 2023, but qualified Roth distributions are completely free from federal income tax, which can make these retirement savings vehicles appealing.

For 2023, you can contribute up to $22,500 to a 401(k) plan ($30,000 if you’re age 50 or older) and up to $6,500 to a traditional IRA or Roth IRA ($7,500 if you’re age 50 or older). The window to make 2023 contributions to an employer plan typically closes at the end of the year, while you generally have until the April tax return filing deadline (April 15, 2024) to make 2023 IRA contributions.

If you started a small business in 2023, talk to your financial or tax advisor about setting up a small business retirement plan before year-end. Most plans must be set up before year-end, but contributions may not be required every year, and they don’t have to be made until the due date of the return (plus extensions). Some small business retirement plans can be set up at tax return time (e.g., SEP-IRA), but they have less contribution flexibility and more stringent rules than other plans (e.g., a solo 401(k)).

Roth IRA Conversions

Year-end is a good time to evaluate whether it makes sense to convert a tax-deferred savings vehicle like a traditional IRA or a 401(k) account to a Roth account. When you convert a traditional IRA to a Roth IRA, or a traditional 401(k) account to a Roth 401(k) account, the converted funds are generally subject to federal income tax in the year that you make the conversion (except to the extent that the funds represent nondeductible after-tax contributions).

If a Roth conversion does make sense, you’ll want to give some thought to the timing of the conversion. For example, if you believe that you’ll be in a better tax situation this year than next (e.g., you will pay tax on the converted funds at a lower rate this year), you might think about acting now rather than waiting. Whether a Roth conversion is appropriate for you depends on many factors, including your current and projected future income tax rates and whether you have the funds to pay the taxes outside of the IRA. Ask your financial or tax advisor whether a Roth Conversion is appropriate for this year or next.

Other Ideas

·       Life changes –– Any major changes in your life such as marriages or divorces, births or deaths in the family, job or employment changes, starting a business, and significant expenditures (real estate purchases, college tuition payments, etc.) can significantly impact the taxes you owe, so be sure to discuss them with your tax or financial advisor.

·       Capital gains/losses –– Consider tax benefits related to using capital losses to offset realized gains –– and move any gains to the lowest tax brackets, if possible. Also, consider selling portfolio investments that are underperforming before the end of the year. Net capital losses can offset up to $3,000 of the current year’s ordinary income. The unused excess net capital loss can be carried forward to use in subsequent years.

·       Estate and gift tax planning –– Make sure you’re appropriately planning for estate and gift tax purposes. There is an annual exclusion for gifts ($17,000 per donee in 2023, $34,000 for married couples) to help save on potential future estate taxes. If your estate/trust is worth over $5 million, it’s imperative to discuss your options with a dedicated estate planning attorney to review lifetime gift and generation-skipping transfer (GST) opportunities to use and plan additional exclusions and exemption amounts.

·       State and local taxes –– Remote working arrangements or moving your residency could potentially have state and local tax implications to consider. Be sure to discuss your working arrangements with your tax advisor.

·       Education planning –– Save for education with Section 529 education savings plans. There can be state income tax benefits to do so, and there have been changes in the way these funds can be used for private K-12 school expenses, paying down some student loans, or contributing leftover funds to Roth IRAs.

·       Updates to financial records –– Determine whether any updates are needed to your insurance policies or beneficiary designations. This should be checked at least once a year, and year-end is a good time to do so.

·       Estimated tax payments –– With underpayment interest rates being on the rise (currently at 8% for federal), you must review withholding and estimated tax payments and assess any requirements for any additional payments. The 4th quarter 2023 estimated income tax payment is due by January 16, 2024.

Hopefully one or more of the above tips helps you save a few dollars on your tax bill. By necessity, many of the tips are abbreviated, so be sure to check with your financial or tax advisor to ensure that they’re appropriate for your tax situation, both currently and in the future.

If you would like to review your current investment portfolio or discuss any other tax or financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so are your financial plan and investment objectives.

Posted in Financial Planning, General, IRA, retirement planning, tax planning. Leave a Comment »

What’s Going on in the Markets November 29, 2023

November 29, 2023 — Sam H. Fawaz

Who ya’ gonna believe? The headlines or the market?

The latest economic headlines read:

“Credit Card Defaults are on the rise”
“Household savings rates are at historic lows”
“Banking Credit Contracts to Levels Not Seen Since the Global Financial Crisis”
“Home Builder Confidence from the National Association of Homebuilders takes another sharp drop”
“Trucking Employment is Contracting at a rate not seen since the 2000 and 2008 Crises.”
“The Conference Board of Leading Economic Indicators Declined for the 19th consecutive month”
“Yield Curves are Steepening after being extensively inverted, a sign of recession”
“Overdue commercial property loans hit 10-year high at US banks”
“No End in Sight for the Ukraine-Russia War”
“Could The War in the Middle East be the start of World War 3?”
“World Panics as supply of Twinkies Shrinks” (OK I made that one up to see if you’re paying attention)

With headlines like these, you’d think the stock markets were crashing, and we’re already in a deep recession.

Instead, the markets are having one of their best Novembers in history (after an awful October), which has led to headlines like these:

“The stock market is following a rare pattern that could signal double-digit gains next year”
“Extreme investor bearishness suggests stock market gains of 16% are coming in the next 12 months”
“The S&P 500 could soar more than 20% in the next year after an ultra-rare buy signal just flashed”
“This stock market signal points to the S&P 500 surging 25% within the next year”
“The Dow just flashed a bullish ‘golden cross’ Two days after the bearish ‘death cross’ signal”

High inflation and interest rates, two prominent wars, and unprecedented dichotomies continue to mount throughout the market and the economy, which can only mean that Wall Street’s roller-coaster ride is far from over. Let’s take a closer look at some of the headlines driving the markets.

Leading Economic Indicators

The Conference Board’s Leading Economic Indicator (LEI) has warned of trouble all year. It has declined for 19 consecutive months, its third-longest streak on record. When viewed as a ratio with the Conference Board’s Coincident Economic Indicator (CEI), declines from peaks have typically led to recessions. When decreasing, this ratio provides evidence that coincident indicators are holding up, but leading indicators are deteriorating. The Leading-to-Coincident Ratio has steeply declined since its peak in December 2021. Never has this ratio fallen this far and at such a rapid rate without a corresponding recession.

Treasury Yields

Another warning sign still flashing red and has a near-perfect track record for predicting recessions is the yield spread between 10-year and 2-year Treasurys.

Typically, one would expect to receive a higher interest rate on longer-duration bonds, CDs, debt, etc. After all, the more time a debt is outstanding, the more risk the lender takes (e.g., default risk, interest rate risk, bankruptcy, death, etc.). 10-year Treasurys should normally pay a higher interest rate than 2-year Treasurys to compensate lenders (the public) for this added risk.

An inversion means shorter-duration Treasurys command a higher interest rate than longer-duration Treasurys. Historically, inversions are unusual and indicate the economy is vulnerable. After all, if you’re concerned about the economy, it means you’re concerned about corporations being able to pay back their debt. Hence, you’re more likely to buy shorter-term debt. That pushes shorter-term interest rates into inversion. Simply put, if you had concerns about your brother-in-law paying back a personal loan, you’re more likely to keep the term shorter rather than longer, right?

The most recent inversion of the 10-year treasury bill and the 2-year treasury bill interest rates began in July of 2022 and quickly became its deepest (widest) since the early 1980s. The initial inversion is an early warning sign of a potential oncoming recession, but when this yield spread moves back above 0.0 (or it un-inverts), historically, there are four months on average before the onset of a recession. So, this is another definite recession warning sign.

Institute for Supply Management (ISM) Economic Indicators

A few macroeconomic indicators bounced back from dire levels or improved earlier this year, spurring hopes of a soft landing. However, unfortunately, many of these improvements have recently reversed course.

The ISM manufacturing index, also known as the purchasing managers’ index (PMI), is a monthly indicator of U.S. economic activity based on a survey of purchasing managers at more than 300 manufacturing firms. It is a key indicator of the state of the U.S. economy. The PMI measures the change in production levels across the U.S. economy from month to month. The PMI report is released on the first business day of each month.

The 50 level in the PMI (both manufacturing and services) is the demarcation between economic expansion and contraction. Above 50, it’s expanding; below 50, it’s contracting.

Late last year, the ISM Manufacturing PMI index fell into contraction territory (<50.0) and has yet to move back into expansion. It has contracted for 12 consecutive months, showing some improvement mid-year before dropping once again in October.

The ISM Non-Manufacturing (or services) Index is an economic index based on surveys of more than 400 non-manufacturing (or services) firms’ purchasing and supply executives. The ISM Services PMI comes out in the first week of each month and provides a detailed view of the U.S. economy from a non-manufacturing standpoint.

The ISM Services Index has been resilient this year, dropping below 50.0 just once since the pandemic. After initially improving in early 2023, it has declined for the past two months and is now at a five-month low. Because more than 70% of the economy is services-based, any contraction would not benefit the whole economy.

Housing and Real Estate

Housing, another major economic sector, accounts for 15-18% of U.S. GDP and is also on somewhat of a roller coaster ride of its own. Despite its improvement earlier this year, home sales have retracted and are at their lowest levels since 2010.

Existing home sales, which comprise most of the housing market, decreased 4.1% in October 2023 from the level in September to a seasonally adjusted annual rate of 3.79 million, the lowest rate since August 2010, according to the National Association of Realtors. October sales fell 14.6% from a year earlier.

New home sales for October came in lower than expected at 679,000, lower than September’s surprise of 759,000 but slightly higher than August’s 675,000. Despite being below expectations, these numbers are pretty robust (not surprising, given that existing homeowners with low mortgage rates are not selling).

Today’s housing market is still one of the most unaffordable in U.S. history. Home prices have exceeded the extremes of the 2005 housing bubble peak. With today’s high mortgage rates, high home prices, and ever-increasing ownership costs, housing activity seems to be at a standstill overall. Continued declines in home sales would hint at a bursting housing bubble.

On November 8, the Financial Times reported that overdue commercial property loans hit a 10-year high at U.S. banks. The Federal Reserve’s hiking campaign to curb inflation has caused borrowing costs of all types to surge this year, including in commercial real estate. Combined with empty building space from the pandemic work-from-home trend, commercial real estate is in a tight spot. The Green Street Commercial Property Price Index is now down nearly 20% from its 2022 peak and back to a level not seen since the short COVID-induced recession in 2020.

Inflation

While commercial property prices have fallen, price pressures elsewhere have reaccelerated in recent months, prompting consumers to expect inflation to remain elevated in the months ahead. After all, how many items at the grocery or department store have you seen come down in price (besides perhaps eggs and gasoline?)

For October, while headline and Core Consumer Price Indexes (CPI) improved slightly (inflation down), the recent acceleration in consumer inflation expectations indicates that this improvement could be temporary.

In consumer sentiment surveys, the first half of this year saw consumers growing more optimistic about the economy as inflation slowed; however, expectations of future inflation have surged since then, and consumers are becoming discouraged again. Discouraged consumers turn into non-confident consumers who tend to put away their wallets and walk away from discretionary purchases.

Since September, consumer expectations of higher inflation in 12 months have increased significantly to 4.4%. Meanwhile, inflation expectations in five years reached 3.2% as of October’s interim report, their highest level in over a decade. Despite the recent easing in the CPI data, this inflationary expectation pressures the Federal Reserve to keep interest rates elevated.

Inflation expectations notwithstanding, consumers have enthusiastically supported the economy this year despite inflationary challenges. However, the upward trend in credit card delinquency rates indicates an increasingly stressed consumer. Figures from the Federal Reserve show that credit card delinquencies have risen to 2011 levels, and delinquent auto loans are at their highest since 2010. Though not at the extreme levels seen during the Great Financial Crisis (2007-2009), these delinquencies are not slowing and could quickly surge higher if stronger parts of the economy begin to falter.

Jobs

Employment continues to be the last bastion of strength in today’s economy and is important to watch. Jobs remain plentiful, and employees increasingly view employment as transactional (as opposed to long-term). While the unemployment rate remains at historic lows, it has trended upward recently, which could become worrisome.

The unemployment rate in October clocked in at 3.9%, quite low by historical standards but 0.5 percentage points higher than the low rate we saw earlier this year (3.4%).  Increases in the unemployment rate of at least 0.6 percentage points from a cyclical low have confirmed the onset of nearly every recession of the past 50 years, with only one false signal in 1959. Accordingly, the unemployment rate is now just 0.1 percentage points away from reaching this threshold, which would confirm the onset of a recession. The November monthly jobs report and the unemployment rate are scheduled to be released on Friday, December 8.

The Stock Markets: What? Me Worry?

Since the start of November, the S&P 500 Index has been up about 8.5%. The tech-heavy NASDAQ index is up about 10.8%.

Rocket-boosted by the Magnificent Seven tech stocks (Amazon, Apple, Google, Meta, Microsoft, Nvidia, and Tesla), the indexes would not be anywhere nearly as strong without them. While the combined seven stocks are up about 80% year-to-date, the other 493 stocks in the S&P 500 Index are flat. While historically, a handful of stocks “carry” the indexes, we usually see better performance from the rest, and we’re largely not seeing that. Lately, the rally is showing signs of slowly broadening out, which is a good sign going into year’s end.

If you look at the S&P 500 Index on an equal-weight basis (where each stock has an equal “vote,” as opposed to a weighted approach based on company size), the index would be up only 3.8% year-to-date. The Mid-cap 400 index is also up 3.8% year-to-date, and the Small Cap 600 is up 3.3%.

Since we’re in the 4th quarter of a pre-election year, the markets have two reasons to be seasonally positive. True to form, November has reclaimed most of the losses from August to October and looks poised to take out the July high in December. As long as the S&P 500 Index holds the 4400 level, things look good. Daily new high prices among stocks that outnumber new low prices are also encouraging and add to the rally’s strength.

My main concern is with the valuation of the Magnificent Seven Stocks. Compared with the Nifty Fifty Stocks in 1972 and the Tech bubble in 2000, these seven stocks are just as overvalued. Momentum trading combined with valuations this extreme can turn great companies into terrible investments, so buyers at these levels should beware. Should the drive to buy anything related to AI (Artificial Intelligence) cool off in 2024, these seven stocks will have a disproportionate effect on the indexes, driving down the markets quickly, especially since so many portfolio managers have piled into them as “safe havens.” I’m not saying to sell them now, but if you’re overexposed to them and have enjoyed the ride, it would be prudent to trim them at their current levels (this is not a recommendation to buy or sell.)

Recession Watch

A strong consumer, robust labor market, the housing wealth effect, and the lasting effects of a zero interest rate policy held in place too long have made 2023 recession callers look foolish (including me).

Underestimating the U.S. Consumer has always been a bad bet, especially when locked down for months, saving their stimulus checks and unspent wages and ultimately coming out of the gates splurging. While their savings are nearly depleted, I would not completely count them out just yet, and a recession in 2024 is definitely not a sure thing, although I still believe we will have one next year.

As discussed above, there are signs that the post-pandemic fiscal and monetary drugs are starting to wear off for the world’s economies, and a hangover might be on the horizon. Whether and when that hangover turns gross domestic product in a negative direction and, therefore, an economic recession, is anyone’s guess. I like what Bloomberg Points of Return writer John Authers wrote this week on that topic:

“…Having got this far, there’s now a pretty good chance the US can get through the next two years without a recession. But the odds still point more to a downturn. That explains the negativity in opinion polls and surveys of consumers, even if it completely fails to explain the enthusiasm among consumers when they go shopping. And then there’s the issue of stock market sentiment, which is utterly baffling.”

It would be understandable to read this post and think that things look grim and that it’s time to batten down the hatches and sell everything. It’s not. When it comes to discounting the future, the markets usually have it right (looking out 6-9 months), and we may just be experiencing some economic indigestion that will resolve itself, and the stock markets will challenge and exceed the all-time highs in 2024.

Election years are positive for a reason: the incumbents want to be re-elected, so you can’t underestimate the levers they can pull to keep the economy firing on all cylinders and postpone any recession until a later year. Never underestimate what determined politicians can do.

I would like to take this opportunity to wish your family and you a very happy holiday season.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client, an initial consultation is complimentary, and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so are your financial plan and investment objectives.

Source: InvesTech Research

Posted in American Economy, General, Stock Market. Tags: , , , , , . Leave a Comment »

What’s Going on in the Markets October 31, 2023

October 31, 2023 — Sam H. Fawaz

With so many global crosscurrents–another Middle East war, an uneven economy, stubborn inflation, and high interest rates, it’s no surprise that many will be happy to forget about October 2023. While nothing weighs as heavily as the horrific tragedies of the war in the Middle East, the stock markets saw their third consecutive down month after a terrific run up from the October 2022 bottom. Let’s look at what’s weighing on the markets and what might be ahead.

Stubborn Inflation

Over the past year, I’ve expected inflation to retreat from its historically high level. But I’ve also stated in past writings that inflation pressures would be more stubborn than many on Wall Street believed.

After easing to 3.0%, the Consumer Price Index (CPI) has increased for three consecutive months and is now at 3.7%. Furthermore, measures of underlying inflation have started to reaccelerate.

In the latest Personal Income and Outlays reports, inflation showed an unwillingness to continue its recent descent. On Friday, October 27, the Personal Consumption Expenditures (PCE) for September showed inflation up 0.3% monthly (3.7% annualized). The PCE is the Federal Reserve’s (AKA The Fed) preferred measure of inflation.

While both inflation numbers are much improved over the 5%+ rates we saw earlier this year and last, they are a far cry from the Federal Reserve’s 2% annual inflation target.

Sticky Price CPI, which measures prices that are slower to change, like medical care, education, and housing, has resumed its increase. The annualized 3-month rate of change has shot up from 3.4% in July to over 4.4% last month. This is one of its highest readings of the past three decades outside of the post-pandemic surge. This suggests The Fed may have trouble getting inflation back to its 2% target.

Inflation measures are important not only because they erode the buying power of our dollars but also because they affect consumer sentiment, and sentiment influences consumer spending. Unhappy or non-confident consumers spend less, and less consumer spending can lead to an economic recession (which does not help keep stock prices up.)

High Interest Rates

To control inflation, The Fed adjusts short-term interest rates to cool consumer and business spending. The thinking is that higher interest rates discourage borrowing, which leads to lower demand, and lower demand presumably tends to portend lower prices.

The Federal Reserve meets about every six weeks to decide whether it will raise, lower, or hold short-term interest rates, considering various economic reports and factors. The last time they met was in September when they held short-term interest rates at 5.0%-5.25%.

In a meeting that concludes on Wednesday, November 1, they are widely expected to continue holding rates at this level. Many will listen to Federal Reserve Chairman Jerome Powell’s comments to assess the prospect of future higher or lower short-term interest rates. I think they’re done hiking rates but won’t hint at any rate reductions, which Wall Street is looking for.

The good news is that higher interest rates mean that cash is no longer “trash.” You can earn a 4.5%-5.5%+ return on your money market savings, CDs, and bonds. The bad news is that higher interest rates mean lower bond prices and may lead to an unprecedented 3rd consecutive year of bond price declines (interest rates and bond prices are inversely correlated). In addition, higher interest rates on cash and bonds mean less of an urgency to take risks in the stock market, especially if one can get 5%-6% risk-free (no doubt that this sentiment has contributed to the pullback in the stock market over the last few months.)

Faltering Housing

Housing is one of the largest sources of wealth for consumers and a vital industry for the economy’s health.

New Home Sales increased in September as homebuilders offered price-cut incentives and mortgage rate buydowns to attract buyers. Pending Home Sales, which tracks unclosed transactions of existing homes, ticked up in September but remained at the third lowest reading in its history.

Like consumer and business sentiment, homebuilder confidence is a crucial indicator to follow. It takes the pulse of current attitudes and can be an excellent predictor of future housing activity. Despite its rebound in the first half of the year, the National Association of Home Builders (NAHB) Housing Market Index (Builder Confidence Survey) is again falling. Today’s low confidence levels indicate a much weaker outlook and reflect the effects of rapidly rising interest rates.

Today’s mortgage rates are at a 23-year high and heading toward 8.0%. This is a staggering increase of almost five percentage points since its record low in early 2021 and the second-quickest rise in history. The only faster increase in mortgage rates occurred in the early 1980s – a move only marginally steeper than today’s. Predictably, this has a significant impact on housing affordability.

Current multi-decade-high mortgage rates would be much more digestible to homebuyers if home prices weren’t still in a bubble. Unfortunately for them, prices have hardly budged. Home prices have surged by nearly 60% over the past five years, putting a significant strain on affordability. This problem has been exacerbated by rising mortgage rates, causing the average mortgage payment to increase by 134% since early 2018. And this doesn’t even include the increases in property taxes, insurance, repairs, maintenance, dues, etc. As a result, this is perhaps the most unaffordable time in U.S. history to buy a home.

Cooling Sentiment

Consumer and Business Sentiments are crucial to watch as their recent rebounds seem to be running out of steam. As mentioned above, consumer sentiment is essential to encourage spending and keep the economy “humming.” Small business sentiment is important because it encourages hiring, capital investments, and expansion. There are several surveys and measures of consumer and business sentiment, including widely followed surveys by the Conference Board and the University of Michigan.

October’s preliminary consumer sentiment readings plunged by more than forecast and were well below their 70-year average. Both Current Conditions and Future Expectations were down significantly. Inflation Expectations for the year ahead rose by 0.6 percentage points while expected business conditions for the next year dropped by 19%.

The latest and final October consumer sentiment readings from the University of Michigan finished October at 0.8 points higher than its preliminary reading yet is 4.1 points below September’s final reading. A significant reason for the decline in Consumer Sentiment this month was a rebound in consumers’ inflation expectations for the year ahead, which jumped from 3.2% to 4.2%.

The National Federation of Independent Businesses (NFIB) Small Business Optimism Index has been below its 49-year average for the last 21 months. Among small business owners, significant concerns remain regarding inflation, labor availability, and future economic conditions. As small businesses often need capital to grow, they are the most affected by high interest rates, and it is no surprise they are worried about the future.

I’m concerned about business and consumer sentiment because the readings I’m seeing have rarely occurred outside of an oncoming recession. Business owners are struggling, and there are signs that strong consumers are starting to tighten their belts.

Another Middle East War

As the horrific events in the Middle East continue to develop and command the attention of the world, economic issues may seem relatively unimportant. However, the Israel-Hamas conflict creates geopolitical risks with potential global economic consequences, and it may be helpful to consider early projections and analysis of how these consequences might unfold.

Any impact comes when the global economy is fragile, already strained by the ongoing Ukraine-Russia war, and facing challenges such as weak growth, economic fragmentation, high interest rates, and stubborn inflation.

On the other hand, the U.S. economy appears relatively strong by many measures, and the United States is the world’s largest oil producer and thus relatively insulated from small shifts in the global oil supply that usually occur during wartime.

While U.S. military support of Israel will add to expenditures that have already been increased by the Ukraine war, U.S. Treasury Secretary Janet Yellen has indicated that the United States can support both allies. Of course, that will lead to even more inflation, causing spending deficits.

Many U.S. technology companies have production or research and development facilities in Israel. However, work in those facilities is expected to continue except for employees called for reserve duty.

So far, the U.S. stock market reaction to the war has been relatively muted. Historically, wars outside U.S. borders tend not to create lasting trouble for the domestic stock market.

Clearly, it is still early, and the economic situation can change anytime. For now, while the Israel-Hamas conflict is a tragic humanitarian crisis, it is not a reason to change your personal financial or investing strategy.

Wobbling Stock Markets

October has been living up to its reputation for being a volatile month in the stock markets and closing down for the third consecutive month (-2.2%). The S&P 500 index is down over 9% from the peak in July 2023. However, we are entering a seasonally favorable time of year in the markets. November to December tend to be stronger months of the year, but as a pre-election year, it has even more favorable seasonality. Finally, when the market is so strong as it was through July, historically, it has also portended a nice finish to the year.

But given the headwinds just discussed, any year-end rally could fail to meet expectations or, worse, not materialize.

There is a continuing debate about whether the October 2022 lows ended the bear (down trending) market that started in January 2022. Some assert that a new bull (up-trending) market was born and that we are in the early innings of an upward trend, the start of a new bull market. Others assert that the bear market is intact, and all that we’ve witnessed since October 2022 was an extended bear market rally, which is now over. Only in the fullness of time can we know which camp is right.

The bears will point out that it is unprecedented to have a 10% correction in the first year of a bull market. It’s also unusual to see small capitalization stocks struggle so much in the early stages of a new bull market. In fact, the small caps are down for the year and are at risk of undercutting their October 2022 lows. Thus, the outsized correction and narrowness of the rally from the October 2022 bottom gives me food for thought and leaves me a bit skeptical that we’re in a new bull market.

Currently, on the surface, the S&P 500 is up about 9.2% year to date. But if you take away the seven strongest tech stocks in the index, AKA the Magnificent Seven (Apple, Amazon, Meta, Microsoft, Microsoft, Nvidia, Tesla), the index would be only up slightly on the year. In fact, if you look at the equal-weighted S&P 500 index (where each stock gets an equal “vote” rather than being weighted by size), it is down 4.1% year-to-date. Clearly, most stocks are not participating in the “new bull market.”

By all accounts, so far, third quarter 2023 corporate earnings are strong and beating expectations, though revenue growth is somewhat tepid. Much of the earnings growth comes from higher profit margins, meaning that cost savings are the primary driver of higher earnings, not strong and improving consumer demand.

Until seasonality asserts itself and strength re-emerges in the stock market, I believe caution and defensiveness are warranted for short-term investors. For long-term investors, this may be a time to pick some favorite positions you plan to keep for 3-5 years or longer. While this is not a recommendation to buy or sell any securities, this is when taking advantage of a stock market sale works in the long term. For our client portfolios, we remain hedged and recently slightly reduced our exposure to stocks, considering the risks discussed above.

Recession or No Recession?

When it comes to economic recessions, it’s a matter of when not if. So, while pundits continue to debate whether we’ll have a soft landing (no recession) or a hard landing (recession), they both might be right—just at different times.

The last recession we had in 2020, post-COVID, was short-lived thanks to the extraordinary fiscal and monetary stimulus unleashed on the economy back then. This, in my opinion, has contributed to the inflation hangover we’re now experiencing. Pass the aspirin, please!

In my opinion, despite a still strong job market and robust consumer spending to date, the weight of evidence points to several areas of gradual deterioration in the economy that will lead to a recession by mid-2024. Admittedly, I thought we’d be in a recession with much lower housing prices by now. But I obviously underestimated the strength and durability of the consumer with wallets full of cash and credit cards looking to spend after an awful and extended COVID lockdown. And I clearly did not anticipate how fast mortgage interest rates would rise, taking existing homeowners with low-interest-rate mortgages out of the housing market and making the supply of homes as tight as it is.

Today, we have a federal reserve intent on taming inflation, so interest rates will be higher for longer, which is not stock-market friendly. While many might not dump their existing stocks in this new high-interest rate environment, they might not be as willing to take on more risk in a world where 5%-6% returns come “risk-free.” And while a stock market buyer’s strike might not be as bad as all-out selling, it certainly doesn’t help stock prices rise to the level of a new bull market.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so are your financial plan and investment objectives.

Source: InvesTech Research

Posted in General. Leave a Comment »

Should the Government Shut Up or Shut Down?

September 28, 2023 — Sam H. Fawaz

As September ends, the U.S. government seems headed for a shutdown, which would begin on October 1st. Although it is possible that a last-minute agreement could keep the lights on, that becomes less likely with each passing day. With all the nonsense that comes from Washington, would we rather have our government shut up rather than shut down?

Regardless, here’s a look at the federal funding process, the current situation in Congress, and the potential consequences of a failure to fund government operations.

Twelve appropriations bills

The federal fiscal year begins on October 1, and under normal procedures, 12 appropriations bills for various government sectors should be passed by that date to fund activities ranging from defense and national park operations to food safety and salaries for federal employees.

These appropriations are considered discretionary spending, meaning that Congress has flexibility in setting the amounts.  Although discretionary spending is an ongoing source of conflict, it accounted for only 27% of federal spending in fiscal year (FY) 2023, and almost half of that was for defense, which is typically less of a point of conflict. Mandatory spending (including Social Security and Medicare), which is required by law, accounted for about 63%, and interest on the federal debt accounted for 10%.1

Obviously, it would be helpful for federal agencies to know their operating budgets in advance of the fiscal year, but all 12 appropriations bills have not been passed before October 1 since FY 1997. In 11 of the last 13 years, lawmakers have not passed a single spending bill in time.2 That is the situation as of September 27 this year (although, one bill, to fund military construction and the Department of Veterans Affairs, has been passed by the House but not the Senate.)3

Continuing resolutions and omnibus spending bills

To buy time for further budget negotiations, Congress typically passes a continuing resolution, which extends federal spending to a specific date, generally at or based on the same level as the previous year. These bills are essentially placeholders that keep the government open until full-year spending legislation is enacted. Since 1998, it has taken an average of almost four months after the beginning of the fiscal year for that year’s final spending bill to become law.4

Even with the extension provided by continuing resolutions, Congress seldom passes the 12 appropriations bills. Instead, they are often combined into massive omnibus spending bills that may include other provisions that do not affect funding.  For example, the SECURE 2.0 Act, which fundamentally changed the retirement savings rules, was included in the omnibus spending bill for FY 2023, passed in late December 2023, almost three months into the fiscal year.

Current Congressional situation

The U.S. Constitution gives the House of Representatives sole power to initiate revenue bills, so the House typically passes funding legislation and sends it to the Senate. There are often conflicts between the two bodies, especially when they are controlled by different parties, as they are now. These conflicts are typically settled through negotiations after a continuing resolution extends the budget process.

In a reversal of the typical process, the Senate acted first this year, releasing bipartisan legislation on September 26 that would maintain current funding through November 17 and provide additional funding for disaster relief and the war in Ukraine. Although this is likely to pass the Senate later in the week, it was unclear how the House would react to the legislation.5

Late on September 26, the House cleared four appropriation bills for debate (Agriculture, Defense, Homeland Security, and State Department). It is unknown whether these bills will pass the House, and if they do, it will likely be too late to negotiate the provisions with the Senate. A proposed continuing resolution that would extend government funding and include new provisions for border security had not been cleared for debate as of the afternoon of September 27.6

Effects of a shutdown

The effects of a government shutdown depend on its length, and fortunately, most are short. There have been 20 shutdowns since the current budget process began in the mid-1970s, with an average length of eight days. The longest by far was the most recent shutdown, which lasted 35 days in December 2018 and January 2019, and demonstrates some potential consequences of an extended closure.7 However, in 2018-19, five of the 12 spending bills had already passed before the shutdown — including large agencies like Defense, Education, and Health & Human Services — which helped limit the damage. The current impasse, with no appropriations passed, could lead to an even more painful situation.8

Here are some things that will not be affected: The mail will be delivered. Social Security checks will be mailed. Interest on U.S. Treasury bonds will be paid.9 However, some programs will stop immediately, including the Supplemental Nutrition Program for Women, Infants, and Children, which helps to provide food for about seven-million low-income mothers and children.10

Federal workers will not be paid. Workers considered “essential” will be required to work without pay, while others will be furloughed.  Lost wages will be reimbursed after funding is approved, but this does not help lower-paid employees who may be living paycheck to paycheck.11 In an extended shutdown, the greatest hardship would fall on lower-paid essential workers, which would include many military families. Furloughed workers would struggle as well, but they might look for other jobs, and in many states would be able to apply for unemployment benefits.12 Members of Congress, who are paid out of a permanent appropriation that does need renewal, would continue to be paid (shocked, aren’t you?).13

Air travel could be affected. In 2019, absenteeism more than tripled among Transportation Security Administration (TSA) workers, resulting in long lines, delays, and gate closures at some airports. According to the TSA, many workers took time off for financial reasons.14 Air traffic controllers, who are better paid, remained on the job without pay and without normal support staff. However, on January 25, 2019, an increase in absences by controllers temporarily shut down New York’s La Guardia airport and led to substantial delays at airports in Newark, Philadelphia, and Atlanta. This may have been the impetus to reopen the government later that day.15

Unlike federal employees, workers for government contractors are not guaranteed to be paid, and contractors often work side-by-side with federal employees in government agencies. In 2019, it was estimated that 1.2 million contract employees faced lost or delayed revenue of more than $200 million per day.16 A more widespread shutdown would put even more workers at risk.

While essential workers will maintain some federal services, furloughed workers would leave significant gaps. At this time, it’s unknown exactly how each agency will respond to a shutdown. In 2019, some national parks used alternate funding to maintain limited access, which caused problems with trash and vandalism and was deemed illegal by the Government Accounting Office. This year, all parks might be closed during an extended shutdown.17 Many other federal services may be delayed or suspended, ranging from food inspections to small business loans and economic reports.18 Delays in economic statistics could make it more difficult for the Federal Reserve to judge appropriate monetary policy.19

Although a shutdown would cause temporary hardship for workers and the citizens they serve, the long-term effect on the economy would be relatively benign, because lost payments are generally made up after spending is authorized. A shutdown might decrease gross domestic product (GDP) for the fourth quarter of 2023, but if the shutdown ends by the end of the year, GDP for the first quarter of 2024 would theoretically be increased. Even if delayed spending is recovered, however, lost productivity by furloughed workers will not be regained. And an extended shutdown could harm consumer and investor sentiment.20

Surprisingly, previous shutdowns generally have not hurt the broad stock market, other than short-term reactions. But the current market situation is delicate to begin with, and it is impossible to predict future market direction.21

For now, it’s wise to maintain a steady course in your own finances. Based on historical precedent, the shutdown is a non-event as far as your investment portfolio is concerned. But in the event of a shutdown, be sure to check the status of federal agencies and services that may affect you directly.

And the next time you see your favorite federal government politician, let them know you’d prefer them to shut up rather than shut down.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so are your financial plan and investment objectives.

Sources:

1) Congressional Budget Office, May 2023

2, 4, 8) Pew Research Center, September 13, 2023

3) Committee for a Responsible Federal Budget, September 27, 2023

5, 6, 9, 18, 19) The Wall Street Journal, September 26, 2023

7, 11) CNN, September 21, 2023

10) MarketWatch, September 26, 2023

12) afge.org, September 25, 2023 (American Federation of Government Employees)

13) CBS News, September 25, 2023

14) Associated Press, January 21, 2019

15) The Washington Post, January 25, 2019

16) Bloomberg, January 17, 2019

17) Bloomberg Government, September 12, 2023

20) Congressional Research Service, September 22, 2023

21) USA Today, September 26, 2023

Posted in American Economy, Financial Planning, General, Social Security Benefits. Leave a Comment »

Protecting Yourself from the Latest Cyber Scams

August 30, 2023 — Sam H. Fawaz

Technology is ever-changing, and so are cybercriminals’ strategies.

What can you do to help prevent yourself from falling victim to new and trending scams? Read on to stay up-to-date on the latest cyber threats and ways to avoid them. 

1. Vishing and Voice Clone scams

Vishing, known as “voice phishing,” is a tactic where scammers leverage automated, computer-generated voice messages to call people and build trust in an attempt to obtain personal information. 

Vishing attacks are becoming more sophisticated as emerging artificial intelligence (AI) tools allow scammers to create audio content that can clone the voices of friends and family members.

If an alleged friend or family member calls frantically asking for money, hang up and call the person directly. You could also create a “safe word” that only you and your close family know. Should you ever receive a desperate call, you can quickly verify the validity with the safe word.

2. Phone scams: Smishing, SIM Swapping and OTP Bots, Contest or Crypto scams

We rely on our smartphones for almost everything. Unfortunately, there are more than a few ways scammers can reach unsuspecting victims through their smartphones. 

Cybercriminals are always looking for new ways to go “phishing” for your personal information. When tried and true methods grow tired and easy to spot, they’ll often shift their approach. Their latest tactics? Text message and social media scams.

Smishing: Smishing, or SMS phishing, is when a scammer sends a text pretending to be from a legitimate company (i.e. USPS, FedEX, etc.) in order to get sensitive information like your credit card or social security number. The text also often has a link asking you to confirm information. If there are typos in the message or if you’re suspicious, never click on the link. 

Fast Fact: Smishing is on the rise, costing victims a significant amount of money. In 2021, consumers lost an estimated $131 million because of SMS phishing attacks.

You may be aware of the security risks involved with phishing scams and clicking unknown URLs in emails, but the dangers are less well known when it comes to texts. Don’t be inclined to trust a text message any more than you do an email. Unfortunately, it’s just the latest trick.

You also need to watch out for job hoaxes, deposit scams and tax fraud.

SIM swapping: Another way hackers can use your phone is by “SIM swapping”. It’s actually similar to the process of getting a new phone and SIM card from your provider. From there, the scammer can get access to multiple accounts by inputting a verification code or starting an account password reset.

Reach out to your mobile phone provider and ask about additional security measures to protect yourself from SIM swapping. 

One Time Password (OTP) bots: Another tactic scammers use is OTP bots, which trick people into sharing authentication codes received by text or email. You might receive a robocall or text from someone posing as a legit company like your bank. 

Remember, no legitimate company will contact you to ask for your username, password or full card number over the phone.

3. Student Loan Payment scams

Scammers can take advantage of those who owe student loans by posing as federal loan servicers or seemingly legitimate businesses. They call and email to offer solutions such as loan consolidation or lower monthly payments. 

As part of the application form to qualify for these services, they might ask for sensitive information like your Social Security number or banking information.

If you receive an unexpected phone call or email from someone who says they’re with your loan servicer, hang up and contact your servicer instead. 

With federal student loan payments resuming in October, student loan payment scams are on the rise. Therefore, I will have a more detailed write-up on student loan payment scams coming in September.

4. Social Media scams

Popular movies and streaming services often depict shocking social media schemes where cybercriminals scam millions from unsuspecting victims. These scams may seem obvious when viewing them on screen — giving you a feeling of immunity against these attacks. But, social media scams can be subtle and difficult to detect, despite becoming increasingly common.

Be extremely wary when people you’re connected to on social networks ask for money through instant message (IM) or email. Fraudsters have been known to hack social networks and assume the identity of real users, then send messages to their contacts stating the person has been robbed or is stranded somewhere and needs you to wire money in order to get home.

If you receive one of these requests, contact the person by phone and verify the request is real.

5. Investment, Contest or Crypto scams

Illegitimate contests, prizes and early investment opportunities are often at the center of crypto scams. They often target people who have already fallen for a crypto scam, so don’t let yourself be a repeat victim. They may offer you a refund if you pay an upfront fee or for access to your crypto wallet. 

If you hear about an investment opportunity that sounds too good to be true, it’s wise to think twice.

6. Digital Payment App scams

Third-party payment apps are convenient but beware of scammers when using them. While you can usually contest an illegitimate payment with your bank, it’s much more difficult to get a refund from a payment app.

Some common scenarios include accidentally overpaying, fake fraud alerts as well as phishing emails or texts. If you get a message that looks like it’s from a payment app, verify it by logging into your account through the app or website.

While it may be convenient, you should think twice before using payment apps while you’re connected to public Wi-Fi. These networks often have low security and may leave your personal information vulnerable to hackers and scammers. When you’re on the go, turn off both automatic Wi-Fi and Bluetooth connectivity on your phone to avoid automatically connecting to public Wi-Fi. 

7. Online Marketplace scams

Watch out for similar scams when selling or buying items through sites like Craigslist, Facebook Marketplace or eBay.

When you’re the seller, you might receive a fake payment receipt. Scammers may also overpay for an item you’re selling and then ask for a refund on that amount. When you send it, you may realize you never received their initial payment. Never ship the item until you have confirmation from your bank that payment has been received.

As a buyer, beware of bootlegs or broken items. If a deal seems too good to be true, it usually is. 

8. Work-from-Home scams

These typically start as an ad saying you can make big money working from home. Or maybe after posting your resume on a job search website, you’re contacted by an employer, who wants your driver’s license and bank account numbers before they even interview you.

What happens next? When you inquire about the job, the potential employer might ask for your sensitive personal information and subsequently swipe your identity and/or money.

9. Romance scams

In a romance scam, an unsuspecting person is tricked into believing they’re in a relationship with someone they met online — but in reality, it’s a con artist who often claims, conveniently, they can’t meet up IRL (in real life).

They’ll ask you to wire money for things like plane tickets, surgery or gambling debts. Their hope is that they can rely on the personal relationship they’ve built with you, though fraudulent, to guilt you into helping them in their time of need. 

If you’ve never met someone in real life, you should always view requests for payment and loans as potential red flags.

10. Suspicious “spoofing” Websites

Criminals create fake websites that look like real company websites in order to steal your personal information. Be cautious of links sent to you in emails. Phishing emails and smishing texts include links to these fake sites.

The best way to know that you are going to the real website is to type the URL directly in your browser or use favorites/bookmarks to access the website.

As a rule of thumb, look at the website address to be sure it starts with “https:” before entering personal information on a site. A green security status bar and padlock icon next to the web address are additional visual indicators that confirm you are on a secure site.

For additional protection, activate the additional web protection features of your anti-malware software such as Norton Cybersecurity.

Stay Active, Stay Safe

In addition to these scams, would-be cybercriminals also have more traditional tricks up their sleeves. Help keep yourself protected by remaining vigilant and remembering that if something sounds too good to be true, it usually is. By playing an active role in your safety and cybersecurity, you can stay ahead of even the craftiest of cybercriminals.

Also, don’t hesitate to report a suspected scam: 

  • If you suspect fraud, you can file a complaint with the Federal Trade Commission at reportfraud.ftc.gov.
  • To report suspected identity fraud, report it to identitytheft.gov and the social security administration at 800-269-0271.
  • For Online crime or cyber scams, you can report it to the Internet Crime Complaint Center (IC3) at ic3.gov or the Cybersecurity and Infrastructure Security Agency at cisa.gov/uscert/report. 
  • For Phishing scams, report it to the National Cybersecurity Communications and Integration Center (NCCIC) at us-cert.gov/report. 
  • For suspicious text messages, copy the message and forward it to 7726, a centralized spam reporting service among all wireless carriers. 

If you suspect fraud or your credentials are stolen or compromised, change your password(s) immediately. Changing your password regularly to a long and complicated password keeps you one step ahead of the cyber scammers.
 
Most of us become victims of cyber scams because of complacency or laziness. We don’t want to bother with a long or complicated password, we skip the privacy settings on social media sites, we fail to activate two-factor authentication, or we don’t double check our monthly statements and transactions.
 
Unfortunately, getting in the habit of doing all these things on a regular basis is the only way to protect ourselves from potentially expensive losses of money, time and sanity.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so are your financial plan and investment objectives.

Sources: FTC.gov, Ally Bank, consumerfinance.gov

Posted in Consumer Alert, Elder Care, Financial Planning, General, Identity Theft. Leave a Comment »

Is a Recession Looming?

July 31, 2023 — Sam H. Fawaz

With inflation falling, the housing market stabilizing, and consumer spending showing surprising resiliency in the face of rising interest rates, both Wall Street and Main Street are passionately embracing the outlook for an economic soft landing.

Despite enthusiastic buying in the stock market of late, some major recession warning flags have not disappeared, consumer financial stress is increasing, and the Federal Reserve has just increased short-term interest rates by another 0.25% to 5.25%, and signaled that they may not be done raising interest rates.

The question on everyone’s mind: is a recession looming?

To answer that question, with help and data from InvesTech Research, let’s look at both sides: the economic “soft-landing” camp and the “hard-landing” camp, and see if we can’t draw any conclusions using a weight-of-evidence approach.

Evidence Supporting a Soft Landing

Inflation is Coming Down: The Consumer Price Index (CPI) is leading the optimistic charge in the media, with reports of decreasing inflation over the last twelve months. Headline CPI fell from 4.0% to 3.0% in June on a year-over-year basis. While much of this decline was driven by cyclical factors like energy costs, it still increases the odds of a soft landing.

Contributing to the decrease in overall prices are both the manufacturing and services sectors. The services sector saw inflationary pressures subside starting in early 2022. The Institute for Supply Management Services Prices Paid Index has declined by 30.4 points from its all-time high in December 2021. It has been down for the last seven out of eight months and remains in expansion territory (for now). This, too, supports a possible soft landing.

With decreasing inflation comes decreasing inflation psychology. Recently, consumers have reduced their expectations of inflation over the next year significantly. This measure fell in June to 3.3%, its largest decline since 2008, while the longer-term 5-year expectations remain more firmly anchored at 3.0%.

Actual inflation partially depends on what consumers expect it to be. If consumers expect inflation to be lower next year, businesses will plan to price their goods or services accordingly. It’s likely that the expected inflation rate will continue its downtrend and make a soft landing more likely.

Parts of the economy remain surprisingly resilient: In addition to easing inflation pressures, persistent strength in parts of the economy also supports a potential soft landing. Specifically, the service sector appears to remain resilient.

Services: The Institute for Supply Management Services Index (Non-Manufacturing) remains solidly in expansion territory with a reading of 53.9 last month (any reading above 50 is considered expansionary) and only one month of contraction in the last decade (outside of the pandemic). With services accounting for over 75% of U.S. gross domestic product (GDP), the current Index levels show continued growth. While there is no guarantee this will be maintained, its recent strength provides recession-free hope.

Labor: The relentlessly tight labor market has remained a stronghold of the economy for the last few years. June’s Non-Farm Payrolls report showed 209,000 new jobs created, another banner month for this indicator. The monthly average of new jobs added since January 2022 is almost twice as high as it was during the same period in 2018-2019 prior to the pandemic. In addition, the unemployment rate is currently at 3.6%, just fractionally above its 50-year low. With job growth holding up so well, it doesn’t point to a recession, despite being a heavily revised figure.

Housing: The last bit of soft-landing evidence is one of its strongest – New Home Sales. Sales of new construction have rebounded sharply. New homes currently account for a near-record 29% of all homes for sale, while the historical average is less than half that at just 13%. This recent rebound is driven by a resurgence in enthusiastic buyer psychology, reflected in a rise in traffic of prospective buyers and a reluctance by existing homeowners to sell their homes because of: 1) their current ultra-low mortgage interest rates, 2) higher home replacement costs and 3) potential capital gains taxes on highly appreciated primary residences. Whether this increase is sustainable will be clearer in the coming months.

Evidence Supporting a Hard Landing

A recession may nonetheless be in the cards: While I’ve laid out the evidence in support of a soft landing, many significant indicators just don’t add up, and therefore a recession may still be in the cards.

Leading Economic Index (LEI): The most glaring evidence against a soft landing is the Conference Board’s LEI, which has fallen for 15 consecutive months. Declines of this magnitude have always corresponded to a hard landing, and when the LEI falls below its 18-month moving average, a recession almost invariably follows. Additionally, the LEI’s 6-month rate of change (ROC) is deeply negative, further solidifying this warning flag (red flags are when the 6-month ROC breaks through the zero level prior to a recession). The LEI is historically a reliable indicator, and it is not sending an optimistic signal.

Yield Spreads: Another indicator that is screaming hard landing is the Federal Reserve’s Yield Spread model, which measures the risk of recession in the next 12 months. It’s based on the difference between long-term and short-term Treasury bond yields and recently hit a 42-year high of 71% before retreating slightly to 67% in June. This highly dependable indicator has never reached this level without a resulting recession, although lead times can vary significantly.

Consumer Spending: Lastly, consumer spending has supported the economy for much of the last few years, bolstered by trillions of dollars in stimulus payments and other benefits. Excess savings and lockdowns have helped fuel this strength, though it may be starting to slow.

Within retail sales, “Same-Store Sales” measures growth in revenue from existing (not new) store locations.  Johnson Redbook’s latest Same-Store Sales year-over-year figure went negative, indicating fewer purchases compared to a year ago. If this continues to deteriorate, it implies consumers are spending less overall than before, and a recession becomes more probable.

The Federal Reserve’s (a.k.a. The Fed) job is far from over: A potential soft landing combined with some weak economic indicators is a conundrum that puts the Fed in a tight spot. In addition, while headed in the right direction, inflation is still well above the Fed’s 2% target.

Sticky inflation, which tracks items that change in price very slowly, has not come down as rapidly as overall measures. Sticky Price CPI from the Atlanta Fed has started to decline on a 12-month ROC basis but is still quite elevated, with the current reading at 5.8%.

The shorter, 3-month annualized ROC is much lower but still not close enough to the Fed’s target. It’s very likely that Sticky CPI will continue to decline, but the elusive 2.0% will take much longer to reach than the Fed would like.

Core PCE: Yet another, perhaps more important, inflation indicator is the Core Personal Consumption Expenditures (PCE) Price Index, which measures PCE excluding food and energy. This is the Fed’s preferred measure of inflation and remains at more than twice of the 2.0% inflation target. On Friday, the latest PCE measure came in at 4.1% YoY for June, declining from 4.6% in May.

Making the situation even worse, Core PCE has been flat for the past year and is falling very slowly. Even if it does start to trend lower, it will take quite a long time to reach the target level, putting pressure on the Fed to keep interest rates higher for longer.

Wage Growth: When it comes to inflation, one of the stickiest components is wage growth. The labor market remains tight, there are still more job openings than available employees, and wages continue to rise. The Atlanta Fed’s Wage Growth Tracker is off its all-time high, but at 5.6%, it is still far above its historical average. While increasing wages are beneficial for consumers, it’s a problem for the Fed as failure to control wage growth could risk another inflation surge.

Consumer Distress as a Potential Systemic Risk: Consumers amassed over $2 trillion in excess savings after the pandemic, primarily due to government support and lockdowns. This backlog of cash has helped smooth over many underlying problems in the economy.  After lockdowns ended, consumers spent as if they had unlimited funds. Tack on a decades-high level of inflation, and they’ve now burned through over 80% of their excess savings. Based on current trends, these savings will be completely exhausted by the end of this year. Once savings are depleted, some consumers will likely resort to what is now very expensive revolving debt.

And some already have. Despite the amassed excess savings in some households, consumers still took on more debt than ever after the pandemic. As a result, the combination of auto loans, credit card debt, student loans, and other debt is now at a record high – 72% higher than during the Great Financial Crisis.

Regarding student loan debt, the Consumer Financial Protection Bureau reported that half of borrowers whose payments are scheduled to restart soon have other debts that are at least 10% more expensive now than before the pandemic. If these trends persist, consumers may struggle to bring their savings back to pre-pandemic levels.

Those who have opened new credit cards in recent years or regularly carry credit card debt are quickly coming under more severe financial stress. Monetary tightening has driven average credit card interest rates to over 22% in May – the highest rate since the Federal Reserve began tracking the data in late 1994. Extremely high credit card interest rates combined with record consumer debt outstanding could prove to be an ominous combination.

Consumer spending is the ultimate driver of the economy, making up almost 70% of GDP. If consumers can no longer afford to spend, this systemic risk can become a reality.

The Weight of Evidence

While the evidence is compelling in both the economic soft-landing and the hard-landing camps, more upcoming near-term economic data will help tip the scale solidly into one of the camps.

While it’s easy to say that a recession is inevitable, one could make that statement anytime during our lifetimes. Indeed, it’s not a matter of whether we’ll have a recession because we will. It’s all about the “when” of the recession.

In my opinion, the weight of current evidence supports a recession starting within six months. To be honest, I personally thought we were already in a recession, but the economic data has not supported that opinion, which means I have been wrong so far.

Regardless, a continued deterioration in consumer spending, increasing debt levels, growing layoffs, and higher short-term interest rates will have a detrimental impact on consumer confidence, which constitutes a negative feedback loop that will lead to even further reduced consumer spending and increasing layoffs.

The next few months will be very revealing…. if not exciting!

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so are your financial plan and investment objectives.

Source: Investech Research

Posted in American Economy, Financial Planning, retirement planning, US Stock Market. Tags: , , , . Leave a Comment »

Is the Bull Market Really Ready to Charge?

June 30, 2023 — Sam H. Fawaz

On June 8, 2023, the S&P 500 index closed at 4,293.93, just over 20% higher than its lowest recent closing value of 3,577.03 reached on October 12, 2022.(1) According to a common definition of market cycles, this indicated that the benchmark index was officially in a bull market (uptrend) after a bear market (downtrend) that began in January 2022. By this definition, the current bull market began on October 13, 2022, the day after the bear market ended at its lowest point.

In more general terms, a bull market is an extended period of rising stock values. Bull markets tend to last longer than bear markets, and bull gains tend to be greater than bear losses. Since the end of World War II, the average bull market has lasted more than five years with a cumulative gain of 177%. By contrast, the average bear market has lasted about a year with a cumulative loss of 33%.(2)

Although a bull market is typically a time for celebration by investors, the current bull is being met cautiously, and it is unclear whether it will keep charging or shift into retreat. While it is impossible to predict market direction,  here are some factors to consider.

It’s important to understand that while a 20% rally off last October’s bottom technically qualifies as a new bull market by Wall Street standards, it does not signal clear sailing ahead.

Over the past 100 years, a dozen bear market rallies of 20% or more occurred in protracted long-term bear markets. Not so surprisingly, five of these occurred in the 1929-32 slide into the Great Depression. A not-so-humorous anecdote from that era was that seven months after the October 1929 Crash, the stock market had recovered over half of its loss, and exuberant confidence had returned to both Wall Street and Main Street.

“While the crash only took place six months ago, I am convinced we have now passed the worst, and with continued unity of effort we shall rapidly recover.” President Hoover – May 1, 1930

Yet the majority of the 1929-32 bear market still lay ahead.

Likewise, more recently, the 2000-02 bear market was interrupted by two very alluring back-to-back bear market rallies. One was +49%, that technically, by Wall Street standards– would have qualified for new bull market status.

It’s important to consider how long every major stock market bottom has taken to achieve the 20% status to qualify as a “new” bull market. Since 1932, the median length of time to reach a 20% “liftoff” has been 64 days.

Today’s bull market required a lengthy 164 trading days to reach a +20% gain. Instead of a V-shaped bottom from extreme oversold and undervalued levels, this has turned into a grueling struggle. Ironically, the longest period in the past 100 years was in the 1947 bull market (281 days), which peaked with only a +24.4% gain just one month after reaching the 20% level. Real bull markets charge forward and are not timid.

Still lagging behind the high

One reason the new bull might not seem convincing is that (as of late June) the S&P 500 remains well below the record bull market peak in early January 2022. (3) Investors who hold positions in the broader market are still looking at paper losses and could face real losses if they choose to sell, a situation that may not generate the kind of widespread confidence that often drives extended rallies.

The current bull market is already eight months old, and it’s unknown how much longer it might take to recover the total bear loss of about 25%, but recent history offers contrasting possibilities (remember, a 25% loss requires a 33% gain just to get back to even).

The last bull market regained the pandemic bear loss of 34% in five months and went on to a cumulative gain of 114%. The long bull market that followed the Great Recession of 2007-2009 took more than four years to recover an even steeper loss of 57%. But that bull kept charging and went on to a cumulative gain of 400%. (4–5)

A more pressing question is whether the recent surge could be a temporary bear market rally that quickly slips back into bear territory. This happened during the bear markets of 2000–2002 and 2007–2009. However, in 12 other “bear exits” since World War II, a gain of 20% from the most recent low was the beginning of a solid bull market. (6)

A narrow rally

Another key concern is that the current rally has been driven by large technology companies, which have posted big gains, due in part to excitement over the future of artificial intelligence. (7) The S&P 500  is a market-cap-weighted index, which means that companies with larger market capitalization (number of shares multiplied by share price) have an outsized effect on index performance.  As of May 31, the ten biggest companies, including eight technology companies, accounted for more than 30% of the index value. (8) Fewer than one out of four S&P 500 stocks have beaten the index in 2023, and nearly half have dropped in value. While it is not unusual for a relatively small number of companies to drive a rally, the current situation is more imbalanced than usual, and it remains to be seen whether exuberance for Big Tech will spread to the broader market. (9–10)

The market and the economy

While the stock market sometimes seems to have a mind of its own, it is anchored over the longer term to the U.S. economy, and the current economy continues to send mixed signals. The long-predicted recession has failed to materialize, and consumer spending and the job market remain strong. (11) On the other hand, inflation, while improving, is still too high for a healthy economy. Although the Fed paused its aggressive rate hikes in June — one reason for the market rally — a majority of Fed officials projected two more increases by the end of the year, and Fed Chair Jerome Powell confirmed the prospect of higher rates in Congressional testimony on June 21. (12)

Higher interest rates are intended to slow the economy and inflation by making it more expensive for consumers and businesses to borrow, which should slow consumer spending and business growth — and could send the economy into a recession. Although it may seem counterintuitive, bull markets usually begin during a recession, or to look at it another way, the market usually hits bottom while the economy is down and recovers along with the broader economy. Along the same lines, a bull market typically begins when the Fed is lowering interest rates to stimulate the economy, not when it’s raising them to slow it down. (13) The current bull will have to buck both of these trends to sustain momentum.  And if a recession does develop, it could turn the bull into a bear.

Corporate earnings

Although investor enthusiasm can carry the market a long way, corporate earnings are the most fundamental factor in market performance, and the earnings picture is also mixed. Earnings declined by 2%  in Q1 2023 — less of a loss than analysts expected but the second consecutive quarter of earnings declines. The slide is expected to continue with a 6.4% projected decrease in Q2, which would be the largest decline since the pandemic rocked the market in Q2 2020.  The good news is that earnings growth is expected to return in the second half of the year, with robust growth of 8.2% in Q4. However, as with the current market rally, the surge is projected to be driven by large technology companies. (14)

Clearly, this bull market faces serious headwinds, and it may be some time before its true character emerges. While market cycles are important, it’s generally not wise to overreact to short-term shifts, and it’s better to focus on a long-term investment strategy appropriate for your personal goals, time frame, and risk tolerance.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

Disclaimer: The return and principal value of stocks fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost. The S&P 500 index is an unmanaged group of securities that is considered to be representative of the U.S. stock market in general. The performance of an unmanaged index is not indicative of the performance of any specific investment. Individuals cannot invest directly in an index. Past performance is no guarantee of future results. Actual results will vary. Forecasts are based on current conditions, are subject to change, and may not come to pass.

1, 3–4, 8) S&P Dow Jones Indices, 2023

2, 5) Yardeni Research, October 28, 2022

6) MarketWatch, June 8, 2023

7, 9) CNN, June 9, 2023

10)  Associated Press, June 8, 2023

11) Fitch Ratings, June 8, 2023

12) CNBC, June 21, 2021

13)  Bloomberg, June 5, 2023

14) FactSet, June 9, 2023

Posted in General. Leave a Comment »

Working while Collecting Social Security Benefits Increases Lifetime Benefits

May 31, 2023 — Sam H. Fawaz

The rules governing working while collecting social security benefits are complicated and voluminous. Many people think they can’t work once they start collecting social security or they must return all benefits received. That’s simply not the case.

In some cases, you can earn unlimited income from work and keep 100% of your social security benefits. In other cases, you may have to re-pay some or all your social security benefits if you earn too much money.

In short, anyone can get Social Security retirement or survivors benefits and work at the same time. But, if you’re younger than full retirement age (see below), and earn more than certain amounts, your benefits will be reduced.

The amount that your benefits are reduced, however, isn’t truly lost. Your benefit will increase at your full retirement age to account for benefits withheld due to earlier earnings. Note that spouses and survivors who receive benefits because they care for children who are minors or have disabilities, don’t receive increased benefits at full retirement age if benefits were withheld because of work.
 
NOTE: Different rules apply if you receive Social Security disability benefits or Supplemental Security Income payments. If so, then you must report all earnings to the Social Security Administration (SSA). Also, different rules apply if you work outside the United States.
 
How much can you earn and still get benefits?
If you were born after January 1, 1960, then your full retirement age for retirement insurance benefits is 67.

If you work, and are at full retirement age or older, you keep all your benefits, no matter how much money you earn.

If you’re younger than full retirement age, there is a limit to how much you can earn and still receive full Social Security benefits.

  • If you’re younger than full retirement age during all of 2023, the SSA must deduct $1 from your benefits for each $2 you earn above $21,240.
  • If you reach full retirement age in 2023, the SSA will deduct $1 from your benefits for each $3 you earn above $56,520 until the month you reach full retirement age.

The following two examples show how the rules might affect you:

Example #1: Let’s say that you file for Social Security benefits at age 62 in January 2023 and your payment will be $600 per month ($7,200 for the year). During 2023, you plan to work and earn $23,920 ($2,680 above the $21,240 limit). The SSA would withhold $1,340 of your Social Security benefits ($1 for every $2 you earn over the limit). To do this, SSA would withhold all monthly benefit payments from January 2023 through March 2023 ($1,800 total). Beginning in April 2023, you would receive your full $600 benefit and this amount would be paid to you each month for the remainder of the year. In 2024, SSA would pay you the additional $460 ($1,800 minus $1,340) over-withheld in March 2023.

Example #2: Let’s say you aren’t yet at full retirement age at the beginning of the year but reach it in November 2023. You expect to earn $57,000 in the 10 months from January through October. During this period, SSA would withhold $160 ($1 for every $3 you earn above the $56,520 limit). To do this, SSA would withhold the full benefit payment for January 2023 ($600), your first check of the year. Beginning in February 2023, you would receive your $600 benefit, and this amount would be paid to you each month for the remainder of the year. In 2024, SSA would pay you the additional $440 over-withheld in January 2023.

NOTE: If you receive survivors’ benefits, SSA uses your full retirement age for retirement benefits when applying the annual earnings test (AET) for retirement or survivors’ benefits. Although the full retirement age for survivors’ benefits may be earlier, for AET purposes, SSA uses your full retirement age for retirement benefits. This rule applies even if you are not entitled to your own retirement benefits.

What Income Counts and When is it Counted?
If you work for an employer, only your wages count toward Social Security’s earnings limits. If you’re self-employed, only your net earnings from self-employment count. For the earnings limits, SSA doesn’t count income such as other government benefits, investment earnings, interest, pensions, annuities, and capital gains. However, SSA does count an employee’s contribution to a pension or retirement plan (i.e., 401(k) or 403(b) plan) if the contribution amount is included in the employee’s gross wages.

If you earn salary or wages, income counts when it’s earned, not when it’s paid. If you have income that you earned in one year, but the payment was made in the following year, it should be counted as earnings for the year you earned it, not the year paid to you. Some examples include year-end earnings paid in January, accumulated sick pay, vacation pay, or bonuses.
 
If you’re self-employed, income counts when you receive it, not when you earn it. This is not the case if it’s paid in a year after you become entitled to social security benefits but earned before you became entitled to benefits.

Special Rule for the First Year You Retire
Sometimes people who retire in mid-year have already earned more than the annual earnings limit. That’s why there is a special rule that applies to earnings for one year– usually the first year of retirement.
 
Under this rule, you can get a full Social Security check for any whole month you’re retired, regardless of your yearly earnings. In 2023, a person younger than full retirement age for the entire year is considered retired if monthly earnings are $1,770 or less (1/12th of the annual earnings limit).

Example: Someone retires at age 62 on October 30, 2023 and has earned $45,000 through October. He/she takes a part-time job beginning in November earning $500 per month. Although their earnings for the year substantially exceed the 2023 annual limit ($21,240), they will receive a full Social Security payment for November and December. This is because their earnings in those months are $1,770 or less, the monthly limit for people younger than full retirement age. If they earn more than $1,770 in either November or December, they won’t receive a benefit for that month. Beginning in 2024, only the annual limit will apply.
 
If you’re self-employed, SSA considers how much work you do in your business to determine whether you’re retired. One way is by looking at the amount of time that you spend working. In general, if you work more than 45 hours a month in a self-employment venture, you’re not retired. If you work less than 15 hours a month, you’re considered retired. If you work between 15 and 45 hours a month, you won’t be considered retired if it’s in a job that requires a lot of skill, or you’re managing a sizable business.

Should You Report Changes in Your Earnings?
SSA adjusts the amount of your Social Security benefits in 2023 based on what you told them you would earn in 2023. If you think your earnings for 2023 will be different from what you originally told the SSA, let them know right away.

If other family members get benefits based on your work, your earnings from work you do after you start getting retirement benefits could reduce their benefits, too. If your spouse and children get benefits as family members, however, earnings from their own work affect only their own benefits.

Will You Receive Higher Monthly Benefits Later if Benefits are Withheld Because of Work?
Yes, if some of your retirement benefits are withheld because of your earnings, your monthly benefit will increase starting at your full retirement age. This is to consider those months in which benefits were withheld.

Example: Let’s say you claim retirement benefits upon turning 62 in 2023, and your payment is $910 per month. Subsequently, you return to work and have 12 months of benefits withheld.

In that case, SSA would recalculate your benefit at your full retirement age of 67 and pay you $975 per month (in today’s dollars). Or maybe you earn so much between the ages of 62 and 67 that all benefits in those years are withheld. In that case, SSA would pay you $1,300 a month starting at age 67.

Are There Other Ways That Work Can Increase Your Benefits?
Yes. Each year the SSA reviews the records for all Social Security recipients who work. If your latest year of earnings turns out to be one of your highest years, the SSA refigures your benefit and pays you any increase due. This is an automatic process, and benefits are paid in December of the following year. For example, in December 2023, you should get an increase for your 2022 earnings if those earnings raised your benefit. The increase would be retroactive to January 2023.

The number of possible work and social security benefit scenarios are many and varied. If your situation is unique or complicated, it may be worth a call to your local social security office to find out how the rules affect your situation.

The bottom line is that working while receiving social security benefits may temporarily reduce your benefits, but may, in fact, increase your overall lifetime benefits. If you plan to claim social security benefits before your full retirement age, you should talk to your financial advisor or contact us for help.

If you would like to review your current investment portfolio or discuss any other financial planning or social security benefit matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so are your financial plan and investment objectives.

Source: SSA.gov, “How Work Affects Your Benefits”

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