Consumer Price Index

Raymond James Economy & Policy

Eugenio J. Alemán, Ph.D. - Chief Economist

October 13, 2022

Bottom Line:

This was an overall bad inflation report, as inflation was 0.4% during September compared to market expectations of a 0.2% reading. Although the year-over-year rate was slightly lower, at 8.2% in September versus 8.3% in August, the strength in core prices is not a good omen for inflation going forward and assures that the Federal Reserve (Fed) will increase the federal funds rate by 75 basis points during its November FOMC meeting.

 Summary:

The consumer price index (CPI) increased a more than expected 0.4% in September on a seasonally adjusted basis, according to the Bureau of Labor Statistics. Year-over-year, and not seasonally adjusted, the CPI increased 8.2%. Although energy prices declined by 2.1% during September, food prices increased by 0.8% with food at home inching up 0.7% and food away from home increasing 0.9%. Gasoline prices declined 4.7% during the month while the price of fuel oil declined 2.7%. Energy services prices increased 1.1% due to an increase of 0.4% in electricity prices and a 2.9% increase in natural gas prices. The all items less food and energy index increased a more than expected 0.6%, repeating the August increase and is up 6.6% compared to September of last year on a non-seasonally adjusted basis. The largest increase in the core services was allocated to shelter costs, up 0.7%, transportation services, up 1.9% and medical services, up 1.0%. Overall services prices less energy services increased 0.8%. Commodities less food and energy commodities were flat in September due to a 0.7% increase in new vehicles prices and a 1.1% decline in used cars and trucks.

 Observations:

This was an overall bad inflation report as inflation was pushed up by a strong increase in core services prices as well as strong food prices. This report will keep the Fed in a defensive position and will ensure an increase of 75 basis points in the federal funds rate during the November Federal Open Market Committee meeting.

This material is being provided for informational purposes only. Expressions of opinion are provided as of the date above and subject to change. Any information should not be deemed a recommendation. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the economy, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Past performance does not guarantee future results.

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Raymond James & Associates, Inc., member New York Stock Exchange/SIPC

Split Congress could be Goldilocks outcome for markets

ECONOMY & POLICY

October 11, 2022

A divided government result from the U.S. midterm elections would reduce the risk of significant tax adjustments and outsized budget battles, explains Washington Policy Analyst Ed Mills.

To read the full article, see the Investment Strategy Quarterly publication linked below.

Key takeaways

• In the midterms, Democrats are battling history and an unfavorable macro environment.

• There are signs that the floor is rising in terms of expected Democratic performance that could present resistance.

• Political support for the Biden Administration’s regulatory agenda and the ability of the White House to confirm candidates for top government posts rests with control of the Senate.

• Dobbs decision impacts key Senate races in terms of turnout, enthusiasm, and support from Democratic-leaning independent voters.

• The result of a split Congress following the midterm elections may be the Goldilocks outcome for the markets.

The political set up at the beginning of 2022 carried significant warning signs for Democrats with a political prognosis favoring the election of Republicans. Democrats, now holding the White House and both houses of Congress (five seats in the House and tied in the Senate), are not only battling history (the party controlling the White House has lost an average of 23 seats in the midterms over the last 40 years), but they are also battling a macro environment that traditionally is a political albatross for the party in power.

Polling shows near record levels of dissatisfaction with the direction of the country among voters, historically low approval ratings for President Biden, and inflation concerns are dominating headlines. Looking at the data, voters’ minds regarding midterm elections have traditionally been effectively made up around the spring of a midterm election year. In fact, presidential approval has not been shown to materially improve in the past 40 years from the spring into the fall of a midterm election.

However, while there are still significant structural factors that favor Republican candidates in this midterm cycle, we are seeing signals that the floor is rising in terms of expected Democratic performance that could present unexpected resistance for Republicans’ chances of significantly altering control of Washington.

Recent electoral surprises favoring Democrats in Kansas, New York, and Alaska highlight that the race is more fluid than many had expected at the start of this year. The traditional voter enthusiasm behind challengers is in part being matched by voters responding to the recent Supreme Court decision in Dobbs v. Jackson Women’s Health Organization. Additional factors motivating Democratic voters and Democratic-leaning independents include a string of high-profile legislative victories, including domestic technology manufacturing incentives and a finalized reconciliation bill that directs new funding toward clean energy production and extends healthcare coverage for many Americans. Further, the announcement of action on student debt relief will also be weighed as a motivating factor for younger voters.

In all, while we continue to expect that Democrats are likely to lose the House (and with it, their Congressional majority), prospects for Democrats retaining the Senate have materially improved into the fall. This will have important market impact in terms of the Biden administration’s regulatory agenda and confirmation ability for key posts if Democrats ultimately maintain or expand their Senate majority.

Favorable environment for Republicans, but don’t discount Democrats

The overall trend in national political factors has been one of a Democratic recovery relative to the national environment seen earlier this year. The increased prominence of social issues, sustained labor market recovery, and the potential peak of inflation (if the downward trend in domestic energy prices holds) alleviate some of the pressure that has capped Democrats’ prospects.

While we continue to see material Republican gains (most likely in the House), the likelihood is growing that the earlier forecasted “Red Wave” is dampened by a reinforced “Blue Wall,” particularly when it comes to improved chances for Democrats to hold the Senate. In effect, the result of a split Congress following the midterm elections may be the Goldilocks outcome for markets. With this setup, any further threat of significant tax adjustments will be off the table until 2025. Headline risk on budget/debt ceiling battles will also be less of a factor, as these fights are likely to stay within Congress and be resolved, rather than pit a unified Republican Congress against a Democratic White House.

While we view a scenario of Democrats controlling both the House and Senate in 2023 as the possibility with the lowest odds, this would also be the scenario that would drive an outsized market reaction. Legislative risk driven by tax increases as part of the Democratic reconciliation and social policy agenda is now largely viewed as a nonfactor by the market given the current political setup but would be poised for a resurgence on the off chance that Democrats overperform and maintain control of both chambers of Congress.

We caution that the electoral landscape will continue to be fluid up until the election, and that recent cycles have shown that “unprecedented” results cannot be fully discounted.

https://www.raymondjames.com/-/media/rj/common/investment-strategy-publications/investment-strategy-quarterly

* Transfer receipts are benefits received by persons for which no current services are performed. They are payments by government and business to individuals and non-profit institutions.

All expressions of opinion reflect the judgment of the author, the Investment Strategy Committee, or the Chief Investment Office and are subject to change. Past performance may not be indicative of future results. There is no assurance any of the trends mentioned will continue or forecasts will occur.

Reports: Solid Growth, Persistent Inflation

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

October 10, 2022

Recent economic reports further undermine the politically-motivated argument from earlier this year that the US was already in a recession. They also undercut the Fed’s hopes that inflation will soon subside.

On the job front, nonfarm payrolls rose 263,000 in September while the unemployment rate fell back to 3.5%, tying the lowest level since 1969. Payrolls are up at an average monthly pace of 420,000 so far this year – that isn’t a recession. And data show the share of voluntary job leavers (often called “quitters”) among the unemployed reached 15.9%, the highest since 1990. People don’t quit their jobs unless they have optimism about their job and earning prospects.

Meanwhile, the ISM Services index came in at a robust 56.7 for September. Yes, the ISM Manufacturing index declined to 50.9, but that’s still in expansion territory (north of 50) and the services portion of the economy is much larger than manufacturing. Auto sales remained softer than normal in September, but, at a 13.5 million annual rate, were the fastest since April.

Put it all together, and we are tracking a 3.0% real GDP growth rate in the third quarter. The Atlanta Fed’s GDPNow model is tracking 2.9%, almost exactly the same. Net exports look very good in Q3 and should account for most of the growth. Again, no recession, yet.

At the same time, inflation remains stubbornly high. The consensus forecast for this Thursday’s report on the Consumer Price Index (CPI) is that it grew by a relatively mild 0.2% in September. We would not be surprised by an increase of 0.2% but think the increase is more likely to be 0.3%.

But that’s for September, when oil prices were weaker. For October, the Cleveland Fed’s “inflation nowcast” is tracking an increase of 0.7% in the CPI. The Cleveland Fed also forecasts the “core” CPI, which excludes food and energy, will rise 0.5% in both September and October. In addition, the nowcast suggests PCE inflation will run 6.1% for 2022 (Q4/Q4) compared to the 5.4% the Federal Reserve projected less than three weeks ago.

If the Fed can keep the M2 measure of the money supply growing at the 1.5% annual rate that’s prevailed so far this year, we think inflation will eventually slow down. But that doesn’t mean it’s going to slow down as fast as the Fed thinks. Less than three weeks ago the Fed projected 2.8% PCE inflation in 2023. That seems like a political forecast, not a forecast based on economic reality and models.

Rents make up a large part of consumer inflation measures and still have a very long way to go to catch up to home price appreciation during COVID. They’re an even larger part of “core” inflation measures, which should outstrip broader inflation for the next year or so. Moreover, after falling below $80 a barrel a few weeks ago, West Texas Crude prices are now back above $90. Inflation data is not going to be pretty in the quarters ahead.

The bottom line is that the Fed isn’t going to stop or even slow rate hikes very soon. Expect another hike by three-quarters of a percentage point (75 basis points) in early November, followed by another half percentage point (or more!) in mid-December. Then, in 2023, look for rougher economic waters by year end.

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Make your files findable when you leave them to your heirs

Raymond James

ESTATE & GIVING

Living life and facing death can be liberating – and it doesn’t have to be hard.

Depending on the source, about half of Americans know they should have a will but don’t. And a National Library of Medicine study found that in 2017 only a third of us had completed end-of-life forms that outline our wishes for comfort and care during that final transition. Not surprising, maybe, since the process can be confusing and perhaps distressing when considering our own mortality. What may be surprising is the fact that the unpredictable pandemic may have shifted Americans’ attitudes toward codifying our wishes in a very practical sense.

The why

It seems, despite living through a once-in-a-century pandemic, our interest in actually completing the task still wavers. However, top of the list of benefits is peace of mind – saving cost, time and heartache. Doing the work to have everything in place means medical professionals will be guided by your voice, your loved ones won’t have to bear the burden of guessing what you would want, and you’ll know that your heirs will receive the accounts and assets that you intended for them. It may not make it easier to say goodbye but should make the aftermath a lot easier.

Another beautiful potential benefit, perhaps even the most important one? Quelling the potential for intra-family strife during an already stressful time. Proper planning could help protect sibling and family relationships, which can get ugly when it comes to medical and financial matters. Experts recommend making your wishes clear and communicating them well before your passing, particularly if you’re part of a blended family.

The what

You’ll want to put some strong safeguards in place. Ask your medical and financial professionals if you need any or all of these documents. Don’t be intimidated. You don’t have to codify everything at once, and many are fairly straightforward. The more emotional tasks like writing letters of love or an ethical will, which outlines your values, may actually be the hardest.

Financial power of attorney. Durable powers of attorney give someone permission to make decisions on your behalf – anything from communicating with your cable company to dealing with banking, real estate, business and legal matters.

POLST forms outline physician orders for life-sustaining treatment for those with serious conditions, indicating things like whether you’d like CPR, mechanical ventilation, feeding tubes or ICU treatment.

Medical power of attorney. Sometimes called a living will or advanced directive, this outlines medical treatments you want and those you don’t and authorizes a proxy to make decisions for you.

A last will and testament.

Beneficiary forms. For insurance policies, retirement accounts and some other assets, the beneficiary form prevails over the will.

A declaration of guardian appoints someone to look after your minor children.

A trust. In many states, a living trust can be used to transfer assets and personal property in an orderly and more private manner than a will and can even stipulate special provisions such as age-based distribution so young adults don’t inherit all at once.

The where and how

If you need help getting started, first get organized.

Discover what you already have. For example, you may already have a healthcare proxy. From there, make an appointment with an attorney who specializes in estate or elder care law to review what you have and help you fill any gaps. Include your financial advisor to ensure you’ve made a plan for all relevant assets.

You may want to also make an advanced care planning appointment with your doctor. Often this can be done remotely (two 30-minute appointments are covered by Medicare, as is advanced planning for a cognitively impaired patient). Be sure to ask so you’ll know what your financial liability may be.

Once gathered, store all relevant paperwork in one place. Some prefer a binder in a safe deposit box, but another secure way may be an online vault that allows you to grant differing levels of access to those you trust most. Just make sure your family members and righthand professionals know where to find these important documents and how to access them.

The who

Last, but certainly not least, make time to share your decisions with those they’ll affect. Talk to your loved ones about your healthcare and financial plans and preferences, where important documents live and how to access them. Your advisor can help you set up regular family meetings to address who inherits what and why, as well as other details. Of course, the most important thing is to take the time to tell your family just how much you love them.

Raymond James is not affiliated with any organizations mentioned. Raymond James does not provide legal services. Please discuss these matters with the appropriate professional.

Sources: vox.com; theatlantic.com; compassionandchoices.org; Centers for Disease Control and Prevention; Health Affairs; nytimes.com; time.com

No Recession, Yet

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

October 3, 2022

We are not “recession deniers,” we just don’t think one has started yet. The distortions of economic activity from lockdowns, massive deficit spending, and money printing are immense. It’s hard to imagine the US can unwind these policies and not have a recession.

Monetary policy, for example, is going to have to get tight and stay tight to bring down inflation and keep it there, so we don’t get into a stop-and-go cycle of inflation problems like we did back in the 1970s and early 1980s. And a monetary policy that gets tight enough and stays tight enough for long enough to achieve that goal is very likely to cause a recession. We’re just not there yet.

Initial jobless claims totaled only 193,000 in the week ending September 24, extremely low by historical standards, while continuing jobless claims are just 1.347 million. Industrial production is up at a 4.0% annual rate in the first eight months of the year. Gross Domestic Income (GDI) was positive in the first six months of 2022. These are just not recessionary numbers.

Meanwhile, we are projecting a 3.0% annualized growth rate for real GDP in the third quarter. Hurricane Ian should have a temporary negative effect, but it hit so late in Q3 that its impact on GDP data should be minor.

Yes, the goods sector of the US economy has seen better days. Some companies in the goods sector, like Peloton and CarMax, have gotten hammered because they seemed to project forward COVID-like economic conditions forever, including lockdowns. Or, maybe they just had business models whose problems could be better hidden when the federal government was passing around stimulus checks like candy. That was unwise and these companies are paying for it now as the balance between goods and services returns toward normal.

It should be no wonder the US is not in recession yet. Until two weeks ago, the Federal Reserve hadn’t raised short-term rates above the 2.5% level it thinks is the long run average. Even at current levels, short-term rates are still well below inflation.

Yes, growth in the M2 measure of the money supply slowed sharply starting in February but as Milton Friedman taught us (unlike those at the Fed who are still ignoring his lessons), the link between growth in the money supply and inflation is long and variable.

In addition, there are reasons to question whether the slowdown in M2 money growth means tight money. The Treasury now holds a very large balance in its checking account at the Fed – The “Treasury General Account.” So far in 2022, the Fed has collected roughly $480 billion in taxes or bond sales that it deposited at the Fed and did not spend. This subtracts from M2, at least temporarily.

Why the Treasury needs such a large amount of cash sitting around is a mystery. Especially when it has a massive structural annual budget deficit. As a result, we believe this can’t continue, and so it remains to be seen whether the slowdown in the growth of M2 will persist.

In the meantime, rate hikes, which have already impacted the housing market will likely cause a recession by the second half of next year, with some probability of it starting early next year and some probability it starts as late as 2024. There is more economic pain to come; in certain areas, like the labor market, the pain is almost completely in front of us, not behind.

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Stocks tumble 10% in September; recession approaching?

Raymond James

MARKETS & INVESTING

October 03, 2022

The S&P 500, NASDAQ and Dow have all fallen more than 20% from their year-end levels.

Inflation remains persistent. To fight it, the Federal Reserve (the Fed) indicated it would need to raise rates higher than originally expected for longer, sending shocks through the market. As in previous months, these events drove the market’s major currents in September as investors concluded that a deeper recession in 2023 may be the necessary antidote to inflation.

As a result, the S&P 500 recorded a 9.34% loss for the month, in line with the other major indices.

Recession is a word that evokes a lot of dread, especially if one uses 2020 or 2008 as their recessional archetype, and not 2001 or 1990. But while we believe that we can expect more months of volatility, and more sequels in this continuing market storyline to come, we think a 2023 recession should be relatively mild, historically speaking, as the labor market remains strong and consumer confidence edges up with slowly abating prices.

This from Raymond James Chief Investment Officer Larry Adam:

“It is understandable that investors are growing weary due to the difficulties and unforeseen events experienced this year. And during these times of uncertainty, it can be difficult to imagine anything but the worst-case scenario unfolding. While our outlook for the next 12 months isn’t without challenges, we do not think a severe economic downturn and continued weakness for the major asset classes is what’s to come.”

Returning to September, the Fed raised its baseline interest rate by 75 basis points and the expectation is that it will follow up with an additional 100 basis points by the end of the year, 100 basis points higher than was generally expected. While the impact of this could be seen throughout the economy, the real estate sector showed its particular vulnerability to higher interest rates as residential housing investments took a large step back. Interest rates on 30-year mortgages now exceed 6.5% for the first time since 2008.

All this said, the U.S. is well-positioned compared to much of the world. Let’s explore that after we review the numbers.

The powerful buck

The euro, pound and yen have significantly depreciated against the strength of the U.S. dollar, causing issues for international energy buyers of dollar-priced commodities like oil. Japan intervened in the currency markets to prop up the yen, a strategy not seen since the Asian financial crisis of 1997. Domestically, a strong dollar makes imports cheaper, which helps with inflation, but likewise hinders the affordability of our exports and can paint a more complex picture for global firms based in the U.S.

Crossed strategies in Britain

The United Kingdom confirmed Liz Truss as its new prime minister, its fourth in 12 years. In her first weeks, she faced the pound falling to a new record low and a sharp increase in the cost of sovereign debt – seen as a response to the nation’s high-risk, growth-focused strategy of tax cuts and subsidies, counter to the Bank of England’s actions to put a lid on inflation.

Gas for now. Gas for later?

Since the start of the Russia-Ukraine war, there have been questions about Europe’s capacity to import enough gas to make it through the heating season. Evidence points to yes, though the larger question of energy security and diversification remains open and pressing. Still, the avoidance of a once-looming worst-case scenario is a reason for relief.

Income buyers’ window

The Fed’s transparency has provided a window of opportunity for income investment buyers, with investment-grade corporate and municipal yields significantly up in September and exceeding 5%. Treasuries also remain compelling options, with yields up across the curve.

Equity opportunities

We can expect more discomfort in the months to come, and recession remains a high possibility, but broad declines across the market inherently create opportunities for buyers to pick up high-quality stocks at discounted prices. Though the bottom is uncertain, the upswing on the other side of a recession historically tends to leave room for gain in the years that follow.

The bottom line

There’s no denying the markets are an uncomfortable place to be these days. Global-scale events, war, supply chain weakness – it’s a situation that requires the sterner stuff of a long-term, risk-adjusted investor. In the enthusiasm of a bull market, it can be hard to see the value of more prudent approaches. These are the moments that make their value clear.

If you have any questions, please do not hesitate to reach out to your financial advisor.

Investing involves risk, and investors may incur a profit or a loss. All expressions of opinion reflect the judgment of the authors and are subject to change. There is no assurance the trends mentioned will continue or that the forecasts discussed will be realized. Past performance may not be indicative of future results. Economic and market conditions are subject to change. The Dow Jones Industrial Average is an unmanaged index of 30 widely held stocks. The NASDAQ Composite Index is an unmanaged index of all common stocks listed on the NASDAQ National Stock Market. The S&P 500 is an unmanaged index of 500 widely held stocks. The MSCI EAFE (Europe, Australia, Far East) index is an unmanaged index that is generally considered representative of the international stock market. The Russell 2000 is an unmanaged index of small-cap securities. The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. An investment cannot be made in these indexes. The performance mentioned does not include fees and charges, which would reduce an investor’s returns. Bond prices and yields are subject to change based upon market conditions and availability. If bonds are sold prior to maturity, you may receive more or less than your initial investment. Holding bonds to term allows redemption at par value. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices generally rise. Investing in the energy sector involves special risks, including the potential adverse effects of state and federal regulation, and may not be suitable for all investors. Investing in commodities is generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising. International investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility.

Understanding the Fed (or at Least Trying!)

Thoughts of the Week

Eugenio J. Aleman, PhD, Chief Economist

Giampiero Fuentes, CFP, Economist

Over history, it has not been easy for markets to understand the Federal Reserve (Fed) or how the Fed understands its role, even if its two most important mandates, which are very clear, are price stability and low unemployment. At some point in time, during the tenure of Alan Greenspan, the communications from the Fed were so convoluted that analysts/economists would call Fed communications ‘Fed-speak,’ which basically meant that they could not understand a word of what Mr. Greenspan was saying!

However, today is different. The Fed has gotten much better at communicating what its thoughts are today and going forward. The only problem is that the Fed is like the family doctor: you call the doctor because you feel bad, and the doctor prescribes a very nasty medicine and says that you must take it all during the next several weeks.

Today, markets have been calling the doctor because they have an inflation problem. However, the medicine the doctors are recommending is too nasty to take, let alone do it for the next several months or even quarters.

We don’t think markets were surprised by the 75 basis point increase in the federal funds rate decided after the September Federal Open Market Committee (FOMC) meeting earlier this week. The Fed chairman, Jerome Powell and other members have been filling the airways with a more certain view of the path ahead. What happened after the FOMC meeting this week was that the Fed put a price or, as many would say today, ‘monetized,’ what Fed officials have been saying since the Jackson Hole meeting.

And markets did not like this monetization because it means higher interest rates for a longer period and probably a deeper recession than what they had already priced in.

On Deflation, Inflation, Stagflation, and Disinflation

But let’s try to understand why the Fed seems to have changed its mind about the need to move higher and stay higher for longer. First, it believes, and markets have made it clear, that it was behind the curve by not acting immediately to curb inflation after the inflation monster reared its ugly head. However, for an institution that has been fighting deflation for several decades, this is a ‘peccadillo’ that should have been pardoned already, but markets keep blaming the Fed for not acting on it.

Second, it has been hearing some analysts/economists throwing the word ‘stagflation’ out without any regard for the insurmountable differences that exist today compared to the 1960s, 70s, and 80s (See our Weekly Economics for June 10, 2022). If the Fed had bad policies that tended to perpetuate higher inflation for longer, what do we say about the bad, bad, even atrocious (political) policies pushed during the 1970s that worsened the effects of inflation and created a perfect storm for stagflation to take hold? Not saying that some of today’s policies are great, but nothing compared to what was happening then.

Having said this, the Fed is nevertheless concerned that if it does not act forcefully to control inflation today, high inflation will become the norm and inflation expectations will become entrenched at a higher level. So far, this is not happening, as shown by the different measures of inflation expectations, but it has become highly risk-averse regarding inflation.

Thus, the Fed doesn’t want to risk it and be accused of being soft on inflation as was the case with its colleagues of the stagflation period. That is, Powell and company don’t want to act as the Fed did during the 1960s, 70s, and early 80s and allow inflation to get the upper hand. It just wants markets to take the medicine in full rather than allow the ‘infection,’ i.e., inflation, to come back again and with greater force. And you cannot blame it for not wanting to be compared to those folks.

Third, the Fed, as well as many analysts/economists, were expecting inflation to start turning the corner at the end of the first quarter of this year (yes, this was the ‘transitory’ argument) but a new and unexpected external shock changed the timing for inflation to start coming down: the Russia/Ukraine war. Thus, the Fed doesn’t want another potential external shock to further undermine its inflation fighting credibility and has decided that this time around, it is not waiting for things to happen on their own, and it is ok with increasing interest rates further and pushing the US economy into a recession.

Fourth, because of all this, the Fed is expecting inflation to come down at a slower pace than what it was expecting before through a process that is called disinflation. And it is betting the house on its success. This is the reason why the strategy has changed to ‘higher for longer.’ The Fed has put out its worst-case scenario, something that should be music to the markets’ ears.

For the markets, this should be good news even if it is very difficult to see it at this point. Since this is the worst-case scenario for the Fed, any ‘better-than-expected’ news in the inflation front should be a boon for markets

NAHB Housing Index: The NAHB/WF Housing Market Index continued to decline in September, which is another clear indication of the impact of higher mortgage interest rates on sales of single-family homes. Additionally, we expect the other housing market releases this week (housing starts, existing home sales, and building permits) will show similar weakness. Bad news continues to be good news for the Fed, as it indicates its tightening cycle is working to slow demand. The NAHB/WF Housing Market Index dropped further in September to 46 from a reading of 49 in August, while consensus was expecting a reading of 48. This was the ninth consecutive monthly decline in the index, taking it further below the all-important 50 break-even level, suggesting additional deterioration in the US housing market. The index for current single-family sales remained above the 50-demarcation point, at 54, but the index for single-family homes in the next six months dropped to 46 compared to 47 in August. Similarly, prospective buyer traffic continued to shrink to a level of 31. Most of these indicators are hovering around their lowest levels since 2014 if we take out the decline induced by the COVID-19 pandemic in 2020. The only region that remained barely above the 50-demarcation point continues to be the South, with a reading of 52. Furthermore, the Northeast reported a reading of 48 compared to 49 in August, while the Midwest remained unchanged at 42, and the West dropped even further in September to 34. With mortgage rates continuing to increase and the NAHB/WF Housing Market Index remaining below the 50-demarcation level between expansion and contraction, the housing market is slowing down and is likely to continue to do so. Although the current single-family index for sales remained above 50, the forward-looking part of the index showed very weak expectations going forward.

Housing Starts & Building Permits: Housing starts bounced back in August after plunging in July, recovering to the June 2022 levels. While both segments (single family and five or more units) increased, multi-family housing led the charge as higher mortgage rates and rents are increasing demand for more affordable housing. On the other hand, building permits experienced the largest decline since the pandemic began in March 2020, reaching their lowest level since June 2020. Overall, tighter monetary policies continue to negatively impact the housing market and are making home ownership unaffordable to many. Housing starts in August increased to a seasonally adjusted annual rate of 1.575 million or a 12.2% increase compared to the revised July estimate of 1.404 million, according to the US Census Bureau and the US Department of Housing and Urban Development. This represents approximately the same level reported in August of last year. Single-family housing starts were 935,000 in August or 3.4% higher than the 904,000 million reported for July. On the other hand, building permits declined 10% in August, down to 1.517 million from 1.685 million in July. Compared to August 2021, building permits are down 14.4%. Single-family building permits were 899,000 in August, or 3.5% below the revised July level of 932,000. Building permits of five or more units were 571,000 in August, compared to 701,000 in July. Housing completions were at a seasonally adjusted annual rate of 1.342 million or 5.4% below the July revised estimate of 1.419 million, and 3.1% above the August 2021 rate of 1.302 million. With the average 30-year mortgage rate exceeding 6%, both builder sentiment (as shown in yesterday’s NAHB/WF release) and buyers’ ability to afford single-family homes continued to decline. Looking ahead, as the Fed continues to raise rates to tame inflation, the housing market is likely to get gloomier.

Existing Home Sales: Existing home sales continued to decline in August both on a month-over-month basis as well as compared to last year. Home prices for existing home sales were down compared to July but they are still positive year-over-year. Meanwhile, the supply of homes held steady, at 3.0 months, in August and on a seasonally adjusted basis. Existing home sales decreased by 0.4% in August, to a seasonally adjusted annual rate of 4.80 million according to the National Association of Realtors. Compared to August of last year, existing home sales declined 19.9%. The decline in existing home sales in August was less than what consensus was expecting. The median sales price of existing home sales was $389,500 in August, down from a median sale price of $399,200 in July. Home prices were up 7.7% versus August of last year for the US as a whole. Regionally, they were up 1.5% in the Northeast, 6.6% in the Midwest, 12.4% in the South, and 7.1% in the West, all compared to the same month a year earlier. Although existing home sales were stronger than the consensus expected in August, they were still down compared to July while the median price of existing homes continued to decline, a clear signal that the housing market continued to weaken in August.

Initial Jobless Claims: This was the first increase in jobless claims in several months, but claims remain at non-recessionary levels. This means that the labor market is still strong and higher interest rates are still not having the effects the Federal Reserve has been looking for. Initial jobless claims increased by 5,000 during the week ending on September 17, to a level of 213,000, according to the Department of Labor. This was the first increase in initial jobless claims since early August. However, the four-week moving average was still down, by 6,000 from the previous week, at 216,750. Meanwhile, the advanced seasonally adjusted insured unemployment rate was 1.0% for the week ending September 10 and unchanged from the previous week. There was no state reporting an increase of more than 1,000 claims during the week ended on September 10, 2022, while there were six states reporting a decline in claims of more than 1,000. The states were CA with 3,064 less claims but no sectoral comments; NY, with 2,905 fewer layoffs in the transportation and warehousing, health care and social assistance, and real state and rental and leasing industries; TX, with 2,493 less claims but no sector comment; OK with 1,729 less claims but no comments on the sectors affected; PA with 1,355 less claims in the transportation and warehousing, accommodation and food services, construction, and health care and social assistance industries; and GA with 1,337 less claims in the administrative and support and waste management and remediation services, transportation and warehousing, professional, scientific and technical services, and health care and social assistance industries.

Leading Economic Index: The Leading Economic Index (LEI) continued to point to a weakening US economy in August. We should continue to see weakness in the LEI in the coming months as higher interest rates continue to weigh on the strength of the US labor market. The Conference Board Leading Economic Index declined 0.3% in August, to 116.2, after posting a decline of 0.4% in July. This was the sixth consecutive monthly decline for the index and the Conference Board projects a recession in the coming quarters. This is because of the Federal Reserve’s (Fed) rapid tightening of monetary policy, which ultimately will have an impact on the labor market, as suggested by a Senior Director at the Conference Board: “Labor market strength is expected to continue moderating in the months ahead. Indeed, the average workweek in manufacturing contracted in four of the last six months—a notable sign, as firms reduce hours before reducing their workforce.” The Fed’s hawkish tone at the Federal Open Market Committee meeting on September 21 indicated that interest rates will be higher for longer, with a forecasted federal funds rate at ~4.5% by the end of the year. This LEI reading just confirms our view of a weakening economic environment in the US, and, with the Fed now expected to hike rates into restrictive territory, the US economy is likely to enter a recession in the next quarters.

DISCLOSURES Economic and market conditions are subject to change. Opinions are those of Investment Strategy and not necessarily those Raymond James and are subject to change without notice the information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. There is no assurance any of the trends mentioned will continue or forecasts will occur last performance may not be indicative of future results. Consumer Price Index is a measure of inflation compiled by the US Bureau of Labor Studies. Currencies investing are generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising. Consumer Sentiment is a consumer confidence index published monthly by the University of Michigan. The index is normalized to have a value of 100 in the first quarter of 1966. Each month at least 500 telephone interviews are conducted of a contiguous United States sample. Personal Consumption Expenditures Price Index (PCE): The PCE is a measure of the prices that people living in the United States, or those buying on their behalf, pay for goods and services. The change in the PCE price index is known for capturing inflation (or deflation) across a wide range of consumer expenses and reflecting changes in consumer behavior. Consumer confidence index is an economic indicator published by various organizations in several countries. In simple terms, increased consumer confidence indicates economic growth in which consumers are spending money, indicating higher consumption. The Consumer Confidence Index (CCI) is a survey, administered by The Conference Board, that measures how optimistic or pessimistic consumers are regarding their expected financial situation. Leading Economic Indicators: The Conference Board Leading Economic Index is an American economic leading indicator intended to forecast future economic activity. It is calculated by The Conference Board, a non-governmental organization, which determines the value of the index from the values of ten key variables Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements. Source: FactSet, data as of 9/23/2022

More Trouble Ahead

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

September 26, 2022

We had been bullish on stocks all the way back to March 2009, when mark-to market accounting was fixed and the Financial Panic started to recede. At that time the S&P 500 traded as low as 677. What a time to buy!

After that we remained bullish. We didn’t recommend selling in spite of a wide range of fears that spooked many others, including the Great Recession lasting through 2010, a double-dip recession, a second wave of home foreclosures, an implosion in commercial real estate, the passage of Obamacare, a Greek debt default, a potential breakup of the Eurozone, the Fiscal Cliff, Brexit, or the election of President Trump. While others bailed out way too early on the bull, we kept riding.

We rode it so long that some called us “perma-bulls.” But as we looked at low interest rates and healthy profits, we didn’t see any other choice.

Then in June we announced we were bullish no more. In particular, we said “we don’t expect the S&P 500 to hit a new all-time high, above the old high of 4,797, anytime soon.” Instead, until one of our two scenarios plays out – a recession or the realization the Fed has pulled off a soft-landing – US equities are likely to be in a trading range with potential bear market rallies that come and go.”

We still expect the much more likely scenario is that a recession will arrive sometime in 2023 (possibly early 2024) and that stocks will remain in a bear market until the recession hits. Why a recession? Because the Federal Reserve will have to get tight enough to reduce inflation toward its target and a monetary policy that’s tight enough to control inflation is going to send the economy into a recession.

Back in June we said that stocks could easily rally from then-current levels, when the S&P 500 was at 3675, but that such a rally wouldn’t last. After that the S&P rallied up to a closing high of 4305 in mid-August before dropping to 3693 at Friday’s close. Don’t be surprised by other bear-market rallies, which will also fade.

As always, we used our Capitalized Profits Model to assess fair value for the stock market. The model starts with the government’s measure of economy-wide corporate profits and uses the yield on the 10-year Treasury Note to discount those profits.

The yield on the 10-year Treasury Note finished last week right around 3.70%, which, when plugged into our model, suggests fair value for the S&P 500 is about 3600. That would be a 2.5% decline versus the Friday close.

But long-term yields may go higher from here. With a 4.00% yield on the 10-year Treasury, the model says fair value on the S&P is about 3325, which would be a 10% drop versus Friday’s close. And even if long-term yields don’t go higher from here, approaching and entering a recession is highly likely to eventually cut corporate profits. Either way, there are reasons to expect we haven’t seen the bottom yet for stocks.

A couple of things to keep in mind. If you’re a very long-term investor who doesn’t want to time the market, none of this discussion matters much. Just maintain your normal allocation to stocks and don’t be shy about continuing to buy stocks at your normal intervals. That way you’ll be buying at low stock prices, too, and stocks should be worth substantially more when you’re spending down assets in the far away future.

However, those investors willing to take some risk on timing the market should consider that the future year or so probably includes better entry points for broad stock indexes than today’s levels.

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The S&P 500 is an unmanaged index of 500 widely held stocks that's generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary.

High Frequency Data Tracker

First Trust Economics

Brian S. Wesbury - Chief Economist

September 23, 2022

We live in unprecedented times. The recession in 2020 was not so much a recession as it was a lockdown. Using “normal words” to describe the economy in the last 2 years, we believe, does not make sense. Now with two consecutive quarters of declining real GDP, many are saying we are back in a recession. The charts in the High Frequency Data Tracker follow data that are published either weekly or daily, providing a good real-time look at where the economy stands. As of now we believe these measures, along with other monthly economic data coming in, show we are not in a recession.

To view more important information regarding this click on the link below!

https://www.ftportfolios.com/Commentary/EconomicResearch/2022/9/23/high-frequency-data-tracker-9232022

Over Time, Markets Have Proved Positive and Resilient

Raymond James

Markets & Investing

When markets react, consider a broader historical perspective before changing your financial course.

Market volatility can often trigger emotional responses in investors, responses that can impact judgement and potentially affect long-term plans.

These periods of volatility are an opportunity to connect with your advisor, enabling them to act as a sounding board for your concerns. By talking about current events in light of your overall financial plan, your advisor can provide reassuring perspective to help you stay the course or readjust if needed.

Pullbacks throughout history

Pullbacks can make you want to pull up stakes and run – a reaction that’s often a mistake, especially for long-term investors. The right knowledge and historical perspective can help us avoid making investment decisions based on emotion rather than strategy.

By looking at the market over a long period of time, we’re provided with a true testament of resiliency. Each decline along the way felt terrible, and declines today feel just as uncomfortable. But when we track the overall growth the market has achieved, it’s clear that there are benefits to persistence, patience and commitment.

Remember:

• The stock market is cyclical.

• You will likely encounter numerous pullbacks and/or corrections as a long-term investor.

• A study of the stock market shows its resilience.

• In the long run, the upturns have always been stronger than the downturns.

Stocks overcome bumps in the road
Growth of $10,000 in the S&P 500

Source: Morningstar. This chart is for illustrative purposes only. This analysis does not include transaction costs, which could reduce an investor’s return. Growth of $10,000 in the S&P 500 1/31/40 - 12/31/21.

Staying invested through volatile times

Timing the market is a near-impossible task. By staying invested, even through periods of volatility, investors can increase their chances of achieving higher returns.

Take a look at the chart below illustrating how missing even a few market days can impact overall returns. Over the past 20 years, the S&P 500 has grown at an annualized rate of 7.3%. However, removing only the five best trading days over that 20-year period would bring the index’s total growth down to 4.9%, and missing the 20 best trading days pulls its return to only 0.6%.

As of 12/31/21. Source: Raymond James Investment Strategy research. This example is for illustrative purposes only and is not indicative of the performance of any investment. It does not reflect the impact of taxes, management fees, or sales charges.

Don’t inadvertently miss out on important recovery days by trying to time the market’s every movement. Instead, speak with your advisor about how your long-term plan is positioned to weather short-term volatility – and discuss whether temporary pullbacks are actually an opportunity to strategically add to your portfolio.

Remember:

• Generally, returns have been less volatile over longer holding periods.

• Returns over time have been positive in most cases.

• Even a few strong market days can significantly impact total returns.

• Dollar-cost averaging can help take advantage of volatility.

Especially during declines, your advisor can act as a sounding board for your concerns. By talking about current events in light of your overall financial plan, your advisor can help provide reassuring perspective to help you stay the course and take advantage of any opportunities that tumultuous markets can present.

Read the full
Weathering Market Volatility brochure

Past performance may not be indicative of future results. There is no assurance these trends will continue. The market value of securities fluctuates and you may incur a profit or a loss. Investing involves risk including the possible loss of capital. The S&P is a weighted, unmanaged index composed of 500 stocks believed to be a broad indicator of stock price movements. Investors cannot buy or invest directly in market indexes or averages. Past performance is no guarantee of future results. Dollar-cost averaging does not assure a profit and does not protect against loss. It involves continuous investment regardless of fluctuating price levels of such securities. Investors should consider their financial ability to continue purchases through periods of low price levels.

Hot Inflation Report Sparks Panic, Misses Bigger Picture

Raymond James

Economy & Policy

September 13, 2022

The S&P 500 had its worst day since March 2020, but don't lose sight of the bigger picture, said Larry Adam, chief investment officer at Raymond James.

The financial markets have had a laser focus on inflation as it has such a huge impact on the prospects of Federal Reserve(Fed) tightening, interest rates and valuation metrics on the equity market. The markets have been constantly recalibrating expectations: easing inflation with the potential ending of the Fed’s tightening cycle versus persistent inflation driving further rate hikes. Today’s 4.3% decline is over the apparent disappointment that the latter scenario is likely. Just as the three-year inflation expectations in the New York Fed’s Survey of Consumer Expectations fell to nearly a two-year low, the August inflation report came in hotter-than-expected and the fears of an aggressive for longer Fed were once again revived as the S&P 500 posted its worst day since March 2020. While market movements such as these are uncomfortable, there are some dynamics to consider. 

The shortcomings of CPI calculation

The Consumer Price Index (CPI) captures more than its fair share of media attention, perhaps because it is heavily utilized as a benchmark for public policy and oftentimes is the first inflation reading released each month. Regardless, the methodology behind its calculation is flawed and many economists and market commentators (including ourselves and the Fed) do not believe it is a superior measure of inflation. In fact, in 2013, Federal Reserve Bank of St. Louis President James Bullard wrote about the many reasons why the Fed changed its preferred measure of inflation to the Personal Consumption Expenditures (PCE). In summary, the Consumer Price Index does not account for the substitution of goods (e.g., trading down), has less comprehensive coverage, and does not readily account for shifts in consumer behavior. As a result of these biases, CPI tends to overstate inflation. For example, over the time period of Bullard’s study (January1995 to May 2013), CPI was more than 7% higher than PCE.

One print doesn't make a pattern

This is a phrase expressed by the Fed and we’ve repeated it as we’ve discussed the potential policy path over the past several weeks and months. Today, we will use it again as we explain why this singular CPI reading is not indicative of inflation’s path moving forward – which we believe is still in a downward trajectory. Why? There are a number of real-time indicators that suggest inflationary pressures are easing. The average price of a gallon of gasoline has fallen for over 90 days – the longest streak since 2015. Oceanic freight rates posted their largest weekly decline on record (-14%) and are now down~70% from their recent peak. Elevated inventories have led to an above-average proportion of apparel and footwear on markdown. The Manheim Used Vehicle Value Index has declined for six out of the last seven months. There are even more indicators that we could highlight (e.g., impact of the stronger dollar, falling supply chain bottle necks), but we believe the breadth of evidence supports our view that the pace of inflation will ease in the months ahead.

Pricing pressures expected to ease

In the Investment Strategy Webinar held this past Monday, we explained that many of the components that drove inflation higher are set to reverse in the coming months. We laid out a clear timeline of how we expected inflation pressures to decelerate. First, commodity prices such as oil, copper and lumber have already fallen 29%, 27%, and67% from their respective peaks. Second, goods prices like apparel and home furnishings are being discounted to reduce inventories to bring in holiday-oriented goods. Third, service prices for things like travel are in the process of easing as we exit the travel-heavy summer travel period. Going forward, we believe food price increases are likely to fall during the fourth quarter. And while U.S. inflation statistics point to still increasing prices, broader global food indices like the UN Food Price Index have declined for five consecutive months since its record high in March – supported by declines in wheat, corn, and soybean oil down32%, 13%, 26% respectively.

This should translate into grocery bills and restaurant costs easing in the fourth quarter and the early part of 2023.Finally, rent (or shelter prices) increases should start to slow if not stall in 2023. It our belief that rents lag the health of the housing market so when the housing market is strong, rents tend to move higher and when the housing market stalls, rental increases stall or are lower. And from our vantage point, the housing market is struggling – especially as mortgage rates have risen. As a result, our economist believes that rents tend to lag the housing market by approximately one year, so as house price appreciation decelerates from approximately 20% year-over-year to the mid to low single digits over the next year, so will rental increases slow which will cause inflation to decelerate. And the good news is when you look at real time data from Zillow, it does look as if rents are already starting to decelerate from very elevated levels.

The bottom line is that inflation is going to have multiple pieces fall into place – falling commodity prices, falling goods prices, falling food prices and then decelerating rents as we go into next year – which should help inflationary pressures accelerate their downward trajectory going into next year.

Supportive seasonal shift

In addition to the fundamental components of inflation, the calendar effects will also help push inflation lower. As we transition into the fall, headline and core indices will ‘roll off’ two of the hotter monthly inflation prints seen in October and November of last year. At the headline CPI level, these prints were +0.9% and +0.7% for the two months, respectively. How does this impact the year-over-year pace? If the monthly pace of headline inflation remains consistent with this month’s report (+0.1%), the year-over-year pace will fall from +8.4% to +6.5% by November. If this occurs, it would be the swiftest three-month deceleration in the year-over-year pace of headline CPI since 2009, exclusive of COVID-related impacts.

Bottom line: What's the market impact?

The equity market traded significantly lower following the inflation report, as the S&P 500 posted its largest drawdown of the year. However, to put this move into perspective, and following the 5% rally that we’ve seen over the last week, the market is back to its post-Labor Day weekend level.
The market selloff is indicative of fears that the hotter inflation print will inevitably push the Fed further into restrictive territory. In fact, the futures market has now fully priced in a 75 basis point hike at next week’s September FOMC Meeting with which we now agree. As for the peak policy rate, the futures market is now expecting a terminal rate of 4.3% in April 2023, translating to 180 basis points of additional tightening from current levels. This is a significant adjustment considering the peak rate was 3.7% just one month ago. In contrast, we see the fed funds rate peaking at or below 4%. The September 14 Producer Price Index release could place additional pressure on the Fed’s decision, as it could follow CPI’s trend or it could confirm the broader picture that we’ve been seeing.

Ultimately, we believe this sharp upward adjustment in the terminal rate expectations is likely overdone, as the deceleration in the future pace of inflation, combined with a slowdown in economic growth in early 2023 (due to the lagged effects of tightening monetary policy) should allow the Fed to ease its stance by the end of the year.

 All expressions of opinion reflect the judgment of the author(s) and the Investment Strategy Group, but not necessarily those of Raymond James & Associates, and are subject to change. This information should not be construed as a recommendation. The foregoing content is subject to change at any time without notice. Content provided herein is for informational purposes only. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Economic and market conditions are subject to change. Investing involves risks including the possible loss of capital. Material is provided for informational purposes only and does not constitute a recommendation. Diversification and asset allocation do not ensure a profit or protect against a loss. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Diversification and asset allocation do not ensure a profit or protect against a loss.

The S&P 500 is widely regarded as the best single gauge of large-cap U.S. equities. There is over USD 7.8 trillion benchmarked to the index, with index assets comprising approximately USD 2.2 trillion of this total. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization.

What You Need to Know About Student Loan Forgiveness

Raymond James

Economy & Policy

August 24, 2022

President Biden's student loan relief exceeds expectations, said Ed Mills, managing director and Washington policy analyst for Equity Research.

The details of the long-awaited student loan forgiveness program are more substantial than expectations. Headlines will highlight the $10,000 forgiveness for borrowers with income below $125,000 and households below $250,000, but the income-based repayment change, including changes to the maximum monthly payments and changes to interest calculations, will have a far greater impact. “We will be watching changes to consumer spending as well as if tuition rate increases accelerate further,” said Managing Director and Washington Policy Analyst for Equity Research Ed Mills. Additionally, the relief of $20,000 for borrowers who received Pell Grants is more debt relief than anticipated. The current pause on repayment of government-backed student loans is also extended to January 2023.

Debt relief details

Individuals with student loans held by the Department of Education can receive up to $20,000 in debt cancellation. The debt cancellation is $10,000 for borrowers with income less than $125,000 or household income below $250,000. Borrowers who received Pell Grants (and meet the income requirements) are eligible for an additional $10,000 in loan forgiveness for a total of up to $20,000 in debt cancelation. The Biden Administration highlights that 43 million borrowers will be impacted by this action, with 20 million borrowers having the entirety of the student loan debt canceled. The Biden Administration defends the additional debt cancellation for recipients of Pell Grants as a way to further target debt relief, as 93% of Pell recipients are from households with income less than $60,000 (66% below $30,000), according to the White House. The Department of Education is setting up a program to certify income for eligible borrowers.

Income-based repayments cut in half

Monthly student loan repayment amounts are now capped at 5% of a borrower’s discretionary income, a reduction from the current 10% cap – an estimated savings of $1,000 annually for borrowers (while the fact sheet shows examples with some borrowers receiving significantly greater savings). The Biden Administration’s action will also change the calculation of what is considered nondiscretionary income to 225% of the federal poverty level. This change will result in $0 monthly payments for borrowers earning $31,200 (or $15 an hour). Borrowers with original loan balances of $12,000 or less will have loan balances forgiven after 10 years of payments – this is being promoted as a way to create a debt-free community college program after 10 years of payments.

Interest calculation changes are a massive shift

Negative amortization of student loans is ending under Biden’s plan. Going forward, if an income-based repayment does not cover the interest charged, the loan balance will not continue to grow. Any browsing of “student-loan Twitter” has countless examples of ever-increasing student loan balances despite years of repayments. This effect was created by the income-based repayment programs that did not cover the interest owed and advocates argued it was creating debt traps borrowers could not escape. In connection with the new 5% income-based cap, this is a fundamental overhaul of the student loan program.

Student loan repayment pause extended

Current borrowers have had the moratorium on student loan repayments extended from August 31, 2022, to January 2023. The current moratorium began in March 2020, in response to COVID-19. Borrowers will have almost three full years with no student loan repayments and zero interest accrual on accounts. The lack of any student loan delinquencies during this period (you can’t be delinquent if you do not have a payment) arguably has created a better overall consumer credit environment and has increased the discretionary income of borrowers who have been free to allocate their student loan payments to other expenses, increase their savings and/or cushion the impact of inflation.

What’s next?

The Biden Administration is also proposing an expansion of the Pell Grant program and making community colleges free (but this remains unlikely). We are also likely to see legal challenges to the President’s authority to implement these changes. Democrats have argued that the President/Secretary of Education has the ability to modify existing student loans under the Higher Education Act, while critics argue that the authority is more limited.

The bottom line

The income-based repayment cap and the changes to the calculation of interest are likely the most significant longer-term impact of this announcement. There will be an immediate economic benefit for the 20 million borrowers who will have their entire student loans canceled. However, the lower repayments, including the increase in the nondiscretionary calculation will allow low- and middle-income borrowers greater discretionary income, which should be a net positive for consumer discretionary spending. One likely consequence of this change is that we could see a continued increase in tuition growth. The 5% cap on monthly loan repayments and interest forgiveness will shift more of the cost of college education to the federal government, and borrowers will feel less impact of tuition increases if their total repayment does not change. Individuals who are not eligible for this assistance are likely to see an increase in their cost of attendance for higher education.

Will Higher Interest Rates Tame Inflation?

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

September 19, 2022

We know many people think we are beating a dead horse, but this horse is far from dead. Instead, she’s in the middle of one of the most important races of her life. What we have been talking about – and will keep talking about until we think Americans understand it – is monetary policy and the Federal Reserve.

Ludwig von Mises once said that the value of money is at least as important to a society as its Constitution. The value of money should be sacrosanct, and Government, if that’s who’s in charge of it, has a responsibility to keep it stable. Fourteen years ago the Federal Reserve completely changed the way it manages the value of our money when it shifted monetary policy from a “scarce reserve” model to an “abundant reserve” model, and we believe there is a direct connection between these actions, and the dramatic decline in the value of our money the likes of which we haven’t seen in 40 years. Inflation undermines work, living standards, investments and is a nightmare for future planning. The Fed has failed.

In a scarce reserve model, the Fed can add or subtract reserves from the banking system and through this mechanism push the federal funds rate (FFR) up or down. Banks compete for these reserves and, through a market of bids and asks, set an interest rate for reserves. In an abundant reserve model, there are so many excess reserves that banks don’t need to compete for them. The FFR is essentially zero because only in very special situations do banks need to borrow reserves. So the Fed created an interest rate that it pays on excess reserves (the IOER), which acts as a floor for interest rates, and that rate is whatever the Fed decides it is.

In other words, while under the old system the market was involved in setting interest rates, today, the Fed now artificially sets interest rates. And as you might deduce, if the government sets interest rates, they likely set them lower than they would be if markets decided what interest rate was correct.

The Fed declares success when market rates move with its rates. But this is a test with a determined outcome. If the Fed grew five trillion bushels of corn, and corn was so plentiful that the price per bushel was essentially zero, then no private farm could sell corn for more. If the Fed then raised the price of its corn to $1/bushel, farmers could then sell theirs for 99 cents/bushel, but it’d be a completely manipulated market.

So, while raising interest rates may reduce economic growth and may throw the US into recession, there is no guarantee that this will fix inflation. Interest rates don’t determine inflation; the amount of money circulating in the economy determines inflation. And this is where the problem lies.

The Fed’s balance sheet held $850 billion in reserves at the end of 2007. Today, it is close to $9 trillion. Most of these deposits at the Fed are bank reserves which the Fed created by buying Treasury bonds, much of which was money the Treasury itself handed out during the pandemic. At this point, if we add excess reserves to reverse repos, there are over $5 trillion in excess money in the system.

Technically, banks can do whatever they want with these reserves as long as they meet the capital and liquidity ratio requirements set by regulators. They can hold them at the Fed and get the interest rate the Fed sets, or they can lend them out at current market interest rates. In turn, the big question is whether the Fed can pay banks enough to stop them from lending in the private marketplace and multiplying the money supply.

But we’ve never done this before. We’ve never tried to stop bank lending in an inflationary environment by just raising the IOER. What interest rate is enough? And when will politicians go bonkers over how much the Fed is paying the banks? After all, if we combine how much the Fed pays private (foreign and domestic) entities on both excess reserves and reverse repos, at a 3% rate it will be $150 billion per year.

If the Fed raises rates to 4% under this new method of managing monetary policy, it will pay private entities $200 billion per year! Wait until politicians who love to hate banks find this out! Moreover, the Fed is now losing money on much of its bond portfolio because it bought so many bonds at low interest rates. At some point the Fed will be paying out more in interest than it is earning on its securities.

Jerome Powell was recently asked if he would ever go back to a scarce reserve model. He said no way. He argued that because of recent crises (2008 financial crisis and the Pandemic) this new abundant reserve model is better. To be brief, government always uses crisis to grow and we would have never had the inflation we have today under the old model.

Like the rest of the government, the Fed has become way too big. Too many resources, and too much power in the hands of so few is antithetical to free markets. To say we are worried about this is an understatement. We just wish more people understood it and called the Fed to task. The Fed should return to a scarce reserve model as soon as possible. We feel like Don Quixote, but we won’t stop dreaming.

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

The Fed: What to Expect and What to Watch

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

September 12, 2022

If you’re still wondering how much the Federal Reserve will raise short-term interest rates next week, you should wonder no more: the Fed is almost certainly going to raise rates by threequarters of a percentage point (75 basis points), just like it did back in both June and July. That’ll put the target short-term rate at 3.125%, the first time it’s been north of 3.0% since early 2008.

Why are we so confident the Fed will raise 75 bps next week? Because Fed Chief Jerome Powell and other policymakers have been sounding hawkish and they haven’t pushed back on the futures market’s expectations of 75 bps. This Fed doesn’t like surprises, so if intended to do 50 bps, it would have pushed back forcefully by now against the expectation of 75 bps.

Beyond this week, we expect smaller, but continued rate hikes, of about 100 basis points total before the Fed is done by early next year. That means getting to around 4.0% on shortterm rates. After that, don’t expect the Fed to cut rates until it is either very confident inflation is heading down toward its 2.0% target or the economy is heading into recession.

But investors need to focus not only on what the Fed is going to do with interest rates, but also on what’s happening with the money supply and bank lending. The world of “abundant reserves” – how the Fed now manages monetary policy, as opposed to the “scarce reserves” system prior to the Financial Panic of 2008 – is an unprecedented, experimental, and potentially volatile world.

The M2 measure of the money supply grew a very rapid 24.8% in 2020 and 12.4% in 2021. Year-to-date through July, M2 has grown at only a 1.8% annual rate in 2022. Since inflation came from this money printing, we see this as progress!

However, bank credit (all securities, loans and leases on banks’ books) keeps expanding, having grown 8.6% in 2020, 9.1% in 2021, and 8.6% annualized through August in 2022. We will be watching both sets of figures, M2 and bank credit. If the Fed gets its way, bank credit should slow as the Fed’s higher interest payments to banks deter more lending. Remember, in the abundant reserve system, the Fed pays banks interest to do nothing with their reserves! If bank credit keeps expanding rapidly into next year, the Fed may have to keep rates moving significantly higher than 4.0% to shrink the amount of money circulating.

The problem is that the Fed thinks it can manage both real economic growth and inflation just by targeting short-term rates. We think the jury is still out and won’t be coming to a verdict anytime soon. Essentially, the Fed is hoping that it can pay banks enough to prevent them from lending, even though Powell says inflation came from the pandemic, not bad monetary policy. That process of tightening is in stark contrast to the old system, where the Fed would directly withdraw liquidity from the banks.

In this precarious environment, we are sticking to our view that the US stock market is “range bound.” (See MMO, June 21, 2022). It will not get back into a long-term bull market at least until we know how far the Fed has to go to control inflation and probably not until the next recession has started.

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Home Prices Plateauing, Rents Catching Up

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

September 6, 2022

The housing sector surged during COVID in large part due to loose money. The Federal Reserve kept short-term rates artificially low and the M2 measure of the money supply soared. Now, with rising short-term rates and slower growth in M2 sending mortgage rates higher, the housing sector has a bad case of indigestion. Sales are down, construction is down, and the most recent reports on home prices show a sudden and sharp deceleration.

This should sound familiar, because it’s very similar to what happened to “real” (inflation-adjusted) retail sales. Sales soared in 2021 but have since plateaued, as growth in consumer spending has come from services, not goods. Expect something similar in the next few years with housing, with national average home prices roughly unchanged while rents continue to catch up.

Recent problems in the housing sector are widespread. Existing home sales have dropped for six straight months and, with the exception of the first few months of COVID, are the slowest since 2015. New home sales are the slowest since early 2016, even if you include those horrible first few months of COVID.

Private residential construction rose for twenty-four straight months through May and has now declined for two straight months. Meanwhile, after peaking at a 1.805 million annual rate in April, housing starts fell almost 20% to a 1.446 million rate in July. In time, fewer housing starts today will lead to less overall construction and home completions later this year.

But perhaps the most dramatic change is on prices. The national Case-Shiller index rose more than 1.0% in every month from August 2020 through May 2022. Every single month. Home prices rose a total of 8.9% in the first five months of 2022. More of the same. But then came June, when prices rose a meager 0.3%.

As a result, some are thinking we are in for a massive housing bust the kind of which hit the US after the last boom in the 2000s. But we think that’s highly unlikely. Housing is going to feel some pain, but we are facing nothing like what happened in the last housing bust.

Last time, national average home prices bottomed in 2012 about 25% below where they peaked in 2007. From peak to bottom, housing starts plummeted 79.0% and new home sales fell 80.6%. These are not typos! Existing home sales dropped 52.3%. Mix all these changes with mark-to-market accounting and no wonder we had a Financial Crisis and the Great Recession. That’s not happening this time around.

So why do we think we are not in for a huge housing disaster like last time? First, because the last housing bust was preceded by several years of massive overbuilding. We simply had too many homes; too many homes available for sale, as well as too many homes available to rent. By contrast, the most recent turbulence in the housing market has not been preceded by overbuilding. If anything, we’ve built too few homes in the past decade, not too many.

Second, although home prices have risen substantially since 2020, relative to replacement cost, they are only up about 2% and only about 4% higher than the median in the past forty years. No big deal. Why does replacement cost matter? Because the more it costs to replace your home, the more your current home is worth. So, yes, home prices are up substantially, but if the costs of copper pipe, drywall, lumber, and labor are up, too, then it makes some sense for home prices to be up, as well.

Third, rents should continue to rise at a rapid pace, putting a sturdier floor under home values. In the last housing crisis, not only did home prices fall but housing rents decelerated sharply and then temporarily went negative, as well. Think about that: many people were leaving home-ownership but landlords couldn’t squeeze them for more rent because there were simply too many homes.

Now, in the current environment, where higher mortgage rates are persuading some potential home buyers to remain renters, landlords are in a much stronger position. They can keep raising rents because the market isn’t oversupplied with homes. And, in turn, higher rents should keep home prices from falling like in the prior housing bust. The more a home can generate in rent, the more valuable the home.

The bottom line is that what we are seeing right now in the housing market is a bad case of indigestion from higher interest rates. Due to overly loose monetary policy and other COVID-related policies, home prices got too high versus rents in the past couple of years and both prices and rents need to correct. We project continued gains in rents in the next few years as home prices are roughly unchanged. The maximum drop in home prices from the peak to the bottom in this cycle should be around 5%, not a 25% implosion like last time.

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Braving bear markets: 5 lessons from seasoned investors

BY: CAPITAL INTERNATIONAL ASSET MANAGEMENT

JULY 20, 2022

“No one knows when this decline will end, but I am confident it will end, so I encourage you not to get caught up in pessimism,” says equity portfolio manager Don O’Neal, who has 36 years of investment experience and has navigated several bear markets. “Declines create opportunities for investors who remain calm. If we make good decisions in times of stress, we can potentially set up the next several years for strong returns.”

To read more important information from this article, click on the link below!

https://advisoranalyst.com/2022/07/20/braving-bear-markets-5-lessons-from-seasoned-investors.html/

Fed is once bitten, twice shy on inflation

ECONOMY & POLICY

August 30, 2022

The Fed is hesitant to let up on inflation after its "transitory" misstep, said Larry Adam, chief investment officer at Raymond James.

As we approach the unofficial end of the summer with the upcoming Labor Day holiday, financial markets are laboring after the recent bounce back in equities. However, we continue to stress three dynamics when it comes to investing: perspective, patience and probing beyond the headlines. With regard to perspective, investors had been enjoying a strong summer rally, with the S&P 500 set for its strongest two-month period (+15.3%) since August 2020 – a return that would fall in the 99th percentile over the last 20 years. But recent downside volatility, with the S&P 500 trading 6.4% lower over the last nine days, was not unexpected as the index’s rapid rally took it above our year-end target of 4,180 and the market was in need of a digestive period. Patience is a virtue and neither the Fed, the economy, nor financial markets can adapt as quickly as investors would like. It takes time to unwind from the pandemic and war-induced drivers of inflation over the last two years! And third, and most important, investors need to probe beyond the headlines to understand the true underlying fundamentals.

One print doesn't make a pattern

Many economists and financial market pundits deemed the Fed’s use of the word "transitory" as the "worst call in the history of the Federal Reserve." While the definition can be debated (e.g., how long is transitory?) and other factors such as the Russia/Ukraine war put undue pressure on energy and agricultural inflation, the result is that elevated inflationary pressures have lasted longer than the Fed originally expected. Therefore, Chairman Powell’s rhetoric at the Jackson Hole Symposium on August 26 may be a reflection of the committee being “once bitten, twice shy.” In other words, psychologically, the Fed and Chair Powell do not want to make a second incorrect call and jeopardize their credibility. As a result, to exude confidence and control of the inflation and policy narrative, it is understandable that Chairman Powell would not declare premature victory over inflation and reaffirmed that interest rates would remain higher for longer until a sustainable, consistent streak (e.g., more than the one-month improvement we have seen in official inflation data) of easing pricing pressures was realized.

In our view, that pattern could well develop this fall and lead the Fed to eventually become less aggressive about raising rates as we go into 2023. Another aspect that frustrated the Fed was the fact that with the tightening cycle not even completed yet, the futures market was reflecting 50 basis points of interest rate cuts in 2023. But Chairman Powell’s latest commentary reined in these expectations, as the market’s prospects of cutting interest rates next year was erased. To be clear, the good news is that we are seeing the early signs that inflation is beginning to moderate, as gasoline is down over $1 per gallon from its recent peak and both the Consumer Price Index and the Producer Price Index declined on a monthly basis for the first time since mid-2020 in July. Our expectation remains that the Fed will raise interest rates 50 basis points at the September FOMC meeting (September 20-21), which from a historical perspective, is still aggressive. In fact, out of the 61 rate hikes dating back to 1985, only 20% of them have been of this magnitude or greater (only 12% have been 0.75% or greater). The economy still has to digest all the interest rate hikes this year as monetary policy acts with a lag of six to nine months. As a result, our economist reiterates his base case expectation of the fed funds rate peaking at 3.5% this year and remaining on hold throughout 2023.

No silo mentality

The recent equity weakness is driven by more than the U.S. economy, as other parts of the global economy have been on the brink of recession for months. More specifically, recessionary risks have been plaguing Europe, as elevated energy prices are prolonging the peak in inflation (e.g., the U.S. is past its inflation peak and Europe is on the way to its peak), the weakening of the euro has compounded the reduction in purchasing power (especially for commodities priced in dollars such as oil), and the European Central Bank (ECB) is poised to raise interest rates into a visibly weakening economy. With double-digit inflation in nearly half of the EU countries, the ECB halted its bond buying program, launched a crisis tool to counter rapidly rising interest rates and widening sovereign spreads, and lifted interest rates by 50 basis points last month – its first rate hike in over a decade. Given that this move brought the target rate to 0%, the ECB is forecast to raise rates by a similar magnitude at its next meeting (September 8). Tightening monetary policy in a weakening economic scenario is a recipe that could, as central bankers around the world have argued, result in “some pain” and “sacrifice” on behalf of consumers and businesses. It’s worth noting that the ECB’s decision to increase rates will be preceded by the Bank of Canada (September 7) and followed by the Bank of England (September 15) and Federal Reserve (September 21). The coordinated tightening by more than 80 central banks this year has continually weighed on economies and the potential negative ramifications have kept investors on edge. 

From micro to macro

The 2Q22 earnings season was under the microscope, as investors not only wanted to see the strength of corporate earnings but also needed to hear forward-looking commentary from CEOs about the status of the economy and their businesses. Why? To get more insights into the "boots on the ground" status of the economy. The results? Robust 2Q earnings were not consistent with the recessionary conditions that headlines were insinuating and corporate guidance was much better than feared—at least not recessionary in the near term. And while 2Q earnings growth of 7% was not nearly as impressive as the double-digit quarters we saw through 2021, healthy sales revenues and margins highlighted the effectiveness of corporate America. In addition, contrary to expectations, there was evidence of resilient consumer spending patterns and healthy levels of credit usage despite pricing pressures. This better-than-expected outcome helped the S&P 500 rally 14% from the unofficial start (e.g., big banks reporting) through the unofficial end (e.g., the big box retailers) of the reporting season—the best performance during the earnings season since 1Q97. Now, with earnings results no longer the focus, the equity market is transitioning its attention from the micro (e.g., earnings releases) to the macro (e.g., jobs, inflation, growth, etc.). With recessionary concerns and fears of too much tightening remaining consequential risks, the upcoming Consumer Confidence (August 30), ISM Manufacturing (September 1), employment (September 2), and CPI (September 13) reports could lead to some interim volatility. 

September slowdown

While we place more emphasis on the fundamentals, it is worth noting that the August through September time period has historically been the weakest two-month time period for the equity market. In fact, the S&P 500 has declined ~0.5% on average since 1950 while all other rolling two-month returns are positive. What doesn’t help is that trading volumes are historically depressed during this vacation-laden period so any moves are exacerbated. In addition, midterm election years like the one we are in now have historically compounded the pressure on the markets prior to the election. The good news is that from a historical perspective, both seasonal patterns tend to reverse themselves in the form of a post-midterm election and year-end rally (e.g., November/December). Let’s hope that these patterns repeat themselves this year – especially if inflationary pressures recede as we expect.

The bottom line

The equity market notched an impressive rally after the major indices entered bear market territory, but investors may have gotten ahead of themselves as the S&P 500 soared above our 2022 year-end target of 4,180. Moving forward, positive earnings growth, decelerating inflation, the conclusion of the midterm elections, and positive seasonal factors should help support equity prices by year end. As a result, if weakness in the equity market were to persist, long-term investors could look for buying opportunities should the S&P 500 fall below the 4,000 level. Assuming long-term interest rates are at or near a peak, valuations for equities remain attractive at current levels.

All expressions of opinion reflect the judgment of the author(s) and the Investment Strategy Group, but not necessarily those of Raymond James & Associates, and are subject to change. This information should not be construed as a recommendation. The foregoing content is subject to change at any time without notice. Content provided herein is for informational purposes only. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Economic and market conditions are subject to change. Investing involves risks including the possible loss of capital. Material is provided for informational purposes only and does not constitute a recommendation. Diversification and asset allocation do not ensure a profit or protect against a loss. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Diversification and asset allocation do not ensure a profit or protect against a loss.

The S&P 500 is widely regarded as the best single gauge of large-cap U.S. equities. There is over USD 7.8 trillion benchmarked to the index, with index assets comprising approximately USD 2.2 trillion of this total. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization.

Who should you choose to execute your estate?

ESTATE & GIVING

When selecting a personal representative to carry out the terms of your will, consider the role's many responsibilities.

Selecting a personal representative for your estate, also known as an executor, is no easy task. While it’s an honor to be chosen as an executor, it’s also a demanding commitment consisting of more than two dozen responsibilities and liabilities. For instance, an executor can be held personally liable for improperly spending estate or trust assets or for allowing insurance coverage on the assets to lapse.

Considering the many responsibilities of an executor, it’s important to take several factors into account when determining who’s right for the role. If you’re in the process of choosing your executor, you’ll want to consider the following.

Trust is key. It might seem obvious, but it’s essential that your executor be someone you trust. Not only will they be held legally liable for any corrupt behavior, but you’ll also be putting your legacy intentions in their hands and relying on them to handle important legal documents, such as annual tax returns, honestly and appropriately.

Responsible parties only. Your executor should be a responsible individual who is able to fulfill the time commitment and duties of their role, as well as manage the inherent legal liabilities. For example, if an executor fails to pay taxes or file tax returns in a timely manner, it can throw a wrench in tax-minimization strategies and expose your estate to interest charges and penalties. That’s why it’s crucial to choose someone you can rely on.

Ban biases. Your first choice for an executor may be a family member or friend. Keep in mind, however, that the person you choose should be able to act in an impartial way. If the beneficiaries of your estate believe that your executor has ulterior motives and harbors bias (or can’t be impartial), it can cause unnecessary tensions and legal battles.

Set yourself and your executor up for success

After choosing your executor, you’ll want to take certain steps to help set them – and yourself – up for success.

Establish realistic expectations. Once you decide on an executor, it’s important to sit down with them and explain why you consider them the best person for the position. You’ll want to relay the level of commitment involved and give them time to decide whether they can accept the responsibilities accompanying the role. You’ll also want to have a second person in mind in case your first choice is unable or unwilling to accept the role.

Determine their digital access. It’s important that your executor have access to the digital documents they need to carry out their duties. This can include email or online bank accounts. Without the right passwords or credentials, it can be highly challenging to access digital assets. For instance, Google may provide the contents of a deceased user’s account if the family produces proof of death, but Yahoo accounts require a court order to access accounts without a password. To help prevent unnecessary headaches, you’ll want to provide your executor with the proper digital access. Fortunately, you have different options for how to store and share your information securely, such as with the help of an online tool like Everplans.

A final note

So, who is the most appropriate person to appoint as a personal representative? A digital sleuth with accounting acumen and the skills of a diplomat? Most of us don’t have that person on speed dial. Thankfully, there are several ways to help ensure that your estate is settled properly.

If it’s impartiality and expertise you’re looking for, a corporate personal representative might be an appropriate choice. For instance, a corporate executor can offer their guidance and experience to help ensure assets are distributed according to your wishes, reduce unnecessary expenses, and achieve the most efficient and accurate settlement of your estate with the lowest costs possible. Alternatively, you could appoint both a corporation and an individual to serve as co-executors, or name a corporation as agent for the personal representative, offering an assist to this important role.

Being named a personal representative is an honor, but there’s a reason that it’s often a paid position: It’s a job unto itself. If you want to choose the best fit for the role, it’s important to understand the realities of the position and know the steps you can take to help ensure your estate ends up in the right hands.

Raymond James and its advisors do not offer legal advice. You should discuss any legal matters with the appropriate professional. Raymond James is not affiliated with Everplans.

Biden’s Student-Loan Fiasco

First Trust MMO

Brian S. Wesbury – Chief Economist

Robert Stein, CFA – Dep. Chief Economist

Strider Elass – Senior Economist

Andrew Opdyke, CFA – Senior Economist

Bryce Gill – Economist

The Dow Jones Industrial Average fell more than 1,000 points on Friday, caused apparently by Fed Chairman Jerome Powell’s attempt to use a brief speech to channel the ghost of Paul Volcker. Obviously, this was part of the market’s worries, but the stage was set when the Biden Administration announced a student loan forgiveness program last week. The more we learn about this, the worse it looks.

The executive order would send an already very bad student loan system – a system designed more to create jobs for academics then to really help students – into overdrive, generating huge costs for taxpayers, soaring college prices, and a massive shift in resources toward the already bloated college sector, which already generates negative marginal value-added for both students and our country.

The Biden Administration says the changes would cost $240 billion in the next ten years. The Committee for a Responsible Federal Budget says $440 - 600 billion. A budget model from Wharton says $1 trillion. But even that $1 trillion figure might be way too low.

The key is that, as bad as it is, the cancellation of some student debt that already exists is only a small part of the policy change. The much bigger change, and the one that the market has finally begun to absorb, is limiting future payments on debts to 5% of income, but only after the borrower’s income rises above roughly $30,000 per year. For example, if someone makes $70,000 per year, then no matter how much they borrow they’re limited to paying $2,000 per year (5% of the extra $40,000). After twenty years, any remaining debt would simply disappear. Think about the perverse incentives!

For the vast majority of students, choosing this “income based repayment” system would be a no brainer. And once they pick it, they wouldn’t care at all whether their college charges $35,000 per year (tuition, room, board, and fees), $85,000, or even $150,000. In fact, students would have an incentive to pick the priciest college with the best amenities they could find and pay for it all with federal loan money, because their repayments are capped. If you always wanted Rodney Dangerfield’s dorm room from the movie Back to School, you’re in luck!

Meanwhile, students would have the incentive to take out loans greater than what they need because they can turn the excess into cash for “living expenses.” Then they could use it to buy crypto, throw parties, or pretty much anything else. Who cares?!? The government would limit their future repayments.

And here’s what might be the worst part: colleges would have an incentive to enroll students even if they have horrible future job and earning prospects. By enrolling people no matter how poorly prepared they are, a college can charge whatever they want and get huge checks from the federal government. And the unprepared students won’t care because they really don’t have to pay it back. In effect, colleges could create massive and perfectly legal money-laundering schemes.

We are not legal experts and do not know whether the new proposal will be implemented fully. But, if it is, watch out: college costs are poised to skyrocket and academia is courting a political backlash of enormous proportions. Meanwhile, the market is attempting to digest just how far from economic reality politicians have become. The political allocation of capital is a recipe for economic disaster.

Consensus forecasts come from Bloomberg. This report was prepared by First Trust Advisors L. P., and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward-looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The Dow Jones Industrial Average (DJIA), commonly known as “The Dow” is an index representing 30 stock of companies maintained and reviewed by the editors of the Wall Street Journal. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance.

Distorted

First Trust MMO

Brian S. Wesbury – Chief Economist

Robert Stein, CFA – Dep. Chief Economist

Strider Elass – Senior Economist

Andrew Opdyke, CFA – Senior Economist

Bryce Gill – Economist

One thing we must remember when looking at economic data, is that everything is distorted. The US (in fact, much of the world) panicked in 2020. COVID caused governments around the world to implement unprecedented policies. The US borrowed, printed, and spent its way through the lockdowns. We believe, and we don’t think it’s hard to understand, that the economic bill for these policies, is soon coming due.

We don’t expect a recession like in 2020, or a repeat of the Great Recession in 2008-09, but the unemployment rate will eventually go up, job growth will go negative, industrial production will fall, and so will corporate profits. At that point we won’t have a big debate about whether we’re in a recession; everyone will know it.

In the meantime, before a real recession sets in sometime in 2023 or early 2024, many people will believe the recession is already here. Especially, as the shift away from goods and toward services gathers steam.

Right before COVID started, in February 2020, “real” (inflation-adjusted) consumer spending on services was 64% of all real consumer spending. With the economy locked down, services fell to 59% of spending by March 2021. That five-percentage point decline represented roughly $700 billion of spending. Consumers have clawed some of that back with services now up to 62% of total spending, with big recoveries in health care, recreation, travel, restaurants, bars, and hotels. And, we expect this trend to continue.

Yes, companies like Peloton and Carvana, where investors apparently projected COVID-related trends to persist, have gotten hammered. Some look at layoffs at these companies, and others in similar straights, as a sign that recession is already here. But these aren’t macro-related developments; they are a realignment of economic activity from a distorted world to a more normal one.

Another distortion from COVID policies was a big drop in labor force participation, which is the share of adults who are either working or looking for work. The participation rate was 63.4% in 2020 but now, even though the unemployment rate is back down to the pre-COVID low of 3.5%, participation is only 62.1%.

Part of the problem might be inflation. “Real” hourly earnings are lower than they were pre-COVID. So fewer people might be participating, despite low unemployment, because they (correctly) realize the real value of work is less than it used to be. Another problem is that big-box stores and Amazon stayed open, while many small businesses in certain states were closed. Whether this represents a permanent shift in employment and productivity, or a temporary one, remains unclear.

Yet another shift is in housing. Home prices soared during COVID, with the national Case-Shiller home price index up a total of 41.4% rate in the past 27 months (through May 2022). That’s the fastest increase for any 27-month period on record, even faster than during the “housing bubble” of the 2000s. Meanwhile, with the government preventing landlords from evicting tenants, rent payments grew unusually slowly during the first eighteen months of COVID.

But now rent payments are catching up. Expect a major transition in the next few years, with rents continuing to grow rapidly while home price gains slow to a trickle by late this year and then home prices remain roughly unchanged in the following few years.

What a fiasco. More employment at large firms, less at small firms. More renters, fewer owners. Lower inflation adjusted incomes. Distorted economic data. The costs of the lockdowns, one of the biggest policy mistakes in US history, are absolutely immense.

Voters will react, and at least one house of Congress is likely to go the opposition party this November, meaning legislative gridlock for the next two years as the nation sorts all of this out.

Consensus forecasts come from Bloomberg. This report was prepared by First Trust Advisors L. P., and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward-looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.