The Current State of Household Debt

First Trust Economics

Three on Thursday

Brian S. Wesbury - Chief Economics

August 22, 2024

In this week’s Three on Thursday, we explore the current state of indebtedness and financial health of U.S. households. Each quarter, the Federal Reserve Bank of New York provides a comprehensive overview of consumer borrowing and repayment trends, drawing from a nationally representative sample of Equifax credit reports. This data is thoroughly analyzed to estimate the total debt balances and delinquency rates across the country, offering valuable insights into how American households are managing their financial obligations. Curious about the latest trends? Dive into the three charts below to get a clearer picture of where things stand today.

Household debt balances grew by $109 billion in the second quarter of 2024, marking a 0.6% increase from the previous quarter, bringing the total to $17.80 trillion. Mortgage balances increased by $77 billion, reaching $12.52 trillion, accounting for 70% of overall household debt. This has provided stability for households despite a higher interest rate environment, as 94.3% of these mortgage loans are fixed-rate, with an average rate of 4%. Additionally, non-housing debt balances increased by $28 billion.

Aggregate delinquency rates were unchanged from the previous quarter, with 3.2% of outstanding debt in some stage of delinquency. Besides last quarter, Delinquency rates sit at the highest rate since the fourth quarter of 2020. Over the past year, about 9.1% of credit card balances and 8.0% of auto loan balances have transitioned into delinquency, indicating rising financial strain in these areas. Mortgage delinquency rates edged up by 0.1 percentage point in early-stage delinquencies but remain low by historical standards. The overall 3.2% delinquency rate is still relatively low, but is largely due to the ongoing impact of student loan forbearance.

The share of credit card balances 90+ days delinquent has risen to 10.9%, the highest since Q1 2012. Meanwhile, student loan delinquencies have dropped from around 11% in 2012 to just 0.65%, thanks to the CARES Act, which paused payments and set interest rates to zero. Although payments resumed in October 2023, delinquencies have remained low due to an “onramp” period that allows borrowers to delay payments without penalties until September 2024. However, as interest accrues, delinquencies are expected to rise once this temporary relief ends.

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.

Price Controls Redux?

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

Robert Stein, CFA - Dep. Chief Economist

August 19, 2024

Unfortunately, when it comes to the government, what’s old is sometimes new again.

Back in the late 1960s and 1970s the Federal Reserve printed too much money relative to Real GDP, resulting in repeated bouts of high inflation. President Nixon, having been burned by a mild recession in 1960 the first time he pursued the presidency, wanted to make sure there was no hint of recession in 1972, the year he’d be seeking re-election.

As a result, in 1971, when Nixon closed the “gold window” at the Fed – to give the Fed the chance to print money more freely – he also imposed wage and price controls to try to temporarily hide the inflation that would inevitably result. After the election the controls went away and inflation surged, averaging more than 9% per year from 1973 through 1975. No wonder Nixon got so unpopular after the election!

But price controls have a long and sordid history all over the world, including in ancient Egypt, Babylon, as well as ancient Rome and even modern-day Zimbabwe and Venezuela. During the French Revolution, in 1793, the rapid inflation caused by the paper money issued under the revolution led to price controls enforced by the death penalty, then implemented by the guillotine. But even lopping off heads didn’t fix the problem and shortages were one of the damaging results.

Why do governments periodically do this? Because inflation is political kryptonite. Prior to COVID the US had inflation under control for almost forty years. Now, with inflation having remained stubbornly high the past few years – even though it’s decelerated the last two years – some politicians feel compelled to act, especially because while the rate of inflation is down, the price increases of recent years are still in place.

Politicians say it couldn’t possibly be their fault prices went up too fast, it must be someone else’s, like those wicked “price gougers’ in the private sector, lining their pockets with workers’ hard-earned dollars. But if price gouging is the reason for recent inflation, why weren’t these gougers doing it the past forty years? What changed?

And why has the inflation been such a global phenomenon? Inflation surged around the world, not only in the US. Is every single company in the world price gouging, and if so, doesn’t that present a once in a lifetime opportunity for someone to take market share by reducing prices?

Meanwhile, the cost of government has soared but those who accuse the private sector of price gouging are ignoring that. Since 2012, Chicago school spending per student is up 97% even as test scores have gone down.

But we shouldn’t just pick on Chicago schools. A recent study that used AI looked at SAT scores since 2008. Including the effect of the test getting easier, average math scores are down more than 100 points in the past fifteen years with most of the drop since 2019, right before COVID. Those who want to impose price controls on the private sector want to punish shrinkflationists. But schools have been charging more and shrinking the education they’re giving our kids. Where is the plan to fix that?

Ultimately, the best way to fight inflation is to have the Fed focus on price stability while the government minimizes taxes and regulation to encourage competition and risk-taking. Competition, not new regulations, is the way to keep prices down. School vouchers would certainly accomplish this for education.

The key assumption behind price controls is the rationalist delusion that some group of policymakers can figure out what a “fair” price is for each and every good and service across the vast US economy. It’s the pretense of the kind of central planners who ran the Soviet Union’s economy for decades.

The good news is that we think price controls are a very long shot to take effect. Even already, a candidate suggesting price controls is backpedaling, probably realizing that many political allies think it’s a very bad idea. Meanwhile, it’s unlikely that, outside wartime, such a plan could be imposed without new legislation and that legislation would probably not have the votes to pass.

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 Week Ahead

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

Robert Stein, CFA - Dep. Chief Economist

August 12, 2024

Pretty much every month there’s one week that has the most important economic reports. For the month of August that’s this week. The reports this week include consumer price inflation, producer prices, retail sales, industrial production, housing starts, and unemployment claims.

As it stands, it looks like the broader economy is decelerating as the tighter monetary policy of the past two years finally gains traction. The deceleration has taken longer than it normally does, probably due to the unusual nature of COVID lockdowns and reopening, the massive amount of monetary stimulus that preceded the tightening, plus the unusual expansion of the federal budget deficit last year, in spite of low unemployment and a Supreme Court decision on student loans that artificially reduced the official deficit last year.

In the past two weeks economic reports have included a decline in construction, slower job growth, and mixed ISM indexes, with manufacturing signaling contraction while the service sector remains slightly positive.

What’s likely for this week? It looks like both consumer and producer prices rose 0.2% in July, which would be welcome news compared to the higher average inflation rates of the past few years. If tighter money is gaining traction, these inflation rates should slow even further later this year. It doesn’t mean this trend will be permanent, though. Eventually the Federal Reserve will loosen once again, probably too much, and send inflation higher.

Meanwhile, retail sales and industrial production should bring mixed news. Due to a bounce back in auto sales in July, after the technology-related snafus at auto-dealers in June, total retail sales should be up for the month. However, even if they grow the 0.5% we expect, that would leave them up only 2.5% from a year ago, barely treading water versus inflation.

Worse, we anticipate a decline in industrial production for July, led by the manufacturing sector. Production should still be up slightly versus a year ago, but not by much.

Does this mean the US is already in recession? Not yet. But dark clouds are gathering. Monetary policy is tight right now and has been for some time. Meanwhile, capital standards for banks are likely tightening up even as cuts in short-term rates are nearing. Investors should be wary about slower economic growth than the financial markets now assume.

In the meantime, taking all these data in, it looks more like stagflation than at any time since the 1970s. In spite of AI, space travel, and 3D printing, the economy is growing slowly with inflation still above the 2% level most people have wrongly considered “price stability.” COVID lockdowns and then reopening have seriously impaired seasonal adjustments. Massive federal deficits have allowed spending to continue, but created a bill that is coming due.

The US has backed itself into an economic corner where many are demanding more government interference. We wish we knew exactly how this will end, but experimental policies of the Fed and Treasury are making it very hard to predict.

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 Lags are Over for Tighter Money

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

Robert Stein, CFA - Dep. Chief Economist

August 5, 2024

As Milton Friedman taught us many decades ago, monetary policy works with long and variable lags. Recent economic reports suggest that the long and variable lags on the tightening of monetary policy in 2022-23 are starting to come to an end.

Both inflation and economic growth are decelerating. Consumer prices declined 0.1% in June, the largest drop for any month since the early days of COVID. Much of this was due to a decline in energy prices, but even “core” consumer prices were soft, up only 0.1% for the month, the smallest increase for any month in more than three years. The CPI was still up 3.0% in June versus the year prior, but this year-ago comparison looks like it decelerated in July and will probably do so again in August, given that oil prices are down.

Meanwhile, we are seeing more and more softness in the economy. The housing sector remains mired in slow construction and slow sales. The dollar value of new private housing construction is down in each of the past three months. Recent existing home sales are near the lowest level since the housing bust in 2010; new home sales are lower than they were prior to COVID.

The national ISM Manufacturing index came in at 46.8 for July, below the forecast from every economics group that submits a forecast to Bloomberg and, more important, below 50, which signals contraction. The production component of the index declined to 45.9, the lowest since the COVID Lockdown.

And then the July employment report showed a marked deceleration in job creation, with payroll gains (net of downward revisions for prior months) a tepid 85,000. We like to follow payrolls excluding government (because it's not the private sector), education & health services (dominated by government) and leisure & hospitality (which is still recovering from COVID Lockdowns). That “core” measure of payrolls rose just 17,000 in July, the smallest gain so far this year. At the same time, the unemployment rate rose to 4.3%, 0.4 percentage points higher than it was three months ago, an increase that in the past has often (but not always) been associated with a recession.

It is true that the M2 measure of money bottomed in October and has since been trending upward, but the gain since then has only been 2.4% annualized, much slower than the 6.1% annualized average during the twenty years leading up to COVID, a time when the CPI gained a moderate 2.1% per year.

Put it all together – decelerating inflation and decelerating growth, along with an abnormally slow rebound in M2 – and we have a strong case that the Federal Reserve has implemented tight money. In turn, given the lags between shifts in policy and its economic effects, the Fed now has room to shift to a monetary policy that is less tight.

To most analysts and investors, that means cutting the short-term target rate. As of late Sunday, the futures market in federal funds showed almost 125 basis points in rate cuts later this year. But lower rates, by themselves, are not easier monetary policy.

Instead, the Fed needs to start focusing on the money supply, particularly on M2. If the Fed cuts short-term rates but growth in the money supply remains weak because of tighter capital requirements on banks or because businesses and consumers expect even lower rates further ahead (which might lead them to temporary postpone economic activity) then it isn’t really making monetary policy less tight.

There is a widespread myth that 1980s Fed Chairman Paul Volcker beat inflation by sharply raising short-term interest rates. In truth, he did no such thing. What Volcker did was focus on the money supply and getting its growth under control. That meant using the Fed’s open-market operations to soak up excess liquidity. And it was those operations which resulted in higher short-term rates and lower inflation. The causation is important: less money meant higher rates, but Volcker’s focus was on the money. If he could have withdrawn the excess liquidity without higher rates, he would have been happy to do so.

The problem today is that the current Fed has abandoned a focus on the money supply and has swapped a system of scarce reserves for one in which reserves are excessively abundant, which means short-term interest rates are directly controlled by the government, rather than the market. Investors have a great deal riding on whether the Fed gets it right. Focusing on the money supply will help show how successful the Fed will be.

And, finally, there is a real potential here for the Fed to overreact. The world has gotten used to extremely low interest rates and very easy money. The stock market was overvalued and unemployment was artificially low. If the Fed thinks that was normal it will try to add more money than needed and risks creating stagflation. Just like it did in the 1970s.

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.

Want Affordable Housing? Build Homes, Cut Government

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

Robert Stein, CFA - Dep. Chief Economist

July 29, 2024

Listen to enough politicians and it won’t take long to hear about the lack of “affordable” healthcare, drugs, daycare, and housing. This was going on long before inflation returned after COVID. Everyone wants affordable things.

But the concept of affordability is made up of two components – the price of something and the income of the person who wants to possess it.

There are complicating factors in every market, so let’s focus on one – housing. Almost everyone thinks home prices and rents are just too damn high.

Many blame this on greedy landlords and investment firms buying up apartments and homes. President Biden (prior to his withdrawal from the presidential race) said he wants to impose a form of national rent control on “corporate” landlords.

There should be no doubt that a typical home today costs much more relative to income than it used to. The median price of an existing single-family home that sold in 2022 was about $390,000, which was 5.2 times higher than median household income of $74,580 that year (the most recent year for which median income is available).

By contrast, back in 1968, the median price of an existing single-family home was only 2.6 times median household income. As recently as 2011, the bottom of the housing bust, the ratio was only 3.3 and even at the peak of the housing boom in 2005, the ratio was 4.7. No wonder so many people are finding housing hard to afford.

This is not due to greedy landlords and homebuilders. Government entities of all kinds restrict building and add massive costs through regulation, which all limit housing supply. And don’t forget the inflation caused by excess money printing. Many workers in the US have not seen their wages keep up.

On top of this the US has allowed massive immigration, which increases the demand for housing, while homebuilders have not built enough new homes for basically the last 15 years – since the housing bust of 2007-2009.

But the least talked about issue with affordable housing is the income side. Today, federal, state and local government expenditures, plus the cost of complying with government regulations take at least 50% out of the entire Gross Domestic Product of the United States.

In other words, working Americans, on average, are left with only 50% of what they earned. If government used that money to do things that were more productive than the private sector, we would all be better off. But government programs are less efficient. Elon Musk’s SpaceX is massively more efficient than NASA ever was.

The more the government spends based on political priorities the less taxpayers can spend. And taxing Peter to give money to Paul makes it harder for Peter to buy a house, while Paul probably can’t afford one either. Redistribution limits opportunity. The more the government grows, the less affordable housing becomes. And, yet, no one talks about it.

Ultimately, if populists want to address the problem of housing affordability, they need to give power to the people by letting them keep their earnings, while government stops giving money to people, while grabbing power for itself.

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.

After Biden: What Comes Next?

Raymond James

Markets & Investing

July 23, 2024

Following the historic decision by President Biden to drop out of the 2024 race, Raymond James CIO Larry Adam provides insight into his team's economic and market outlook.

To read the full article, see the Thoughts on the Market publication linked below.

Election cycles are unpredictable, and the 2024 presidential election cycle has proven to be no exception with President Joseph Biden choosing to drop out of the race. Following the historic announcement we’re diving into the questions that are top of mind for investors – how will President Biden’s decision not to seek reelection impact the economy, fixed income and equity markets?

What is the impact on the equity market?

Going forward, with Vice President Kamala Harris likely entering the race against former President Donald Trump, our short- and long-term equity market views remain unchanged. With valuations in the 93rd percentile relative to history, we remain cautious on the equity market in the near term as a lot of good news has been priced into the market and investor optimism has reached extreme levels. However longer term, with earnings likely to move higher (as we do not forecast a recession), $6 trillion of cash on the sidelines, and as we are in the infancy of this current bull market, we would use any periods of weakness as an opportunity. The 2Q24 earnings season that ramps up this week and next will be very important to assessing the health and earnings growth of companies going forward.

We cannot emphasize enough that politics is only one of ten factors in our equity outlook framework. While politics can drive headlines and induce short-term volatility (both up or down), it only ranks eighth in the ranking of the most influential driving factors. The reason? Macro factors such as economic growth and Fed cuts, and fundamental metrics such as earnings growth and valuations are more important in determining the trajectory of the market. Case in point: the Energy and Financials sectors were the two best-performing sectors in the week following Trump’s election, as a deregulatory agenda boosted expectations for these sectors during his Presidency. But they ended up being the worst performing sectors, as macro factors such as reduced demand because of COVID pressured the energy sector and record low interest rates were a headwind for Financials.

Fast forward to today, the recent rotation into small-cap stocks has been explained by market pundits as “the market pricing in a potential Trump victory”. We see this as misguided. Instead, we believe the rally has been fundamentally justified as interest rates have fallen (and small-cap companies rely on debt financing), imminent Fed rate cuts (as inflation reports have shown a significant slowdown in pricing pressures), and the potential for small-cap stocks to exhibit their first quarter of positive EPS growth in six quarters in 3Q24. In many ways, the recent increase in the probability of a Trump win (and sweep) is coincidental with the fundamental improvement in small-cap stocks prospects.

What is the impact on the economy?

As VP Harris likely represents a continuation of President Biden’s policies, there is no real change in our short-term economic outlook. With limited capacity for additional government spending on the horizon given budgetary constraints, the consumer will need to be the driving force of the economy. A softening labor market, rising delinquencies and a slowdown in travel-related spending is likely to lead to weakness in spending moving forward. As a result, we expect two Federal Reserve (Fed) interest rate cuts this year likely beginning in September to help the economy avoid a recession. While political rhetoric will abound if the Fed cuts, we view the Fed as apolitical and doing what it believes is in the best interest of the economy, not the political class. Longer term, the extension of (or lack thereof) the 2017 tax cuts is likely to impact the economy, but that does not occur until the end of 2025.

What is the impact on fixed income?

We expect the bond market to be driven by the fundamentals of economic growth and inflation. And with both likely on a downward trajectory, interest rates (particularly the 10-year Treasury yield) are likely to move lower by the end of this year toward 4%. With the Fed expected to begin cutting interest rates, the yield curve is likely to steepen with shorter-term rates falling faster than longer-term rats.

However, we are mindful of the burgeoning risks associated with the supply/demand dynamics. The trajectory for policy and the impact on government spending should not change with Vice President Harris entering the race. Admittedly, neither Republicans nor Democrats have really focused on containing the national debt. Both administrations added significantly to the overall level of debt (Trump +$8 trillion, Biden +$7 trillion). The good news: until now, the bond market has absorbed the additional issuance from increased spending as retail investors have picked up their pace of buying. Until demand starts to wane (not our base case yet but we continuously monitor), the market should remain reliant on the fundamentals of growth and inflation.

Bottom line

President Biden electing to drop out of the presidential race does not materially impact our view of the current standing of the race. The view of our political team continues to favor former President Trump; however, the potential for a Republican sweep probably gets more challenging as the shift at the top of the ticket is likely to help some down-ballot candidates. However, with over three months to go, the race is far from over and a lot can change between now and November 5. From an asset class perspective, our views are unchanged as current macro factors such as economic and earnings growth and a likely Fed cut in September remain intact. As always, as we approach election day, we will keep you apprised of our latest thinking and how it could impact on the economy and financial markets.

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Moderate Growth in Q2

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

Robert Stein, CFA - Dep. Chief Economist

July 22, 2024

There are signs US economic growth is slowing down. In particular, jobless claims, perhaps the best high-frequency economic indicator, have averaged 235,000 per week in the last four weeks versus 211,000 in the first quarter. Meanwhile, continuing jobless claims are creeping up while overall retail sales are up a meager 0.2% in the past six months, slower than the pace of inflation.

The US is not in a recession at this point but higher claims and soft sales, along with a renewed deceleration in inflation (consumer prices ticked down 0.1% in June), suggest that the drop in the M2 measure of the money supply from early 2022 through late 2023 is finally gaining traction.

We may also be witnessing the end of the temporary and artificial impact of last year’s surge in the budget deficit. In the absence of the Supreme Court’s decision to overturn much of President’s Biden’s plan to forgive student loans, the budget deficit would have been 7.5% of GDP last year. That’s well larger than any year on record when the US was not engaged in a World War and the unemployment rate was below 4.0%.

We estimate that Real GDP expanded at a 2.1% annual rate in the second quarter, mostly accounted for by an increase in consumer spending. (This estimate is not yet set in stone; reports Wednesday about international trade and inventories might lead to an adjustment.)

Consumption: “Real” (inflation-adjusted) retail sales outside the auto sector grew at only a 0.3% annual rate in Q2 but auto sales rebounded at a 9.8% rate. Meanwhile, it looks like real services, which makes up most of consumer spending, grew at a 2.1% pace. Putting it all together, we estimate that real consumer spending on goods and services, combined, increased at a 2.1% rate, adding 1.4 points to the real GDP growth rate (2.1 times the consumption share of GDP, which is 68%, equals 1.4).

Business Investment: We estimate a 1.7% growth rate for business investment, with gains in intellectual property leading the way, while commercial construction declined slightly. A 1.7% growth rate would add 0.2 points to real GDP growth. (1.7 times the 14% business investment share of GDP equals 0.2).

Home Building: Residential construction grew in the second quarter in spite of some lingering pain from higher mortgage rates. Home building looks like it grew at a 4.9% rate, which would add 0.2 points to real GDP growth. (4.9 times the 4% residential construction share of GDP equals 0.2).

Government: Only direct government purchases of goods and services (not transfer payments) count when calculating GDP. We estimate these purchases were up at a 1.7% rate in Q2, which would add 0.3 points to the GDP growth rate (1.7 times the 17% government purchase share of GDP equals 0.3).

Trade: Looks like the trade deficit expanded in Q2, as exports grew but imports grew much faster. In government accounting, a larger trade deficit means slower growth, even if exports and imports both grew. We’re projecting net exports will subtract 0.8 points from real GDP growth.

Inventories: Inventory accumulation looks like it picked up in Q2 relative to Q1, translating into what we estimate will be a 0.8 point addition to the growth rate of real GDP.

Add it all up, and we get a 2.1% annual real GDP growth rate for the second quarter. Good news compared to a recession but not a great starting point if a tighter monetary policy starts to bite harder.

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.

Identify the Connection Between Net Worth and Risk Tolerance

Raymond James

Family & Lifestyle

Understanding your risk profile is an important component of managing significant wealth.

Nobody wants to financially erode the portfolio they’ve built by making risky choices at the wrong time. You spend nearly half of a lifetime working hard to prepare for a secure retirement, so no wonder it isn’t easy to convince yourself to embrace risk. As vital as wealth preservation is, especially when nearing retirement, returns are still an important consideration.

So how do you get over the risk hurdle? Research shows your financial advisor can help. Those who work with an advisor perceive potential higher-risk investments with less negativity. They’re also more apt to recognize the importance of holding thoughtfully selected risk within an investment portfolio compared with wealthy investors who don’t partner with an advisor.

But how risky is too risky when it comes to wealth preservation and generating returns for high-net-worth investors? You might be surprised.

Sometimes looking at the numbers is an exercise in perspective. Investors with significant wealth have a greater ability to absorb financial losses than others – but emotion can sometimes get in the way of seeing the broader context. An amount that may initially cause “sticker shock” may actually be a fraction of your liquidity when considering the bigger picture. Your advisor may be able to run simulations that show how your unique portfolio would react to market pullbacks or changes in interest rates. Seeing these potential outcomes can help clarify the level of risk that fits your tolerance and your investment goals – and it may turn out to be higher than you thought.

Age is less important when determining risk for investors with significant wealth. Your investment time horizon – the length of time you expect to hold an asset – is an important component of risk tolerance. Older investors typically have a shorter time horizon given their proximity to retirement and the usual need to make portfolio withdrawals at that time. However, age may have less impact on the overall risk tolerance of affluent investors whose income needs in retirement are already accounted for. If it’s unlikely you’ll need to liquidate assets in the near term to meet your spending needs, it may be appropriate to maintain a less-conservative allocation for longer.

Being too conservative can be a risk unto itself. Avoiding undue risk is always wise. However, you want to be sure to balance risk with potential return when it comes to your overall plan to outpace inflation and meet your financial goals in retirement, whether that’s supporting your grandkids’ education, giving to charitable causes or taking that once-in-a-lifetime trip. With the more complex planning needs that come with being an affluent investor, it’s important to discuss with your financial advisor an asset allocation that can help maintain your lifestyle over the long term.

Focus less on market timing and more on the timing of your life. Creating a diversified portfolio and revisiting it as your life and goals evolve is more important than any one investment decision. Your financial advisor can help you determine which opportunities provide the best potential for reward for the risk taken that aligns with your unique circumstances, life plans and goals, and provide you with the confidence not to “jump” into and out of the market at the wrong time.

More risk assets, more thoughtful rebalancing. Because private wealth individuals typically hold meaningful wealth in risk assets like equities, which can change significantly in value over time, it’s important to establish a plan with your advisor for periodically returning your portfolio to its target asset allocation. It’s also important for your advisor to see the whole financial picture; holding assets in multiple accounts without informing your advisor of your full portfolio may increase the risk of becoming overly concentrated or underexposed to certain markets. Your selected strategy will have important tax consequences, so talk through various approaches to determine the best fit.

Create a steady withdrawal strategy for retirement. Capital preservation is important to prevent income loss. You’ll still need to ensure your liquidity needs are met with a holistic income strategy. Consider the income sources you’ll have in place, which may include Social Security, pensions, annuities, dividends, bond coupons, etc., and work with your advisor to address any potential mismatch between what’ll be generated and what you’ll need to maintain your desired lifestyle as well as access capital if there is ever a need.

Confront concerns head on. One way to bring confidence to the idea of taking on risk is to simply talk about it openly. Have conversations with your financial advisor to help you understand your risk tolerance today and how risk can affect your future. When ideas and numbers become more tangible, they become more manageable. Your financial advisor can speak directly to the matters that will impact your portfolio the most but change your lifestyle the least.

Maintaining a large portfolio into and through retirement doesn’t have to mean giving up on returns and opportunities for growth, when that risk is managed thoughtfully. It may take a true understanding of your overall financial outlook, and transparent conversations with your financial advisor, to help you get there.

There is no assurance any investment strategy will be successful. Investing involves risk including the possible loss of capital. Asset allocation and diversification do not guarantee a profit nor protect against loss. The process of rebalancing may result in tax consequences.

IMPORTANT: The projections or other information generated by the firm’s portfolio simulation tool (Goal Planning & Monitoring) regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results. Results may vary with each use and over time.

Will the Sun Set on Generous Estate and Gift Tax Exemptions in 2026?

Raymond James

Tax Planning

Now is a good time to review your estate and gifting plans.

High-net-worth individuals and families who benefit from the historically high federal estate and gift tax exemption may soon see it reduced by half. Favorable increases in the estate and gift tax exemption created by the Tax Cuts and Jobs Act of 2017 (TCJA) are scheduled to sunset at the end of 2025 along with other changes the law made, including an increase in the standard deduction and the charitable giving deduction, as well as reductions in individual income tax rates.

With so many tax provisions scheduled to revert back to pre-TCJA levels in under two years, consider moves you might need to make to minimize your tax burden and support your financial goals.

How the lifetime estate and gift tax exemption changed under the TCJA

The TCJA went into effect on January 1, 2018, and doubled the estate and gift tax exemption from $5 million to $10 million for individuals and $10 million to $20 million for joint filers. This exemption is indexed for inflation, so by 2023 it had risen to $12.92 million per person and $25.84 million per married couple.

The lifetime exemption amounts for estate and gift taxes are the same, which is why they’re discussed together. In addition to the estate and gift tax exemption amounts, you may make annual gifts up to $18,000 (per receiver) in 2024 without utilizing any of your gift tax exemption.

The estate tax exemption in 2024 is $13.61 million for individuals and $27.22 million for couples. But because the TCJA sunsets on December 31, 2025, the estate tax exemption in 2026 will fall back to $5 million for individuals and $10 million for couples, indexed for inflation, unless Congress acts to extend the provisions.

If Congress doesn't take any action, the exemption for federal estate tax will be reduced by half after 2025.

How the exemption changes work

For example: A married couple with $25.84 million in assets in 2023 gifted their child $17,000 that year. Because the gift amount didn’t exceed the gift tax exemption for 2023, they didn’t have to pay gift taxes on that gift. But they also made a second gift that year to their child of $25,823,000 – the remaining amount of their lifetime estate and gift tax exemption (as of 2023).

Did the couple have to pay taxes on that generous second gift? No. Even though the second gift is taxable, the IRS applies a credit against the gift tax based on the total estate and gift tax exemption. In other words, the IRS in effect says to such a couple, “You don’t need to pay now for that taxable gift; we’ll settle up with you on all your lifetime gifts and estate taxes when you die.”

Now imagine that this couple passes away in 2024. The TCJA is still in effect, and the couple’s estate ends up paying nothing in gift or estate taxes for either the first or second gift because those two gifts equal $25.84 million, which is less than the 2024 lifetime gift and estate tax exemption of $27.22 million. If at the time of their death the couple’s remaining assets are worth $1.5 million, their estate also wouldn’t need to pay taxes on $1.38 million of those assets because they are covered under the remainder of the $27.22 million exemption.

But suppose this couple instead dies in February of 2026, after the TCJA has ended, and Congress hasn’t acted to extend the provisions. Let’s assume that the indexed gift and estate tax exemption for 2026 is $10.4 million.

Does the expiration of the TCJA mean the couple now has to pay taxes on the amount of their second gift that is above $10.4 million? No. The IRS issued a rule in 2019, clarifying that it won’t “claw back” gifts made during the period when the TCJA was in effect. So the estate in 2026 can calculate its gift and estate tax exemption using the exemption under the TCJA.

The nuances of which particular year of the exemption would apply (whether 2023 or 2025) would be best to discuss with your financial advisor. But the larger point is this: If you act before 2026, you can take advantage of the TCJA to lock in its higher lifetime gift and estate tax exemption even if you expect to live long past December 31, 2025.

Gifts and other strategies

Outright gifts directly to your loved ones are not your only option for taking advantage of the high lifetime gift and estate tax exemption under the TCJA. Based on your circumstances and goals, you might consider several other strategies.

Gifts to an irrevocable trust

You could create an irrevocable trust with designated beneficiaries and distributions based on the terms you choose. Any gifts to this trust can take advantage of the TCJA lifetime gift and estate tax exemption.

Gift to a spousal lifetime access trust (SLAT)

If you’re concerned that giving large gifts directly to others or to a trust might leave you too short on funds to support yourself while you’re alive, you might want to consider a spousal lifetime access trust (SLAT). A SLAT is created by one spouse for the benefit of the other spouse. Any gifts the SLAT creator puts into the trust will be distributed to the beneficiary spouse, who can then use those distributions for joint expenses. You can also configure a SLAT so that its assets pass to your descendants upon the death of both you and the beneficiary spouse.

Gifts the donor sponsor gives to the SLAT are exempt from tax up to the donor spouse’s available exemption amount. In 2024, a donor could gift $13.61 million without paying a gift tax.

While the donor won’t be taxed on contributions below the exemption amount, the beneficiary may well owe tax on distributions from the SLAT, as these are treated as taxable income. And assets distributed to the beneficiary spouse can increase their estate. That increase could be subject to the estate tax or its exemption.

Establishing other types of trusts

There are many other types of trusts that might serve your particular needs. These include dynasty trusts, irrevocable life insurance trusts, and a qualified personal residence trust. Your financial advisor can most effectively evaluate what option or combination of options will achieve your goals.

If your gifts to your SLAT will use up your gift and estate exemption, but you also have a significant life insurance policy, an irrevocable life insurance trust may be a way to prevent the life insurance policy from counting as part of your estate. That way, your beneficiaries benefit from the life insurance payout without being subject to high estate taxes.

A good time to review your estate plan

Although there’s a chance that new tax legislation may take effect between now and 2026 that extends or builds upon the TCJA provisions, it’s still advisable for families to review their estate plan with their financial advisor as soon as possible. Waiting until the latter months of 2025 might limit the strategies available to you to take advantage of the TCJA estate tax exemption provision. Even if you’re confident that the TCJA sunset won’t affect your estate plan, it’s still important to check it regularly.

Raymond James does not provide tax or legal advice. Please discuss these matters with the appropriate professional. 

When it Comes to U.S. Electricity Demand, Chatbots Matter More than Cars

Raymond James

Economy & Policy

July 15, 2024

Artificial intelligence is set to become a game changer for the electric power industry, notes Pavel Molchanov, Managing Director, Energy Analyst, Equity Research.

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

Whether or not you enjoy sitting in front of a computer and conversing with a human-seeming artificial intelligence (AI) platform (i.e., a chatbot), the AI boom will, if nothing else, affect your energy bill. AI is set to become a game changer for the electric power industry – especially, though not solely, in the United States. Principally as a result of AI, U.S. electricity demand is about to start posting meaningful growth for the first time in two decades. Enabling the power grid to manage this growth in demand, while simultaneously shutting down aging coal-fired power plants, will require an all- of-the-above strategy. At Raymond James, analysis of this trend has involved a collaborative, cross-industry effort between the technology and energy research teams.

Demand for electricity set to skyrocket

It may come as a surprise to some of our readers that U.S. electricity demand has been flattish over the past quarter-century – even as population and GDP have continued to grow. The reason is energy efficiency: everything from lightbulbs to air conditioners is more efficient than the older equipment being replaced. U.S. electricity demand in 2023 was up only 10% from 2000, equating to average growth of only 0.4% per year. AI is about to change that in a big way. We forecast that US electricity demand will grow at an average of 2.8% per year through 2030, with AI-related demand comprising two-thirds of incremental demand. The other one-third comprises electric vehicles and, well, everything else! Data centers supporting the AI boom are extremely energy-intensive, even more so than data centers that have been around since the early days of the Internet. Simply put, whenever someone engages with a chatbot – and this is happening countless times every day – a hefty amount of electricity is used. Furthermore, data centers provide a textbook example of mission-critical electricity users: they cannot afford to lose power even for a minute. Data centers run by the large third- party providers and hyperscale cloud companies typically have sufficient on-site generators and temporary battery backup to remain operational during grid outages.

So, is this good news or bad news for the electric power industry? The short answer is: good. Utility companies obviously want to sell more electricity to their customers, and as mentioned earlier, they have had very little organic growth (on the whole) for a long time. That said, utilities also face the risk of managing a power grid that is unprepared for the increasing demand. In the worst-case scenario, it could lead to systematic load shedding—deliberate power outages affecting a large proportion of the population – as a way of reducing the stress on the grid. We are not the only ones who see the risks. In its latest Report Card for America’s Infrastructure, the American Society of Civil Engineers gave electric power infrastructure a lackluster C–grade and forecasted an investment shortfall of $200 billion by 2029.

Power grids in depth

An important but not always understood feature of the U.S. electric grid is the extent of its geographic bottlenecks. The two major grids – Eastern and Western Interconnections – have minimal connectivity, for reasons that go back to the first half of the 20th century. As it stands, there is very little transfer capacity between them. Data center operators in the east need to rely upon physical electricity supply that is also in the east. Likewise, coal plants being shut down in the Rocky Mountain region will be mostly replaced by the wind and solar projects located in the west. Texas, the ERCOT grid, is largely isolated from both the Eastern and Western Interconnections. This presented a major problem during the snowstorm in early 2021, when, despite sky-high power prices, Texas was unable to source urgently needed electricity from its neighbors. In the long run, as part of infrastructure upgrading/ modernization across the board, what needs to happen is for connectivity between the regional grids to be greatly bolstered.

A marathon, not a sprint

What we have discussed in this article encompasses a multi-decade story. In the electric power industry, nothing changes on the spur of the moment – in other words, do not expect any immediate transformation. Utility management teams and policymakers alike are aware of what needs to be done, but complex infrastructure projects are always prone to delays. The capital to make these investments is available, and so is the technology, though labor can be a constraint. This is a proverbial marathon rather than a sprint, which means that a wide range of companies stand to benefit from these opportunities for decades to come.

All expressions of opinion reflect the judgment of the Chief Investment Office, 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. Past performance may not be indicative of future results. Asset allocation and diversification do not guarantee a profit nor protect against loss. The S&P 500 is an unmanaged index of 500 widely held stocks that is 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. Investing in small cap stocks generally involves greater risks, and therefore, may not be appropriate for every investor. International investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility. Investing in emerging markets can be riskier than investing in well-established foreign markets. 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. There is an inverse relationship between interest rate movements and fixed income prices. Generally, when interest rates rise, fixed income prices fall and when interest rates fall, fixed income prices rise. If bonds are sold prior to maturity, the proceeds may be more or less than original cost. A credit rating of a security is not a recommendation to buy, sell or hold securities and may be subject to review, revisions, suspension, reduction or withdrawal at any time by the assigning rating agency. Investing in REITs can be subject to declines in the value of real estate. Economic conditions, property taxes, tax laws and interest rates all present potential risks to real estate investments. The companies engaged in business related to a specific sector are subject to fierce competition and their products and services may be subject to rapid obsolescence.

M2 Slowdown Finally Gaining Traction

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

Robert Stein, CFA - Dep. Chief Economist

June, 15, 2024

The lags between a shift in monetary policy and the economic impact are long and variable. While the actions of the Federal Reserve during the pandemic were unprecedented, it finally looks like the excess money pumped into the economy has worked its way through the system. And with the M2 measure of the money supply down from its peak, the economy is reacting.

This measure of the money supply surged in 2020-21 in the first two years of COVID as the government massively increased deficit spending and enacted temporary tax cuts that didn’t improve the long-term incentives to work, save, and invest. The resulting spike in inflation in 2021-22 certainly didn't surprise us, and it should not have surprised anyone else.

Yet it did. Many went out of their way to find other things to blame for inflation. They ignored M2, and blamed “Putin” or “supply chains” and called inflation “transitory.”

Sure, some prices were boosted by the lockdowns and war, but that was only a small fraction of the problem. If it was the whole problem or most of it, we wouldn’t be sitting here more than four years later with the consumer price index up 3.0% from a year ago. If it were all “transitory,” we should have seen a widespread drop in consumer prices, and that didn’t happen.

The Fed itself continues to ignore the money supply. Fed officials never bring up the topic on their own and reporters rarely if ever ask about it. And on the rare occasion when Fed Chairman Jerome Powell is asked about the money supply, he goes out of his way to say it’s not something the Fed pays much attention to.

However, the link between money and inflation is starting to get some more attention. A recent paper by Greg Mankiw, an academic economist who was the chairman of the Council of Economic Advisers under President George W. Bush, noted that forecasts of high inflation that were made back in 2021 that considered the M2 surge turned out to be right. (Note: the First Trust economics team won an award as the most accurate economists for the US economy for 2022, and we recognized the importance of the M2 surge.)

Which brings us to where the economy is right now. Consumer prices declined 0.1% in June, the largest drop for any month since the early days of COVID. Much of this was due to a drop in energy prices, but even “core” consumer prices were soft, up only 0.1% for the month, the smallest increase for any month in more than three years.

Meanwhile, we are seeing some softness in economic growth. Overall retail sales in May were no higher than in December (after adjusting for normal seasonal variation) and it looks like retail sales fell in June (to be reported Tuesday). Manufacturing production is likely lower than a year ago (reported Wednesday).

Considering that the M2 measure of money peaked roughly two years ago, this should not be surprising. The drop in M2 from early 2022 through late 2023 appears to be finally having an effect.

The wild card is that M2 is up at a modest 2.3% annual rate since last October. If this keeps up, a soft landing is possible while inflation continues to move back down to the Fed’s target. It could also leave room for some rate cuts by the Fed. By contrast, if the M2 money supply resumes a decline, that would raise the risk of a recession and if M2 surges again, it could herald a revival of inflation like we had in the 1970s.

Either way, we are glad the M2 money supply is starting to get more attention, we still follow it closely, and think investors should pay attention, as well.

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.

S&P 500 Index 1H

First Trust Economics

Three on Thursday

Brian S. Wesbury - Chief Economist

July 11, 2024

This week’s edition of “Three on Thursday” focuses on the S&P 500 Index’s performance in the first half of 2024. As a widely respected barometer for the overall stock market, the S&P 500 Index tracks the performance of 500 of the largest companies listed on U.S. stock exchanges. The Index uses a market-cap weighting approach, giving a higher percentage allocation to companies with larger market capitalizations, adjusted for the number of publicly traded shares. In the first half of the year, the S&P 500 Index achieved a remarkable total return of 15.3%, reaching all-time highs 31 times during this period, with a maximum drawdown of only 5.8%. An exceptional first half, indeed! Below are three insightful charts that provide a deeper understanding of the events that shaped this extraordinary first half of the year.

The “Magnificent 7” companies – Apple, Nvidia, Microsoft, Amazon, Tesla, Alphabet, and Meta – which currently hold a combined 29.5% weighting in the S&P 500 Index, accounted for 59.6% of the Index’s 15.3% total return in the first half of 2024. Nvidia stood out with an impressive 149.5% increase, leading the group in contribution. However, not all members of this elite cohort saw positive growth; Tesla experienced a decline of 20.4%, detracting 0.39 percentage points from the market’s overall performance and slipping to the eleventh position by market capitalization, with Berkshire Hathaway replacing it in the seventh slot. If Berkshire Hathaway replaced Tesla in the Magnificent 7, the new group’s contribution to the overall market return for the first half of 2024 would increase to 63.7%.

Although the S&P 500 Index gains have been predominantly driven by the Magnificent 7, it is essential to also consider earnings. Over the past year, the Magnificent 7 have contributed 86.7% to the S&P 500 Index’s earnings growth but only 59.6% to its price gain. Five of these seven companies have seen a higher contribution to the Index’s earnings growth compared to their share of S&P 500 Index price gain. For example, Amazon accounted for 19.3% of the S&P 500 Index’s earnings growth over the past year but only 6.2% of its price gain. While the market gains have been narrow, the concentration in earnings growth has been even more pronounced.

In 2023, market advances were very concentrated, with a mere 27% of firms within the S&P 500 Index surpassing the Index’s performance. The first half of 2024 showed even further narrowing with just 24% of companies in the Index outperforming the overall Index. The proportion of companies surpassing the Index is the lowest going back to 1995 and significantly below the 29-year average of 48%, indicating that the market remains unprecedentedly narrow. However, with earnings expected to accelerate outside of the “Magnificent 7” in the second half of the year, there is hope for some market broadening on the horizon.

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.

Social Security's Uncertain Future?

Raymond James Commentary & Insights

Retirement & Longevity

It’s an election year, which means you can expect to hear presidential candidates being asked about their plan for preventing Social Security from going bankrupt.

While you may not hear a clear answer, you can rest assured that Social Security is not going bankrupt.

Social Security benefits are primarily funded by the payroll taxes collected from today’s workers. Money goes into a pot called (believe it or not) the Old-Age and Survivors Insurance Trust Fund, and benefits are dispersed from there. It’s a pay-as-you-go system, so as long as workers are paying payroll taxes, Social Security benefits will be paid.

The problem isn’t bankruptcy – it’s that the program faces a long-term funding shortfall that, left unaddressed, will mean a reduction in benefits for future retirees.  

For every person drawing Social Security benefits, there are just 2.7 workers paying into the system.

For decades, the Social Security system collected more in payroll taxes and other income than it paid out in benefits, building up a large reserve. In 2021, when the program’s costs began exceeding its income, Social Security started drawing from this reserve fund to make up the difference. When those reserves are depleted – an event expected in about 10 years – benefits will be reduced by an estimated 23%. If Congress takes no action to head this off, people who are 57 years old today will receive 77% of today’s benefits when they reach regular retirement age.

For the average dual-income couple retiring in 2033, that’s $17,400 less.

The problem is mostly a demographic one. In 1940, a 65-year-old had a life expectancy of less than 14 years. For today’s 65-year-olds, that expectancy has increased to 20, and a staggering 10,000 baby boomers are retiring every day.

At the same time, younger generations are getting smaller, which means fewer workers paying into Social Security. In 2022, there were just 2.7 workers paying into the program for each person drawing Social Security benefits. By 2035, that number is projected to go down to 2.3.

Additionally, a smaller percentage of Americans’ income is subject to the payroll taxes that fund Social Security because the earnings of the highest-paid workers have grown faster than those of the average worker. In 1937, 92% of earnings were below the taxable amount. By 2020, it was just 83%.

Since 67 million Americans receive Social Security payments each month – it’s the main source of income for people 65 and older – it’s not hard to see why politicians are on the hot seat about fixing it.

To patch the shortfall, Congress has a few options – none of them particularly appealing.

Option 1: Increase tax revenue

The most obvious way to increase funding to Social Security is to raise payroll taxes. Currently, employers and employees each pay 6.2% for Social Security. Increasing that rate to 7.75% could assure solvency for 75 years. However, this solution may be unaffordable for lower-income workers.

Another option is to add new tax sources. One possibility, floated by the American Academy of Actuaries, is to tax investment income or increase estate and gift taxes – an idea that’s likely to face resistance.

Option 2: Reduce benefits or increase taxes for high earners

The Social Security tax rate applies only to annual wages currently set at $168,600. If Congress removed that cap and taxed all earned income, the additional revenue would wipe out 78% of the shortfall. Traditionally, earners above $160,200 are subject to a wage cap to prevent higher taxation that may not justify the benefits. Social Security’s political support comes from the idea that you can receive back a benefit you have paid into. Not capping the amount subject to taxation would fundamentally alter the program and political support.

Another idea is to reduce benefits for high earners who aren’t yet eligible for Social Security – not those who are already collecting – based on the idea that those people will be less reliant on those benefits. However, this measure alone would not curb Social Security expenditures enough to address the problem.

Option 3: Raise the retirement age

Arguably the most popular solution is to raise the retirement age. Today, Americans can start collecting Social Security benefits at 62, but the benefits increase the longer you wait, reaching a maximum monthly payout at 70.

The full retirement age (FRA) was 65 for much of the program’s existence. Today, FRA is 66 years plus two months for people born in 1955, and increases gradually to 67 for anyone born in 1960 or later.

Some lawmakers advocate for increasing FRA to 70 to bring it in line with today’s longer life expectancy. This change alone could eliminate nearly a third of the Social Security trust fund’s 75-year deficit. However, having to work to an older age could be especially challenging for low-income Americans and people working in jobs that are physically demanding.

The last time Congress overhauled Social Security was in 1983, when the program was just months away from not being able to pay full benefits. The Democratic House, Republican Senate and Republican President Ronald Reagan agreed to gradually raise the full retirement age from 65 to 67, which was reached in 2022. This effectively cut benefits by 13% while increasing payroll taxes.  

No easy answers

Odds are a solution would comprise some combination of these actions – higher taxes for some, lower benefits for some and more years on the job for some. And any proposal is likely to face stiff political opposition

The sooner policymakers act, the more options they will have, and the more time pre-retirement Americans will have to prepare for changes. Acting early allows for any tax increases or benefit reductions to be phased in gradually (rather than, say, implementing a 25% payroll tax increase come 2034). Early action would also enable lawmakers to make adjustments for people who will start receiving Social Security benefits within the next 10 years, before the reserves run dry.

One thing’s for sure: The longer they wait, the more abrupt and painful the changes will be.

Sources: ssa.gov, newsweek.com, npr.org, Investopedia.com, cnbc.com, money.com, cnn.com, cbpp.org, asppa.org

How Strong is the Labor Market?

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

Robert Stein, CFA - Dep. Chief Economist

July 8, 2024

We aren’t naturally cynical about economic data, but there are things that don’t add up about the job market.

On the surface, Friday’s report was solid, with nonfarm payrolls up more than 200,000 in June, another good month. However, downward revisions to the prior two months reduced the net gain in total payrolls to just 95,000, with a net gain of only 50,000 for the private sector.

Now for the strange parts. Nonfarm payrolls are up 2.6 million versus a year ago. But civilian employment, an alternative measure of jobs that includes small business startups is up a grand total of only 195,000 in the past year! Not 195,000 per month, but a total of just 195,000 over the past twelve months. Weird, right?

It's entirely possible that one of the major reasons for this gap is the recent surge in immigration. Immigrants who get jobs at one of the companies included in the payroll survey should be counted because it is filled out by employers. But the civilian employment figures (the weak one) are based on a survey of individual households and it’s hard to survey households in the US that are brand new or that are skittish about filling out a survey sent by the government, particularly if they are here illegally.

It's also important to point out that a gap between the two surveys this large may be highly unusual, but it has happened before. As a share of the labor force, the gap was briefly larger in the mid-1980s, the late 1990s, in 2013, and during COVID.

Another oddity is the consistent negative revisions for the past few years. Back in 2022, the third report for payrolls for a particular month averaged 6,000 less than the initial report for that month. For 2023, the revisions averaged -30,000. So far this year they’ve averaged -49,000. In the past few decades, negative revisions are more likely to happen around recessions than when growth is strong. So maybe it’s a symptom of weakness to come.

But there’s also a more benign explanation. Remember, the payroll report is based on a survey of employers. In the ten years prior to COVID, the government was getting an on-time response rate of 75% from the employers it surveys; but in the past three years the timely response rate has averaged only about 65%.

So maybe the companies that don’t fill out the survey on time for the first payroll report are having more business trouble than their peers (compared to normal). A struggling company would have more important issues to deal with than filling out a government survey. Eventually, the statisticians will get used to that pattern and make adjustments, but the data are looking funny in the meantime.

Another oddity is the gap between full-time and part-time jobs. The civilian employment report shows full-time jobs down 1.6 million in the past year while part-time is up 1.8 million. That kind of loss of full-time positions is normally linked to a recession and declining payrolls, not continued strong economic growth.

Do these anomalies show the government is cooking the books? We wouldn’t go that far. If the Labor Department is cooking the books, presumably for political reasons, then why are they letting the unemployment claims reports show an increase and why don’t they cook the civilian employment report to show more job gains closer to what the payroll report shows?

The problem is that it’s hard to argue at this point that government officials haven’t abused their authority to advance a narrative they’ve found useful, including the “slam dunk” case for Iraq having Weapons of Mass Destruction, or COVIDs “six-foot” rule, school closings, and masks, or even whether the measure of deaths from COVID were “from” COVID or “with” COVID. It’s not just the CDC and NIH that have lost luster in the eyes of average investors, but other government agencies as well. More people are skeptical of government reports than we have seen in our careers.

Putting it altogether, we think the job market is poised somewhere between the still strong picture painted by the payroll report and the soft reports on civilian employment. No recession yet, but some early signs of a slowdown.

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.

Holiday Closure

Let freedom ring! Let us appreciate the liberty we have and honor those who protect it. Our office will be closed Thursday, July 4th and Friday, July 5th in observance of the holiday. Wishing everyone a joyful and safe day of celebration!

Mega-Cap Tech Stocks Continue to Lead the Way

Raymond James

Markets & Investing

July 01, 2024

The S&P 500 is off to its best start to the year since 2019.

Having hit 31 record highs since January and up more than 15% year to date, the S&P 500 is off to its best start to the year since 2019 and the best start to an election year ever, driven by mega-cap tech stocks and artificial intelligence (AI) tailwinds. NVIDIA’s meteoric gains and 10-for-1 stock split briefly propelled the company’s market cap above $3 trillion, surpassing Microsoft as the most valuable public company in the world.

“Tech, Communication Services, and Consumer Discretionary remained center stage as market performance concentration continued — S&P 500 minus mega-cap tech was down,” said Raymond James Chief Investment Officer Larry Adam. “The market continues to rally on weaker economic data but we caution that a slowing economy could dampen earnings growth and hamper the market in the near term.”

Economic growth has moderated – a good sign to those looking to trust recent, improving inflation numbers. For fixed income, this has helped the Bloomberg U.S. Aggregate Bond Index claw back its year-to-date losses.

The year started with expectations for the Federal Reserve to cut interest rates three times beginning in the middle of the year, but higher than expected inflation early in the year halted those hopes. The Fed once again chose to hold rates steady in June and revised its projections to signal only one rate cut this year. However, if inflation continues to cool, we may see two.

The Consumer Price Index (CPI) printed 0.0% in May – a surprise to the markets, which were expecting a 0.1% increase. The core CPI also came in lower than market expectations, up 0.2%.

We’ll dig further into the details below, but first a look at the numbers year-to-date:

Are we finally seeing AI's limit?

While tech mega-caps have dominated performance in the S&P 500 this year, last month we saw the first significant pullback and possibly the end of AI stocks’ rocket-like growth. The question now is: If the leaders take a breather, will the whole market decline or will the laggards get enough action to keep the Index relatively flat?

Labor market holds up, home sales slow down

Nonfarm payrolls grew by 273,000 jobs in May while the household survey showed a decline of 403,000, bringing U.S. unemployment up to 4% for the first time since January 2022. The disparity isn’t entirely unusual, but looking at both surveys together creates a clearer picture of the strength of the labor market.

Existing home sales declined in May, but that weakness is yet to be reflected in existing home sale prices, which continue to rise despite the increase in inventory. New home sales declined more than expected with the increased inventory bringing new home sales prices down. In April, both housing starts and housing permits were also lower than expected, indicating that the market for new homes as well as residential investment is weakening.

PCE signals inflation may be continuing to decline

After a lower-than-anticipated CPI, the bond market waited with bated breath for the Personal Consumption Expenditures (PCE) Index. A lower than expected PCE report on Friday marked a directional trend of significance that will likely lead investors to get ahead of lower interest rates, putting additional pressure on the Fed.

More tech and trade restrictions imposed on China

The U.S. intensified efforts to restrict China’s access to advanced chip technology last month, focusing on high-bandwidth memory (HBM) and gate all-around (GAA) chip technology, both of which are crucial for AI applications. Japan and the Netherlands coordinated with the U.S. to impose additional tech and trade restrictions on China, which could lead to volatility in the global semiconductor industry.

June also marked significant progress in U.S. nuclear energy policy with the passage of the ADVANCE Act, aimed at revitalizing the nuclear industry and maintaining global leadership in nuclear technology.

Oil market remains range-bound amid continued risks

The global oil market remained in a relatively tight trading range last month, with Ukraine’s drone strikes against Russian oil infrastructure having only a modest effect on supply and violence in the Middle East still a headline risk. On the demand side, the International Energy Agency and OPEC released conflicting forecasts, with OPEC calling for double the demand growth forecasted by IEA.

Uncertainty in France; progress in the UK

Developments in the euro area dominated the international investment backdrop in June, with French President M. Emmanuel Macron’s decision to dissolve the country’s lower house National Assembly and hold snap elections surprising both regional politics and the market. Whatever the result of those elections, leaders will be tasked with addressing the deterioration of the country’s public finances in the aftermath of the pandemic and regional energy crisis of 2022.

In contrast, the UK economy is faring comparatively well, as headline inflation hit the 2% target after three years, which will serve as a tailwind for whichever party wins the July 4 election. Still, the Bank of England has voted to maintain the key base interest rate at 5.25% until the incoming government’s plan for pursuing its policy agenda becomes clear.

The bottom line

With the S&P 500’s dogged run and the looming election, it’s normal for investors to ponder the best course of action. Navigating all-time highs is part of the journey – they don’t always mean a correction is imminent, but rather signal a healthy and growing economy. Even if a correction does occur, taking a long-term view will generally yield better results.

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, Australasia and 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. International investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility. Investing in oil involves special risks, including the potential adverse effects of state and federal regulation and may not be suitable for all investors. U.S. government bonds and Treasury notes are guaranteed by the U.S. government and, if held to maturity, offer a fixed rate of return and guaranteed principal value. U.S. government bonds are issued and guaranteed as to the timely payment of principal and interest by the federal government. Treasury notes are certificates reflecting  intermediate-term (2 -10 years) obligations of the U.S. government. Companies engaged in business related to the technology sector are subject to fierce competition and their products and services may be subject to rapid obsolescence. MAGMAN stocks is a term used to describe six of the current largest and least volatile technology companies listed on the NASDAQ – Microsoft, Apple, Google, Meta, Amazon and Nvidia.

Material created by Raymond James for use by its advisors.

America's 3.5-Second Miracle

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

Robert Stein, CFA - Dep. Chief Economist

July 1, 2024

In 1852, Karl Marx said "Men make their own history, but they do not make it as they please; they do not make it under circumstances chosen by themselves, but under circumstances directly encountered and transmitted from the past."

He, obviously knew about the Magna Carta (1215) and the English Parliament’s Bill of Rights (1689), which created a separation of powers between the King and elected representatives. What he didn’t pay much attention to was how the United States had improved upon these documents or he would have seen a country of entrepreneurs that had freedom and property rights along with a constitution so well thought out that it has only been amended twenty-seven times in 235 years. No one puts it better than Ronald Reagan; the excerpt below comes directly from his Commencement Address at the University of Notre Dame back on May 17, 1981.

"This Nation was born when a band of men, the Founding Fathers, a group so unique we've never seen their like since, rose to such selfless heights. Lawyers, tradesmen, merchants, farmers – fifty-six men achieved security and standing in life but valued freedom more. They pledged their lives, their fortunes, and their sacred honor. Sixteen of them gave their lives. Most gave their fortunes. All preserved their sacred honor.”

“They gave us more than a nation. They brought to all mankind for the first time the concept that man was born free, that each of us has inalienable rights, ours by the grace of God, and that government was created by us for our convenience, having only the powers that we choose to give it. This is the heritage that you're about to claim as you come out to join the society made up of those who have preceded you by a few years, or some of us by a great many.”

“This experiment in man's relation to man is a few years into its third century. Saying that may make it sound quite old. But let's look at it from another viewpoint or perspective. A few years ago, someone figured out that if you could condense the entire history of life on Earth into a motion picture that would run for 24 hours a day, 365 days – maybe on leap years we could have an intermission – this idea that is the United States wouldn't appear on the screen until 3.5 seconds before midnight on December 31st. And in those 3.5 seconds not only would a new concept of society come into being, a golden hope for all mankind, but more than half the activity, economic activity in world history, would take place on this continent. Free to express their genius, individual Americans, men and women, in 3.5 seconds, would perform such miracles of invention, construction, and production as the world had never seen.”

America has proven that men and women not only can make their own history, but they can make it as they please, with circumstances chosen by themselves. Happy 4th of July to you all. Let’s take time this week to step back and realize just how fortunate we are to live in a time and place where the fire of invention still burns hot, course corrections (however messy they may be) still take place, and the future remains as bright as ever. May we continue to honor the legacy of those who came before us by striving to uphold the principles that have made this country a beacon of hope and freedom for the world. (We first published a version of this same Monday Morning Outlook in celebration of July 4th, 2023.)

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.

Happy Fourth!

Dear Friends and Clients,

Happy Independence Day! Hard to believe our republic, this grand experiment in democracy, turns a healthy 248 years old this July 4. That’s a long time removed from July 1776, when the first Independence Day celebration took place in Philadelphia. Back then, our newly independent nation had a population of 2.5 million. Today our estimated population is over 341 million.

Suffice to say, we’ve grown a lot since 1776. But, through it all, we’ve held onto the joyful, optimistic spirit that embodies our July Fourth festivities. Since its formal creation in 1941, the Fourth of July holiday has brought our country an opportunity for heartfelt celebration, true comradery, closeness with those we love and a sense of patriotism we can wear proudly.

We have John Adams, our second president, to thank for many of our boisterous Fourth of July traditions. When the Declaration of Independence was approved, he requested we celebrate with “pomp and parade,” with shows, games, sports, bells, bonfires and illuminations, from “one end of this continent to the other, from this time forward forevermore.” You don’t have to ask us twice, John.

I hope you and your loved ones are able to celebrate freedom and all things American this year, and for many years to come. Thank you for your continued confidence in us. It’s an honor to serve you.

 Sincerely,

Historic Highs: U.S. Net Interest Payments Skyrocket

First Trust Three on Thursday

Brian S. Wesbury - Chief Economist

June 27, 2024

In this week’s installment of “Three on Thursday,” we take a look at the surge taking place in net interest payments on treasury debt securities. Each year, when the U.S. incurs a deficit, it contributes to the growth of our national debt. The current outstanding federal debt has surpassed a staggering $33.6 trillion. However, what truly counts is the government’s ability to meet all the interest payments on this accumulating debt. In the last 12 months through May, federal net interest payments have soared to an unprecedented total of $836.1 billion. This figure represents the highest level ever recorded in our nation’s history. It’s important to note that as long as interest rates remain elevated and the government continues to accumulate new debt while refinancing old debt at higher interest rates, this number is poised to rise even further. To provide further insight, we’ve included three informative charts below.

For fiscal year (FY) 2024, ending on September 30th, the OMB estimates that interest on Treasury debt securities will reach $1.144 trillion. However, a more accurate measure of the financial burden of debt servicing is net interest on the federal debt, which excludes the interest payments the government pays itself as part of an accounting gimmick used for trust funds and other government accounts. These intragovernmental interest payments are designed to give the beneficiaries of these programs more confidence that their benefits will be paid in the future, but these interest payments do not affect the overall budget deficit. For FY 2024, the federal government is expected to pay itself $255.0 billion in interest income, making the net interest payments for the year an estimated $888.6 billion.

Net interest payments on government debt, projected at $888.6 billion for FY 2024, would set an all-time high, marking a 35% increase from the previous year, 136.9% over the past five years, and 288.1% over the past decade. Net interest’s share of total federal government spending is estimated to reach 12.8% in FY 2024, the highest since 1999 and nearly matching 2024 FY defense spending, which is projected at 13.1% of government spending. With interest rates elevated compared to the past 20 years and massive deficits forecasted ($1.87 trillion estimated for FY 2024 alone), net interest payments are expected to continue growing, occupying a larger portion of government spending over the next decade.

In the late 1970s, rising national debt and higher interest rates led to a significant increase in interest costs, peaking at 18.4% of federal revenues in 1991. However, smaller budget deficits and lower interest rates caused this ratio to decline over the following decade. From 2003 to 2018, interest outlays remained at or below 10% of federal revenues, despite substantial borrowing, due to low interest rates. Recently, the combination of rising interest rates and mounting debt has pushed net interest as a share of revenues to 17.5% in FY 2024, the highest level since 1992.

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.

What's Driving the Massive Deficits?

First Trust Three on Thursday

Brian S. Wesbury - Chief Economist

June 20, 2024

A prominent senator was on CNBC Tuesday morning and when asked about the issues with government spending in America today, responded it’s unfair “that someone like Jeff Bezos pays taxes at a lower rate than a Boston public school teacher… Those at the top have to pay their fair share of taxes” and in regard to the severe deficit problem, “It’s because we’ve done tax cuts and they’ve reduced our revenues sharply…What did Donald Trump’s tax cuts do? They pushed the deficit up even higher. So part of what we’ve got to do is get our revenue back in balance with our expenditures.” For today’s Three on Thursday, we test these claims by examining recent trends in government spending and revenues as well as the share of taxes the rich have been paying. For more detail please find the three charts below.

Looking back to 1950, government revenues have averaged 17.3% of GDP. During this time frame, the top marginal tax rate has exhibited significant fluctuations, ranging from a peak of 92% to a low of 28%. The best year for revenue as a share of GDP was 2000 when the highest marginal tax rate stood at 39.6%. Yet over this same period government spending has averaged 20.0% of GDP, hitting a record high of 30.8% of GDP in 2020. Since 2018 when the Trump tax cuts went into effect, revenues have averaged 17.0% of GDP, slightly below their historical average. Conversely, spending over the same period has averaged 24.8% of GDP, easily exceeding the historical average. The issue remains firmly on the spending side.

The most recent IRS data from 2021 underscores the highly progressive nature of the federal income tax system. Individuals in the top 1% (those with an adjusted gross income of $682,577 or higher) paid an average of 25.9% of their income to the Federal government. Meanwhile, those in the bottom 50%, (earning less than $46,637) had an average income tax rate of 3.3%. This significant difference shows that the top 1% pay an average federal income tax rate that’s 7.8 times higher than the bottom half of all taxpayers.

The top 1% is comprised of roughly 1.5 million income tax returns, and make 26.3% of total adjusted gross income, but they shoulder a significant 45.8% of the overall federal income tax burden, the highest percentage on record! Conversely, the bottom half, consisting of nearly 77 million income tax returns, make 10.4% of total adjusted gross income, yet their federal income tax burden is comparatively light at 2.3%. It’s worth noting that the bottom 98% of taxpayers, accounting for approximately 150.5 million tax returns and 68.1% of the adjusted gross income, collectively bear 46.2% of the total federal income tax load, basically matching the share carried by the top 1%.

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.