October 15th, 2021
Market bulls stampeded late in the week, boosted by a strong start to the Q3 2021 earnings season. Financial giants Goldman Sachs and Bank of America led the charge, reporting better than expected earnings growth on strong investment banking, trading, and lending revenue. Investors also cheered the September retail sales report which cruised past economists’ estimates. The strong earnings and consumer spending news combined to more than offset early week concerns over the impact inflation is having on consumers and businesses. For the week, the Dow rose 1.58%.
Consumer Spending Strong Despite High Prices
Retail sales surprised on the upside in September, rising 0.70%. That surpassed economist estimates for a 0.20% increase. Excluding autos, sales were up 0.80%, beating the 0.50% forecast. Year-over-year, sales were higher by 13.90% in total, and 15.60% excluding autos. Investors cheered the results as they came during a month when enhanced government benefits came to an end, delta variant cases across the country surged, and inflation remained persistent. Back-to-school spending ultimately proved to be a strong catalyst for consumers to open their wallets. Spending on sporting goods, music, and books stores led the way, rising 3.70%. General merchandise sales also had a good month, up 2.00% while miscellaneous retailers rose 1.80%. Online sales also posted healthy gains, rising 0.60%. If the trend is your friend, the holiday shopping season is shaping up to be a good one for retailers – provided there are any goods on the shelves given recent supply constraints.
Consumers spent strongly in September despite rising prices. The CPI Index rose 0.40%, which accelerated over August’s 0.30%. Year-over-year, prices were up 5.40%. Core prices, which exclude the often-volatile categories of food and energy, climbed 4.00% from the year ago period which is indicative that consumers are facing broad price increases for the goods and services they purchase. Inflation was noted across the gamut from groceries, gasoline, and new vehicles, to rent and furniture. There was some good news for used car buyers and travelers, however, as prices for used cars and airline tickets managed to fall during the month. Consumers have continued to spend during this recent spate of inflation, but it is proving stickier than initially expected. Snarled supply chains across the globe have made it difficult to move goods from point to point, creating shortages in many parts of the country. The Los Angeles and Long Beach ports, which account for 40% of all shipping containers entering the U.S., have announced they are moving to 24/7 operations. The move mirrors major ports in Asia and Europe which operate around the clock. The increased hours are a good first step, but with the cargo backlog and with truck and equipment capacity in short supply, it will be a race to see if goods can get to market with the beginning of the holiday sales season a mere six weeks away.
While the early part of the week was spent worrying about inflation and supply chain disruptions, we ended it on an upbeat note as early earnings reports and a surprisingly strong consumer spending report managed to shift investor sentiment. Of the 41 S&P 500 companies that have reported third quarter results, 80.5% have topped analyst estimates according to FactSet. As we stand today, Q3 2021 earnings are now expected to increase 29.8%. This is higher than previous estimates of 27.6% as analysts have become more optimistic that top line growth continues to hold despite the challenge of higher costs. Keep in mind that the notable earnings to date have generally come from the banking sector, but we’ve yet to truly hear from those industries that have more significant exposures to supply chain challenges, raw material costs, and labor shortages. Those companies’ guidance will ultimately be the key to the remainder of the year, but with this week’s rebound, the Dow sits within just 1.00% of its all-time high – leaving little wiggle room if the narrative for earnings shifts as we get deeper into earnings season.
The Week Ahead
Earnings season rolls on. Supply chain challenges, inflation, and 2022 guidance will be top of mind for traders as they pour through results. In economic news, the real estate market takes center stage with the latest existing home sales and housing starts figures. Overseas, China releases Q3 GDP results.
2021 RMDs: They’re Baaack
Required Minimum Distributions (RMDs) are the mandatory withdrawals that individuals 72 or older must make from retirement accounts under IRS rules. RMDs were waived in 2020 due to the pandemic, but they are back in 2021. The IRS explains on their website that the rules apply to all employer-sponsored retirement plans, including 401(k)s, 403(b)s and 457(b)s, as well as traditional IRAs and IRA-based plans such as SEPs and SIMPLEs. RMDs apply to Roth 401(k) accounts, but do not apply to Roth IRAs while the account owner is still alive. Roth IRAs are subject to RMD rules once the owner has passed away.
Previously, IRA owners had to start taking withdrawals when they reached age 70 ½, however, because of changes made in 2019, individuals who turn 70 on or after July 1, 2019 do not have to take withdrawals until they reach age 72. The amount that must be withdrawn each year is generally determined by dividing the balance of each qualifying account by a “life expectancy factor” as defined by the IRS. An IRS worksheet is available here to help individuals calculate their RMDs. The Uniform Lifetime Table shown here can be used by all IRA owners, unless their sole beneficiary is their spouse who is more than 10 years younger. In that case, the regular Joint Life Expectancy Table available here is used.
The calculation is as follows:
Account balance (as of the end of the previous year) / Life expectancy factor = RMD
For example, an individual who just turned 76 with an IRA balance of $100,000 would have an RMD of $4,545.45 ($100,000 / 22). Individuals can delay their first RMD to as late as April 1 of the year after they reach the RMD age. In all subsequent years, RMDs must be taken by December 31st. Individuals who do not take their RMDs could face a 50% penalty. There are some exceptions so be sure to speak with your advisor.
Note that for inherited retirement accounts, the SECURE (Setting Every Community Up for Retirement Enhancement) Act that was passed in December 2019 made substantial changes to the RMD rules for those accounts. The legislation introduced a new 10-year rule that requires IRA beneficiaries to withdraw the entire balance of the inherited IRA by December 31st of the year of the 10th anniversary of the owner’s death. The first year for the 10-year distribution requirement starts in 2021. Anyone who inherited a retirement account due to an account owner’s death in 2020 should ensure they are following the new SECURE Act inherited RMD rules. Furthermore, there are different rules for trusts and entity beneficiaries so it’s important to speak with your advisors. RMDs always require special planning. That’s especially true this year after changes introduced by new tax legislation. Your tax advisor and your financial planner can help you determine your RMD based on your specific situation and the new rules.