Here are the economic and market highlights for the week:
- After a strong 1.10% rise in July, retail sales slowed to a 0.10% gain in August. While sales slowed considerably from the prior month, August’s report still managed to top analysts’ estimates for a -0.20% decline. Excluding autos and gas, sales grew 0.20%. Diving into the numbers, consumers continued to flex their spending power at miscellaneous stores, ecommerce retailers, health and personal store sales up 1.70%, 1.40%, and 0.70%, respectively. That rise in discretionary spending was fueled by savings at the pump as sales at gas stations slipped -1.20%, dragging on the topline retail sales figure.
- The housing market continued to struggle in August as affordability remained a problem. Sales fell -2.50% month-to-month to a seasonally adjusted annualized rate of 3.86 million units. The drop came as the median price of an existing home sold rose 3.1% from a year ago to $416,700, a new all-time high. Although supply has been improving recently, rising 0.70% from July and 22.70% year-over-year, inventory stands at 4.2 months. That’s a bit shy of the six to seven months supply considered to be a healthy balance between supply and demand. Homeowners could see even greater inventory in the months ahead as housing starts bounced back in August after tumbling in July. Home construction rose 9.60% last month to a 1.36 million annualized rate, the fastest since April. New construction of single-family homes rose nearly 16% to an annualized 992,000 unit pace, the first monthly advance since February. That helped to more than offset a decline in multifamily projects which fell for the first time since May. Building permits, a gauge of future construction, rose 5% to a 1.48 million annualized rate, driven by a 2.80% rise in single-family and 8.40% increase in multi-family. Lower rates should help spur demand as it will lower financing costs for homebuyers and homebuilders.
Fed Goes Big with 50 BPS Cut
The S&P 500 and the Dow Jones Industrial Average hit all-time highs on Thursday, a day after the Fed announced a jumbo 50 bps rate cut to bring the benchmark lending range to 4.75% to 5.00%. That was the central bank’s first rate cut in four years and the first 50 bps cut outside of emergency rate reductions during the start of the Covid pandemic and the 2008 global financial crisis. That was not the Fed’s only surprise for investors. It also penciled in another 50 bps cut by year-end to bring the benchmark rate to a range of 4.25% to 4.50%. Stocks initially rose on Wednesday’s announcement before ending the session lower as investors digested the rate cut and Powell’s post-FOMC comments. Powell let investors know that the 50 bps rate cut should not be expected to be the new pace for future reductions nor should they think we will return to a world of ultra-low interest rates. By Thursday, investors found new appreciation for having gotten a 50 bps cut in the first place and markets entered rally mode on the expectation that a soft landing is virtually assured. The bullish momentum helped drive the S&P 500 above the 5,700 level for the first time while the Dow posted its first close above 42,000.
In leading with a 50 bps cut, the Fed chose to make a statement. Most economists had bet the central bank would play it safe, going for an initial 25 bps cut due to core prices and wage inflation remaining sticky while the consumer is holding steady. Instead, the Fed decided to go big. The central bank took their cues from the jobs market, wanting to shift its priorities to job protection now that it is confident inflationary pressures are continuing to ease towards their 2.00% target level. Powell emphasized in his post-FOMC conference it is now appropriate to “recalibrate” monetary policy while the broader economy is still in good shape. Investors are hopeful the aggressive action will more quickly lower borrowing costs for consumers and businesses to lift economic growth. The bond market, which is sensitive to Fed actions and its implications for the broader economy, offered its own vote of confidence that the Fed has averted a recession. The yield curve steepened with short term rates falling and the 10-year treasury yield rallying from last week’s 3.66% to Friday’s 3.74%. While the yield curve is still inverted, the steepening movement in fixed income yields and the simultaneous rally in equities are clear indications that the market believes a reacceleration in economic growth will soon follow.
The Week Ahead
A relatively quiet week on the economic front with S&P Flash PMIs and durable goods orders being the highlights of the week.
Preparing for the 2025 Tax Cliff
With the 2024 presidential election on the horizon, many individuals are reflecting on how potential shifts in the political landscape may influence their estate planning strategies. In particular, there are growing concerns regarding gift and estate tax exemptions which are set to revert to pre-2017 levels at the end of 2025 if no new legislation is passed. Understanding the implications of tax policy on estate planning can help individuals prepare for a variety of outcomes.
Estate Tax: A Very Brief History
The U.S. began taxing the estates of deceased individuals in 1916, just three years after the start of the federal income tax. Bear in mind that in 1913, the federal income tax form was four pages and included one page of instructions. Today’s federal tax code spans thousands of pages, and the IRS website lists more than 2,000 forms and publications. The Revenue Act of 1916 created a tax on the transfer of wealth from an estate to its beneficiaries. The tax was levied on the estate and was intended to generate revenue for the government during World War I. The legislation taxed larger estates at higher rates with taxes ranging from 1% for estates valued lower than $50,000 and 10% for estates worth more than $5,000,000. An exemption of $50,000 was allowed.
The U.S. tax code has evolved substantially over the past century, and this year’s presidential election is bringing attention to its future. The Tax Cuts and Jobs Act (TCJA) that was signed into law on January 1, 2018 introduced sweeping new tax provisions that will expire at the end of 2025 if Congress does not act. These include lower federal income tax brackets, bigger standard deductions, higher gift and estate tax exemptions, and other provisions. For the purposes of this article, we will highlight the increased lifetime exemption for gift and estate taxes that rose to an historically high $13.61 million (adjusted for inflation) for an individual and $27.22 million for a married couple under the TCJA for a seven-year period (2019-2025). This means that individuals can transfer or gift up to the exemption levels to family members or beneficiaries without owing estate or gift taxes. Estates of decedents survived by a spouse may elect to pass any of the decedent’s unused exemption to the surviving spouse if certain conditions are met.
Depending on what happens in Congress, the exemption could be reduced to approximately $7.2 million per individual or $14.5 million for a married couple. Any assets transferred above those amounts will be subject to a 40% transfer tax. The IRS has communicated that there will be no “claw back” of amounts gifted prior to the higher exemption sunsetting. This is a “use-it-or-lose-it” scenario for gift and estate tax planning with the available exclusion.
Tax Cliff: December 31, 2025
The 2025 Tax Cliff refers to the expiration of provisions in the TCJA set to occur on December 31, 2025. Although it is roughly 15 months away, consulting with your tax advisor and/or financial advisor is recommended. The current tax environment and the upcoming election create a bit more urgency for individuals with appreciating assets, those with a family business, and others with more complex or advanced planning requirements to potentially update plans and maximize the current exemption. Our advisors look forward to helping you and your loved ones implement strategies to protect and preserve your wealth for current and future generations or reviewing your estate and financial plans to look for opportunities.