January 15, 2021
After ringing in the New Year with more record highs, investors took some profits this week as they wait for the Q4 2020 earnings season to kick off next week. Investors welcomed 2021 on a high note as the U.S. rolled out its massive Covid-19 vaccination effort. As of Thursday, 11.9 million doses had been administered in the U.S. in the first full month of vaccine authorization. Although the rollout has missed federal projections, the pace is expected to pick up steam in the coming months as kinks in supply and logistics are hammered out. Markets were also optimistic the U.S. economy will continue to gather momentum in the months ahead as President-elect Joe Biden seeks to steer a $1.9 trillion stimulus plan through Congress. With the Democrats picking up both seats in last week’s Georgia Senate run-offs, the Democrats now control both the Senate and House to form a unified government and places them in the position to push through their legislative priorities. In economic news, the surge in Covid-19 cases in December, as well as the end of enhanced unemployment benefits, took a bite out of consumer spending. This resulted in retail sales falling for the second consecutive month. Despite the pullback in consumer spending, manufacturing remained a bright spot as industrial production figures rose during the month. In overseas news, China reported a record trade surplus, supported by strong demand for goods amid the pandemic. For the week, the S&P 500 dipped -1.48%.
Consumers Pull Back on Covid-19 Restrictions
Retailers had high hopes consumers would splurge on gifts this holiday season as Covid-19 restrictions cut spending on restaurants and reduced traffic to shopping malls. Unfortunately, spending fell short as retail sales fell -0.70% in December. November’s data was revised down to a -1.40% decline, following a previously reported -1.10% drop. Excluding autos, gasoline, building materials and food services, retail sales fell -1.90% after a downwardly revised -1.1% decline in November. The pullback in spending came as stricter Covid restrictions forced more businesses to lay off workers and as the effects from the first round of stimulus were finally exhausted. More job losses are expected in January while the market awaits just how much of Biden’s $1.9 trillion stimulus will ultimately get passed.
Manufacturing Remains Bright Spot
Manufacturing continued its resurgence as industrial production rose 1.60% in December. That was the largest gain since July. For the fourth quarter, industrial production rose at an 8.40% annualized rate. Meanwhile, manufacturing output rose 0.90% in December despite a drop in the production of cars and trucks. The month marked the eighth straight gain in manufacturing. Mining also rose in December, up 1.60%, led by a rebound in the oil and gas sector. The utility sector rounded out the gains with utility output rebounding 6.20% as cold weather gripped the nation. Overall, the rebound in manufacturing looks sustainable, particularly with the prospects that things finally get back to normal within the next quarter or two.
China Posts Record Trade Surplus
Soaring demand for pandemic goods catapulted China to a record $535 billion global trade surplus for 2020. That’s up 27% from the previous year and its highest reading since 2015. December exports rose 18.1% year-over-year (yoy). Work-from-home technology and healthcare equipment helped push exports higher as they remained in high demand amid a spike in Covid-19 cases throughout the world. Demand has been so robust that they have contributed to a bottleneck at ports and led to a shortage of shipping containers and surging costs. The costs have thus far not been passed on to consumers, with U.S. consumer prices up only a modest 1.40% yoy in December. That is well below the Fed’s 2.00% target level. Chinese domestic demand also proved to be strong during the month, up 6.50% yoy. The increase in local Chinese consumption actually helped reverse some of the trade imbalance with the U.S. Chinese demand for U.S. goods outstripped U.S. demand for Chinese goods. Chinese imports of American goods rose 47.7%, the most since January 2013 while Chinese exports to the U.S. rose 34.5%.
While indices pulled back slightly this week, there are still some pretty strong forces supporting markets these days, namely low interest rates, a massive stimulus proposal and the rollout of a nationwide vaccination program. It should come as no surprise that economic growth and earnings follow a path that is correlated with the degree to which things get back to normal societally, and with the vaccination program ramping up, there is a great deal of optimism life could be back to normal by mid-year. The combination of life normalizing, along with a year’s worth of locked up demand being released as people enjoy their newfound freedom, certainly lends bias to the idea that 2021 could be another positive year for markets.
The Week Ahead
The Q4 2020 earnings season kicks off with big banks and tech companies reporting results. Amid the start of earnings season, U.S. economic news will be relatively light with reports on existing home sales and housing starts being the highlights of the week. In overseas markets, China is the first of the world’s biggest economies to release Q4 2020 GDP figures. Meanwhile, the Eurozone releases January composite PMI numbers.
Social Security Changes for 2021
Each year, the Social Security Administration (SSA) announces its annual changes to the Social Security program for the coming year. Below are the changes that took effect on January 1, 2021.
1. Increase in benefits.
The SSA announced a cost-of-living adjustment (COLA) of 1.3%. The figure is calculated based on the year-over-year increase in the cost of a basket of goods and services using the Consumer Price Index for Urban Wage Earners (CPI-W). The CPI-W for the third quarter of 2020 was compared against the third quarter 2019 CPI-W. The fourth quarter numbers are not used because that number is typically not available from the U.S. Bureau of Labor Statistics until mid-January, and the adjustment goes into effect on January 1st. Congress initiated automatic annual COLAs in 1975 to help beneficiaries and their families try to keep up with rising costs. The biggest increase was in 1981 with 14.3% COLA. However, there have been three years in which there was no increase: 2010, 2011, and 2016 because there was little or no inflation. The estimated average monthly Social Security benefit payable in 2021 will increase $20. The average monthly benefit for a couple who are both receiving benefits will rise $33.
2. Increase in maximum taxable income.
Social Security is funded by a dedicated payroll tax. Employers and employees each pay 6.2% of wages up to the taxable maximum. The self-employed pay 12.4%. Social Security’s maximum taxable income is the amount of your earnings on which you pay Social Security taxes. This year, the maximum amount of earnings subject to the tax will increase to $142,800, up $5,100 from $137,700 in 2020, which simply means that individuals who make more than that from work won’t be subject to taxes on the overage. The figure is adjusted annually based on changes in national wage levels.
3. Increase in full retirement age.
The earliest an American worker can start claiming Social Security retirement benefits is age 62. However, the full retirement age (FRA) for Social Security purposes for those who turned 62 in 2020 was 66 and eight months. For those who turn 62 in 2021, the FRA is 66 and 10 months. FRA is set to increase by two months each year until it hits 67. Unless the law changes, anyone born in 1960 or later will not reach FRA until they are 67.
If you claim before your FRA, benefits are reduced by up to 30%. If you delay claiming past your FRA, your benefits can increase by up to 32%, so there is a big incentive for waiting. There is no additional benefit for delaying past age 70.
Our advisors recommend exercising patience when it comes to claiming Social Security benefits due to the penalties and loss of income associated with early claiming. A recent study published in August 2020 by the Bipartisan Policy Center estimates that today’s older Americans will have an average lifetime loss of $95,000 per household by claiming benefits early. The study also found that only 4% of older Americans claim at the age that would maximize their wealth.
4. Increase in the earnings test limit.
If you work and collect Social Security prior to FRA, you’ll be subject to the earnings test. This means that if your income exceeds a certain limit, you risk having some of your benefits withheld. This year, the amount that can be earned without having benefits reduced -– called the earnings test limit –- is $18,960 in 2021. This represents a $720 increase over the 2020 earnings limit. Once your income exceeds that point, you’ll have $1 in Social Security withheld for every $2 you earn.
If you’ll be reaching FRA in 2021, the annual exempt amount increases to $50,520 (up from $48,600 in 2020) this calendar year. You will have $1 in Social Security withheld for every $3 you earn above this amount until the month of your birthday. The benefits that are withheld for exceeding the earnings test limits aren’t lost on a permanent basis. They will be added back into your monthly benefit once you reach FRA.
5. Credit earning threshold increase
Individuals qualify for benefits by earning Social Security credits from working and paying Social Security taxes. The credits are based on the amount of earnings, and, each year, the amount of earnings needed for credits increases slightly. In most cases, workers need to accrue 40 work credits to become eligible for Social Security benefits. One work credit is the equivalent of three months’ worth of qualifying work in a year. SSA refers to this as a “quarter of coverage.” The amount of earnings required for a qualifying quarter of coverage is increasing to $1,470 in 2021, up from $1,410 in 2020. You can earn up to four work credits in 2021 if you earn at least $5,880.
6. Increase in Medicare Part B premiums
Medicare Part B premiums are deducted directly from Social Security benefit payments. For 2021, the standard monthly premium for Part B enrollees, which covers doctor and outpatient services, is $148.50 a month, an increase of $3.90 over 2020. However, high earners pay more in the form of surcharges called IRMAAs or income related monthly adjustment amounts. In 2021, the adjustments kick in for beneficiaries with modified adjusted gross income above $88,000 — or $176,000 for married couples filing jointly. High earners will pay monthly premiums between $207.90 and $504.90. High earners also pay up to $77 more in monthly premiums for Medicare Part D which is prescription drug coverage.
Social Security is an important part of retirement planning, however, many people are surprised to realize that the benefits are relatively modest. The most an individual who files a claim for Social Security retirement benefits in 2021 can receive per month is $2,324 for someone who files at age 62. The maximum benefit for someone who files at full retirement age is $3,148, and for someone who files at age 70, it is $3,895. Our advisors can help clients make the most of their benefits through strategies that maximize income and minimize taxes as part of a comprehensive retirement income plan. If you have questions about Social Security or any aspect of your financial plan, please call us at (214) 891-8131.
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