Below are the economic and market highlights for the week:
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Consumer Sentiment held steady in October despite the government shutdown, worries about the labor market and persistent inflation. The University of Michigan Consumer Sentiment Index registered 55 in October compared to 55.1 in September. The current conditions measure rose 1% to 61, while the expectations reading moved 1% lower to 51.2. On inflation, the one-year outlook was at 4.60%, down 0.1% while the five-year forecast was unchanged at 3.70%. On a positive note, interviews with consumers revealed little evidence that the ongoing federal government shutdown has moved consumers’ views of the economy thus far.
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Fed minutes showed a cautious but notable shift in monetary policy as the central bank lowered rates by 25 bps to a range of 4.00% to 4.25%. This was the first rate cut since December 2024, driven by concerns over a weakening labor market and signs that inflation is gradually easing. While the minutes showed most central bank officials supported the cut and signaled openness to further easing, some expressed concerns that further reductions could reignite inflation, particularly in the housing and services sectors.
- Consumer credit outstanding remained relatively unchanged in August. An increase in non-revolving credit such as car loans and student loans was offset by a drop in credit card spending. Credit card balances were down 2.50% in the past 12 months, their largest drop since the height of the pandemic in 2020.
Stocks Hit Record Highs as Stalemate Continues
Ten days and seven votes later, lawmakers have yet to reach a funding deal to reopen the federal government. With Congress essentially deadlocked, the shutdown is now expected to extend into next week. Despite the stalemate, markets have taken the lack of progress in stride with the S&P 500 and Nasdaq Composite indices scoring all-time highs once again on Wednesday. Continued enthusiasm for the AI trade has kept stocks in rally mode just as investors prep for next week’s official start of the Q3 earnings season. Stocks were on their way to another winning week before turning south on Friday as a reaction to Trump threatening to slap a “massive increase of Tariffs” due to China tightening export controls on rare earths. Turning to economic data, news was very light as key reports on trade and jobs were delayed due to the government shutdown. That left investors to sift through consumer sentiment data and the Fed minutes which showed the economy and consumers continuing to hold up despite lingering uncertainty.
The biggest question on the minds of both consumers and businesses is when will the government shutdown end. As of Friday, there have been no signs that Republicans or Democrats have made meaningful progress on negotiations. However key dates are on the horizon which could nudge them towards striking a deal. October 15th is the next scheduled pay date for active-duty military service members and the funding expiration date for a number of important governmental programs. There is also the upcoming social security cost-of-living adjustment announcement for 2026 as without it, seniors may not know how far their benefits will go. Finally, there is Wall Street who could begin making some noise for a deal. Markets have thus far dismissed the stalemate and are now projecting a one-month closure. Investors may find themselves comfortable with a longer deadline, but the economy may begin showing signs of strain before then. Economic activity is expected to drop as paychecks for government workers dry up, permanent layoffs begin, and air traffic delays pile up, impacting travel. The last shutdown ended when air traffic in New York was curtailed. So far, the shutdown has been quietly accepted, but a mounting public pressure campaign from businesses, workers, and investors could be just what is needed to finally get lawmakers to reach a deal.
The Week Ahead
Wall Street turns its eyes towards earnings season with big banks set to kick off Q3 earnings. Key economic reports include CPI, PPI, and retail sales….again….maybe.
IRS Clarifies Rothification Rules
The Department of the Treasury and the Internal Revenue Service recently issued final regulations addressing several SECURE (Setting Every Community Up for Retirement Enhancement) 2.0 Act provisions relating to catch-up contributions. Catch-up contributions are additional contributions under a 401(k) or similar workplace retirement plan for employees who are age 50 or older. They are intended to help older individuals save more as they approach retirement.
For 2025, the standard 401(k) contribution limit is $23,500, with an extra $7,500 allowed as a catch-up for those who are 50 or older. Workers aged 60-63 qualify for a temporary “super catch-up” of up to $11,250.
Key Changes to Catch-Up Contributions
- Eligible participants whose Federal Insurance Contributions Act (FICA) wages from the sponsoring employer exceeded $145,00 in the prior year must make all catch-up contributions as designated Roth contributions. Under the law’s “Rothification” requirements, there will be no pre-tax catch-up option available for these high earners.
- If an employer’s plan does not offer a Roth option, affected high earners will be unable to make catch-up contributions.
Participants who made less than $145,000 in the previous year can still decide between pretax and Roth (after tax) contributions.
Potential Benefits of Changes
Tax-free growth on withdrawals (if qualified)
Since Roth contributions are made with after-tax dollars, qualified distributions — including earnings — are completely tax-free once you’re over age 59½ and have met the five-year rule. This can help hedge against potential tax increases in the future.
Required Minimum Distribution (RMD) flexibility
Beginning in 2024, Roth 401(k) accounts are no longer subject to RMD requirements.
No income limitations on contributions
Roth 401(k) contributions are permitted at any income level. High-income earners who are otherwise ineligible for a Roth IRA can still contribute via a Roth 401(k).
Potential Downsides of Changes
Loss of immediate tax deduction
A key drawback of the Roth catch-up requirement under the SECURE 2.0 Act is the loss of an immediate tax deduction. For high earners, this can represent a significant trade-off as traditional pre-tax contributions previously helped reduce their taxable income in the current year.
Cash flow burden
Paying taxes now on what would otherwise be deductible contributions reduces take-home pay and may constrain cash flow for those relying on catch-up contributions to boost savings.
Risk of Reduced Participation Due to Changes
Some participants may be discouraged by the immediate tax impact and choose to discontinue catch-up contributions. This could lead to lower overall retirement savings.
The SECURE Act 2.0 provides opportunities for increased savings but adds complexity for high earners and for employers who have to implement changes to their plan to accommodate the new rules. It illustrates the importance of revisiting your retirement and tax planning strategy annually with your advisor and tax professionals.