June 2nd, 2023
Markets rallied this week as the President and Congress managed to strike a deal to raise the debt ceiling and as May nonfarm payrolls crushed analyst estimates. After weeks of political wrangling, Biden and McCarthy agreed on terms to lift the government’s $31.4 trillion debt ceiling, averting a government default. The agreement calls for suspending the nation’s debt limit through Jan 1, 2025 and spending cuts expected to reduce the deficit by about $1.5 trillion over the next decade. Despite the projected deficit cut, the U.S. debt to GDP ratio – which currently stands at 97% – is still estimated to grow to 115% over the next ten years. That’s only slightly below the 119% debt/GDP projected prior to the brokered deal. Still, the agreement brought relief to Main Street and Wall Street which were nervous a government default would send the economy into recession. Economists have been calling for a recession for much of 2023 on the back of high prices, rising rates, recent banking sector turmoil, and a potential government default. The economy, however, continues to maintain its momentum despite all these headwinds. May nonfarm payrolls served to further pump up market bulls on Friday as businesses added 339K new hires, beating estimates of 190K. The strong jobs market should help continue to prop up consumer spending as we enter the busy summer travel season. The positive developments on the Street helped offset a weak ISM Manufacturing report which reinforced the trend of consumers continuing to favor experiences over goods. The Dow Industrials’ 700+ point rally on Friday helped bring the index’s weekly gain to 2.02%.
Sizzling Summer Jobs Market
Despite raising benchmark interest rates 10 times since March 2022, the Federal Reserve’s tightening has had a minimal impact on the hot jobs market. Nonfarm payrolls rose 339K in May, cruising past analyst estimates of 190K. The unemployment rate rose to 3.7%, up from 3.4% in April. The discrepancy between the unemployment rate and the payrolls gain comes from different surveys used to calculate each. The unemployment rate is drawn from the household survey which includes areas not covered by the employer survey. The former additionally includes people who are self-employed or work in private households. Controlling for the polling methodology difference, the household survey would have gone from showing a decline of 310K people employed to a gain of 394K, which is in line with the payrolls report. Meanwhile, average hourly earnings, a key inflation indicator, rose 0.3% month-to-month. That brought annual wage growth to 4.3%. Job gains were broad-based with professional and business services leading the way, adding 64K new hires. Government and healthcare followed with 56K and 52K added to the payrolls, respectively. Overall, it was a strong jobs report and may prompt the Fed to reassess hitting pause on raising benchmark interest rates.
Experiences Over Goods
Consumers continued to favor experiences over goods, pushing the manufacturing sector to its seventh consecutive monthly decline in May. The ISM Manufacturing Index fell to 46.9 from 47.1 in April. Numbers below 50 indicate contraction while numbers above indicate expansion. The sector has struggled to return to expansion since consumer demand has shifted from those goods desired during Covid to now desiring experiences having now exited the pandemic. Demand for goods remains weak overall, which has prompted businesses to carefully manage inventories. New order growth continued to trend lower with the ISM survey’s forward-looking, new orders sub-index dropping to 42.6 last month from 45.7 in April. On a positive note, weak demand has helped push prices lower at the factory gate. Prices paid by manufacturers decreased to 44.2 in May from 53.2 the prior month. Despite subdued demand, manufacturers continued to expand their payrolls in anticipation of a rebound in the coming months as the employment gauge rose to 51.4 from 50.2 in April.
With the debt ceiling debate in the rearview mirror and a resilient jobs market, bulls were quick to send the major indices higher for the week. Although the debt ceiling deal does little to address the nation’s rising debt burden, investors breathed a sigh of relief as a potential crisis was averted and the risk of a much anticipated economic recession in 2023 continues to be extended. That being said, market bulls do appear to be very optimistic over what the second half of 2023 will bring. Headwinds to the bull case remain in the form of high prices (particularly in the services sector), a resilient jobs market (with very strong wage growth), and a tightening banking sector. A Fed pause may indeed be in the cards for later this month given how the Fed has messaged its intent to markets, but that could be only a temporary pause given the continued strength in service demand and as wage growth continues to support inflation. It remains to be seen how the market will react should the central bank be forced resume rate hikes later this year.
The Week Ahead
It will be a quiet week ahead, but we will get a look at ISM Services and China trade data.
Financial Planning for Loved Ones with Special Needs
The future care and wellbeing of a child with special needs requires additional thought be given to how to arrange your estate to provide for your child without disqualifying them from receiving any government benefits. Social Security benefits and Medicaid may be available to your child, however these programs have income and asset limits that are usually very low. If an individual has assets that exceed the limits, an applicant may be ineligible for these services. Additionally, government benefits usually aren’t enough to cover your child’s needs, so families may wish to supplement a child’s income to cover extra items that may make the beneficiary’s life more comfortable, such as recreation, entertainment, and medical attention beyond the basic necessities of life. Keeping Social Security and Medicaid asset limits in mind, families must carefully plan how to account for a child’s financial future.
There are several types of trusts that many families establish for the benefit of individuals with special needs. A special needs trust (SNT), which is sometimes referred to as a supplemental needs trust, can be established by a will or created during the benefactor’s lifetime. This type of trust allows individuals to leave money to a loved one with special needs without jeopardizing any government benefits. The creators of the trust appoint a trustee who has discretion over when and how funds are distributed. The trustee cannot distribute money directly to the dependent, but they can pay for certain items and services not covered by the dependent’s monthly Supplemental Security Income (SSI) for disability. Upon the death of the dependent, whatever assets are left in the trust can be distributed according to the creator’s wishes as specified in the terms of the trust. Note that your child would not have direct control over the funds in a SNT, which may not be ideal if he or she is capable of managing their own finances. There are several different types of SNTs, including first-party, second-party, and pooled, and each is governed by different requirements.
Some families may think it would be a good idea to leave money to a relative to care for a special needs child, however, there is no legal obligation for that money to be spent in the intended manner, and the money is at risk of being lost to creditors, to a divorce settlement, to a lawsuit, or to bankruptcy. Additionally, if the individual who was given the money passes away, their heirs would be the recipient of any remaining funds. It’s also important to note that from a tax perspective, the individual receiving the money to care for your child may be in a higher tax bracket than your special needs child or their SNT.
The Achieving a Better Life Experience Act (ABLE) of 2014 made it possible for families to contribute to a tax-advantaged savings account for individuals with disabilities. Saving in an ABLE account can help shield contributions from resource limits that can disqualify an individual from government benefits. What’s more, after-tax contributions to ABLE accounts can grow tax-deferred, and if withdrawals are used for qualified disability expenses, which includes but is not limited to rent, food, transportation, education and employment training, health care, and personal support services, any earnings on such distributions will be federal income tax-free. These accounts don’t make sense for everyone, and a financial advisor can help determine if it is a good strategy for you. ABLE accounts do have an annual contribution limit, which is $17,000 in 2023. Additionally, the total assets in the ABLE account cannot exceed $100,000. If the total assets go over that limit, Social Security for the person with disabilities will be suspended.
A life insurance policy that names your loved one as the beneficiary may be another option for your family. The policy can be set up to pay proceeds into a SNT so that it would not disqualify the recipient from federal and state resources.
It is important to note that individuals with disabilities may be more vulnerable to scams and identity theft, so families should monitor credit reports and financial transactions. Oftentimes, criminals will impersonate government agents and target the recipients of government checks, so extra care should be taken to help avoid these types of scams.
If you have a special needs child, we encourage you to talk to your financial advisor about how to plan for and safeguard the financial well-being of your child. In addition, a qualified attorney and a tax specialist can be valuable resources to assist you with creating a care plan and a financial plan.