Here are the economic and market highlights for the week:
- It was a solid first half for the U.S. economy as GDP rose at an 2.80% annualized rate in the second quarter, topping estimates of 2.10%. This was a substantial reversal from the first quarter’s slower 1.40% rate. Consumers and businesses both contributed to drive the economy. Consumer spending rose 2.30% in the quarter, faster than Q1’s 1.50% rate. Meanwhile, nonresidential investment increased 5.20%, which was higher than the prior quarter’s 4.40% rate. The rise coincides with an easing in inflationary pressures whereby core inflation, which excludes food and energy, increased only 0.20% in June, bringing the year-over-year (YOY) gain to 2.60%. The economy appears to be in solid shape as real spending gains momentum with prices pressure subsiding.
- The housing market is beginning to shift from a seller’s market to a buyer’s market. Existing home sales totaled 3.89 million on the month, a -5.4% decline on both a monthly and annual basis. That was below analysts’ estimates of 3.95 million. Despite the drop, the median sales price jumped 4.10% from the year ago period to $426,900, the highest median sales price ever recorded. Homes priced above $1 million not only drove the median sales figure higher but was also the only segment to see sales gains during the month. On a positive note, for prospective homebuyers, unsold inventory rose 3.10% from the previous month to 1.32 million. That was the equivalent of 4.1 months’ supply, not far from the six to seven months considered a healthy balance between supply and demand. If the trend towards higher supply continues, homebuyers could see increased affordability in the months ahead.
Wall Street Curbs Its AI Enthusiasm
Megacap tech dragged the NASDAQ and S&P 500 lower with investors being left unimpressed by the first crop of Q2 tech earnings results. Google-parent Alphabet and Tesla were the first to report of the big tech giants. Both sold off. Alphabet, despite managing to narrowly beat estimates, reported advertising revenue from its YouTube unit missed consensus estimates. Meanwhile, Tesla came up well short of analyst expectations, leading to its worst daily performance since 2020. Tech peers Nvidia and Microsoft fell in sympathy as market skepticism for tech and AI’s potential creeped into the market. Friday’s inline PCE report buoyed most major indices higher, however, by keeping the door open for a September rate cut. The report showed easing inflationary pressures, which along with a healthy Q2 GDP, led investors to believe that looming rate cuts will come in time to keep the economy rolling in the second half. The Dow finished the week up 0.75%. Despite Friday’s gains, the tech heavy Nasdaq Composite Index was still off -2.08% for the week as investors continued their Great Rotation out of tech.
Volatility is back with a vengeance over the last three weeks as investors continue to take profits after the big run-up in tech stocks and investors consider what lower rates will bring for more cyclical and industrial sectors. At the heart of it all is a reassessment in tech valuations, given this quarter’s underwhelming contribution of AI on many companies’ bottom line and the fact that lower rates mean that tech is no longer the only game in town – certainly for the price. Notably, investors are questioning whether the AI juice is worth the squeeze, with markets questioning whether the massive capital investment in AI will simply flame out. Both Alphabet and Meta have gone on the record saying too much is being spent on AI infrastructure but they feel they have no choice as the risk of underinvesting is greater than the risk of overinvesting. Meanwhile, economically sensitive stocks and small caps remain undervalued as investors are getting back to basic fundamentals, where what you pay for earnings is ultimately what matters. With the Fed likely to pivot to lower rates in the quarters ahead, more gains could be in store for the Dow and Russell 2000. We should get more color on that next week as the Fed holds its July FOMC meeting.
The Week Ahead
- July FOMC Meeting
- Nonfarm Payrolls
- ISM Manufacturing
Mid-Year Financial Check-Up: Essential Steps to Assess Your Plan and Stay on Track
Summer provides an ideal opportunity to take stock of your financial situation with a mid-year checkup before the busier back to school and holiday seasons are upon us.
“It’s never a bad time to evaluate your financial life,” says Tyler Ozanne, CFP, “but summertime marks the midway point, allowing you to assess how your income, expenses, and overall savings plan have progressed in the first half of the year, while still allowing time to maximize your opportunities and align them with your objectives.”
The list below may seem familiar, but 2024 brings some new twists that investors should be aware of that you may wish to discuss with your financial advisor if you have not met with them since January.
1) Check your retirement plan’s features and your contribution amounts
The fundamentals of retirement plan savings are simple – maximize the amount you can put into your retirement plan, subject to your plan’s limits and your personal budget. At a minimum, you should contribute enough to your plan to collect your full match from your employer. Not doing so is the equivalent of leaving money on the table. Also, since many retirement plans can only be funded with payroll contributions, you should evaluate the amount or percentage you are withholding from your paycheck in order to make sure you are hitting your savings target in the remaining pay periods you have left for the year.
- Secure Act 2.0 Changes: While the fundamentals of retirement saving have not changed, 2024 is the first full year that many of the provisions from the Secure 2.0 Act have gone into effect. The Secure 2.0 Act legislation contains some of the most sweeping changes to retirement plan features in years, and employers and plan sponsors have been feverishly working to adopt the new provisions. Containing over 90 changes to retirement plan and tax law, the new provisions are being rolled out with a variety of effective dates. Savers should consider reviewing their summary plan description distributed annually by their employer in order to evaluate any changes to their plan. Below is a partial list of some of the newer provisions effective in 2024 under the Secure 2.0 Act.
- Increase of “Required Beginning Date” for Distributions: Effective January 1, 2023, SECURE 2.0 extended the age for the required beginning date of mandatory distributions to age 73 for individuals attaining age 72 after December 31, 2022. Effective in 2033, for participants attaining age 73 after December 31, 2032, the required beginning date for distributions is age 75.
- Emergency Savings Accounts: Starting in 2024, sponsors of defined contribution plans may choose to offer eligible employees, other than highly compensated employees, Pension-Linked Emergency Savings Accounts (“PLESAs”) to assist with short term savings. A PLESA is funded entirely by employee contributions on a Roth basis, and the account balance is capped at $2,500 (or a lesser amount specified by the employer). The mechanics and implementation of this feature has many employer-specific variations which employees are encouraged to discuss with their plan provider.
- Matching and Non-elective Contributions Allowed as Roth Contributions: While plan sponsors have been permitted to allow participants in a 401(k), 403(b), or governmental 457(b) plans to elect to receive vested employer matching and non-elective contributions on a Roth basis, significant unanswered questions relating to tax reporting and withholding effectively prevented implementation of this new feature until just recently. A new IRS notice resolved the major stumbling blocks, and recordkeepers are now preparing to move forward. You are encouraged to discuss with your financial planner whether Roth contributions are right for you and consult your plan administrator to see if the feature has been enacted.
- Matching Contributions on Student Loan Payments: To mitigate the adverse effect on retirement savings of the burdensome levels of student loan debt carried by many employees, starting in 2024, 401(k), 403(b), governmental 457(b), and SIMPLE IRA plans that provide matching contributions may treat a “qualified student loan payment” as an elective deferral for purposes of calculating the amount of matching contributions to be made to a given employee.
- Waiver for Individuals with Terminal Illnesses: The Act creates an exception to the 10% early withdrawal tax on distributions made to a terminally ill individual.
2) Review and optimize your emergency funds
The number one rule in financial planning? Have an emergency fund. Many planners recommend having three to six months’ worth of living expenses set aside in a liquid, interest bearing account, to provide for you when life’s emergencies arise. The reality is that while most of us have money scattered around that is mentally earmarked for such situations, few have taken the time to actually measure how much would actually be necessary to live on and even fewer structure their emergency fund to maximize their return while those dollars sit idle. Your retail bank is likely not giving you the best deal. Not all high yield savings accounts are the same. Money market funds pay tremendously different rates. With the Federal Reserve set to lower interest rates in the next few months, you should consider revisiting where you have your money parked and matching your assets’ location with your anticipated liabilities in order to maximize your return.
3) Avoid the year-end custodian crunch
Inevitably year-end, instead of mid-year, becomes the time most of us think about financial and estate planning. Attorneys scramble to produce trust documents. CPAs rush to get valuations for gifting purposes. Clients begin to feel the holiday spirit and want to contribute to their favorite causes. Unfortunately, custodians get bottlenecked and oftentimes last-minute asset transfers cannot be satisfied. It is not uncommon to see a four to six week backlog for typical requests come year end, and with the sunsetting of the current estate tax exemption levels at the end of 2025, we anticipate 2024 will be even busier. These delays can impact qualified charitable donations of cash and securities from your tax qualified account, gifting of assets to trusts, basis step-up on death, as well as standard required minimum distributions in some cases. We encourage you to take one less thing off your plate in December by trying to put your requests in by mid-October.
4) Get your beneficial ownership filing made with FINCEN
Many individuals may be surprised to find that they will be required to submit a Beneficial Ownership Information filing by year end with the Financial Crimes Enforcement Network, a Department of the Treasury, as part of The Corporate Transparency Act (CTA). The Act became effective in 2024 and requires certain corporations, limited liability companies (LLCs), and other entities to disclose individuals who own or control at least 25% of the entity; those who exercise substantial control over the entity, and/or those who receive substantial economic benefits from the entity’s assets.
On its face, the Act is intended to help law enforcement detect, prevent, and punish financial crimes, terrorism, and other misconduct. While the Act provides some exemptions, generally limited to regulated entities, it unfortunately ensnares many legitimate small businesses and entities commonly utilized for estate planning purposes (family LLC investment companies, holding companies, asset specific LLCs, etc.). The filing deadline is year-end 2024, with the penalty for non-compliance being a $500 per day fine. We recommend you review any entities you may operate or have filed with the Secretary of State and discuss with your attorney or CPA whether the filing requirement applies.
5) Check your beneficiaries
Last but not least, we recommend reviewing your beneficiary information on your IRAs, and retirement plan accounts. While the transfer of non-qualified accounts, such as individual and trust accounts, are dictated by the terms of one’s trust document, will, or determination of the probate court, beneficiary designations on IRAs and retirement plan accounts often supersede other estate planning documents. There have been numerous, recent court cases in which a deceased individual forgot to change their beneficiary, and proceeds were transferred to an ex-spouse (which was subsequently upheld by the court) despite the deceased’s intent being clear to the contrary in more contemporary estate documents. A simple review or change in beneficiary form is all it takes to make sure your IRA or retirement plan account goes to those you intend.
When it is 100 degrees outside, year-end seems a long way off, but it will be here before you know it. 2024 has some unique opportunities for saving and estate planning, with even more on the horizon for 2025. As we look ahead to the second half of the year and beyond, consulting with your financial advisor can help navigate these changes and align your strategies with evolving financial landscapes. Don’t wait until the year-end rush—empower your financial future today.