Weekly Reflection for February 2, 2024

The Week - An Update in Charts

This was a very busy week for financial news. We are still in the the thick of earnings reporting season with the largest companies in the world, like Microsoft, Alphabet and Amazon, giving forward guidance on their business prospects, which are good, by the way. The Federal Reserve announced on Wednesday that interest rates will be held steady for the forth time in a row, also saying no interest rate cuts are imminent. The economy continues to be incredibly resilient and the jobs market healthier than ever. Stocks are just taking it in.

Energy stock returns and their earnings were some of the poorest numbers coming out of 2023. A more generous view would be to say that compared to 2022, which was a banner year for companies like Chevron and Exxon, the numbers are not that dismal.

Despite, or perhaps due to, the two wars in Ukraine and Israel/Palestine, consumers are being cautious and the U.S. is determined to produce its own supply at a furious pace. Inventories of extra oil reserves are healthy too.

Looking forward, analysts expect a bumpy road for 2024. However, tumultuous global events could throw all of these projections out the window and prices could zoom up again.

It must be cloudy in Puxatawny, Pennsylvania today. The world's most famous groundhog, Puxatawny Phil, did not see his shadow and the prediction for an early spring was met by a round of cheers. An early spring prediction has previously been linked to a bump in stock returns. No one can say exactly why but averages lift nearly 3% after an "early spring" prediction.

This might not be helpful to the bears in Montana who officials say will likely be getting less sleep this winter. Warmer than usual weather these last few months means that hibernating creatures may be popping out of dens early. Montana is telling residents and visitors to be extra vigilant these next few months.

The job market has finally fully recovered from pandemic with all of the major sectors having replaced the jobs lost in 2020. The last piece was the Leisure and Hospitality group, which returned to 2020 levels just last month.

Still a chance? Chair Powell really tried to let everyone down easily on Wednesday, explaining as plainly as he could that the economy is doing pretty well, and well enough that the chance of an interest rate cut in March was not likely. Inflation rates are still too high - trending in the 3% range rather than the preferred 2% area.

Stocks sold off initially but on further thought, prices rebounded on Thursday, as if there may still be a chance for a March cut. Jim Carrey’s character in the movie Dumb and Dumber remarks, in a

memorable scene with the charming Lauren Holly character, “so you’re telling me there’s a chance?! Yeah!” after she says the odds of them dating are “like one in a million.”

Yelp, the online crowd-sourced review business, says that a record of new start-up companies began listing on the platform in 2023. Businesses on the platform grew 20% over 2022. Many are service focused and cater to homeowners, like contractors and carpenters. The data confirms a similar finding from an analysis of governmental filings, which suggest there has been an "entrepreneurship boom" in the last few years.

What Rate Cuts Do (or Don't) Mean For You

Americans have become conversational experts on the Federal Reserve and interest rates by now. Rates, and knowing how important they are to our household structure, which depends on borrowing and leverage, means that most people can accurately pinpoint where the federal funds rate is at any moment. If you believe it is in the range of 5.25% to 5.5%, you are correct! The federal funds rate is what the Federal Reserve votes to adjust, or leave as is, at each of their eight meetings per year.

On Wednesday, the Fed said in a statement that it "does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%." Inflation is in the 3% range currently. When or how the Fed will achieve “greater confidence” is unknown to most of us but the markets have been anticipating that it will be soon, like within a few months.

One of the nice side-effects of high borrowing rates has been some of the highest returns on savings accounts in many years. Let’s take a look at how those accounts have benefited and how that could change when the Fed reduces rates later this year.

Per the FDIC's monthly report, bank checking and savings accounts are still paying a pittance in interest, with meager increases over the last couple of years. Interest checking pays 0.07% annually and savings pays 0.47%. “High yield” savings and money market accounts are where things get exciting – these accounts usually come with minimums or terms but a persistent and patient investor can find options in the 4.5% - 5% range.

The return on all of these options will decrease as the Federal Reserve cuts the funds rate, but not necessarily in lockstep or right away. A bank that is in competition for deposits might be inclined to keep rates higher for longer; these are banks that are also able to generate new loans at high rates, so can afford to pay more for deposits.

For those looking to take out a new mortgage, they may be disappointed if rates do not fall quickly, which has been the historical norm. Because mortgage rates are affected by financial markets and metrics like the 10-year U.S. Treasury note, home loan rates follow a slightly different path. Per the Wall Street Journal, the 30-year mortgage average has already tipped down; it briefly touched 8.28% in the Fall and is in the 7% range without any Fed action thus far. We started this century with rates around 7% and it took 20 years to dip below 3% in 2020. As anxious as people are, as quickly as rates skyrocketed, the ride down might be less steep, for better or worse.

A Primer for Tax Season

The IRS began accepting tax returns on Monday. Not everyone should rush to be the first to turn in their paperwork, as good as that may feel. Here are some tips to handling the "season".

* Employers had until January 31st to send out W2s and 1099s to income earners in 2023. For banks and brokerages, like Charles Schwab, the timing is usually a little later for sending 1099s that record dividends, interest and capital gains or losses in taxable accounts. Schwab says all 1099s will be available by February 16th online. The later timing is meant to verify that correct, not rushed, information is provided. If anything is found to be incorrect, a restated 1099 is provided, which has caused early filers to need to refile or amend their taxes.

* Anyone who still needs a new tax-preparer for 2023 may find themselves in a pinch. The number of CPAs in the U.S. has been declining for years and finding one to do your taxes during this time of year can be a struggle. The time to lock down a new relationship is in the Fall. If tax firms do accept new clients, they will often fill an extension. This means that they will alert the IRS that you are requesting an October 15th deadline and will start working on

your return immediately following the April 15th normal deadline.

* File online if you can, especially if you expect a refund. Refunds take about three weeks for online filers; it takes many weeks-to-months for paper returns to be processed.

* There is also still the question around cryptocurrency right at the top of the form as it has been for a couple of years now. This time it asks every filer, individual or corporation, if there was any acquisition or disposal of a cryptocurrency asset at any time in 2023.

* Those who have business income received via payment services like Paypal, Venmo or Apple's Cash app, may have reporting requirements. While the law will get more stringent for 2024 income, currently those with more than 200 transactions that exceed $20,000 in income are the only filers with reporting requirements.

* Remember, if you were a client at TD Ameritrade last year, you may receive two 1099 reports - one from TD Ameritrade for the period January 1 - September 5. A 1099 for taxable activity after that will come from Schwab.

Please let us know if you have any questions - we are here to help!