Weekly Reflection for January 20, 2023

Market Update in Charts

The U.S. stock market got off to a good start to begin January but ran of juice this week. Since Monday, the S&P 500 Index has lost 0.7%, the Dow Jones Industrial dropped 2.7% while the Nasdaq pushed ahead 0.6%. The Nasdaq, which fell over 32% last year, has been on a little rally this month. Technicians, who chart everything possible in order to predict the future, say that the buying looks "panicked." Netflix's earnings got investors very excited and that enthusiasm has trickled over to other "growth-y" companies. Still, earnings announcements have just barely begun and overall, pessimism remains the dominant mood amongst most economists.

As you have no doubt heard, the federal government has reached the end of its credit line. To keep the lights on, the government is using "extraordinary measures." That means there is some shuffling of accounts, moving money from one place to another. It also means that certain government funds are not being funded, like the Postal Service Retiree Health Benefits Fund. By June 5th all of the tricks will be played and officially then, there will be no more money for the bills unless the government can borrow more money.

And this is where the U.S. government spends the money. Social Security and Medicaid/Medicare have always been the largest of the pie pieces. Defense is right up there too. None of these programs are expected to see cuts during the next 5 months if the debt ceiling is not lifted, which seems a remote possibility at this juncture.

Speaking of defense, the U.S. Department of Defense is the largest employer in the world. Only Amazon and McDonald's come anywhere close to employing as many workers.

Headlines remain buzzing as companies continue to announce layoffs. Microsoft is cutting 4.5% of staff and Alphabet (Google) 6% of their workforce. Since last year, over 100,000 "big tech" employees have lost their jobs. And while these announcements hit Silicon Valley type companies, the pain on the ground is being felt in the "Silicon Forest" as the Pacific Northwest and Seattle have taken a big hit.

Secure Act 2.0

It is okay if you do not recall version 1.0 of the Secure Act, or even know that 2.0 was signed into law by President Biden on December 23rd. But the act passed, has broad bi-partisan support and brings major updates to all things retirement and money. There are over 100 provisions. Here are the most impactful ones today. The Required Minimum Distribution (RMD) age has been increased to 73. Now retirees do not have to take withdrawals from pre-tax retirement accounts until then. In 10 years, the age will be raised to 75. Also, there is no longer a Roth 401(k) required distribution at all. So now like its cousin the Roth IRA, the Roth 401(k) will not be subject to an RMD. The "catch-up" contribution is getting a make-over. Retirement savers whoare better than age 50 have long been able to add more to their retirement plans than younger savers. Now there is a jump for those aged 60-63 starting in 2025. And, very important that starting in 2024, workers with wages over $145,000 understand that their catch-up contributions must be made to a Roth 401(k). More on this to come! Making a Roth rollover to a 529 plan beginning in 2024 will be a popular wealth planning tool. There are a number of requirements that must be met, such as the Roth IRA account must be in the name of the 529 plan beneficiary and the 529 in existence for for at least 15 years, but this provision is already making waves. Many are calling it the "new" back-door Roth. There are new rules for the qualified charitable distributions (QCDs). Currently individuals age 70.5 and older can send up to $100,000 in distributions per year from a traditional IRA to qualified 501(c)(3) charitable organization, effectively making a donation while bypassing the need to recognize the distribution as income. In 2024 the maximum contribution amount will increase with inflation. Also, the distribution can go directly to a Charitable Remainder Unit Trust (CRUT). Limited to $50,000 and a one-time option, the IRA owner can make distributions over time to a charity and remove the assets from their estate all at once.

More Than Just One Bad Score

The next math test taken by a student in your life might mean more than just a grade. It might indicate whether their life takes a totally different path. What 30-years of advancements in U.S. student math scores brought, Covid ripped down in nearly three.

Forty-four states had data on 8th-graders that researchers could use to mark improvements in math knowledge base on consistent data. (The other eight states did not have comparable data.) As scores improved, the word started to get out that the U.S. was indeed catching up to the rest of the world. Then there was always the wrestle of whether students were really learning or whether teachers got better at teaching "to the test". While still relevant, now the more pressing question is how to stop the regression. Per the study, "8th grade math achievement declined by .2 standard deviations between 2019 and 2022, effectively forfeiting forty percent of the prior increase." Researchers say the lost knowledge will reduce the lifetime earnings for the average student by 1.6%, or $19,400 in today’s dollars. If that does not sound like much, extrapolated across all 48 million U.S. public school students the estimated loss comes close to a $1 trillion. From another perspective, one standard deviation in improvement correlates to an 8% rise in income, better overall educational attainment, fewer teen mothers and lower incarceration and arrest rates. That is the direction we must be moving.