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A massive selloff in bonds. A plunge in tech stocks. The implosion of cryptocurrencies. The highest inflation in four decades.
Amid a brutal and uncertain climate, we asked six heavyweights in the world of finance to share their thoughts on the state of the markets, how they have handled this year’s carnage and what they anticipate in the future.
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My boyfriend owns a house with a 30-year mortgage balance of $150,000 on a 4% interest rate. He has $275,000 in cash and retirement accounts. He is retired.
My house is paid off. I have $50,000 in cash and retirement accounts. I would like to retire within one to two years.
We wish to cohabitate but have not been able to agree on a fair “rent” to pay. He is not willing to live in my house because it has fewer amenities.
“‘He believes I should pay half of his monthly cost at his nicer, more expensive house. He could pay off his mortgage and save $600 a month, but he likes to have cash. ‘”
He believes I should pay half of his monthly cost at his nicer, more expensive house. He could pay off his mortgage and save $600 a month, but he likes to have cash.
I have forgone that luxury and paid off my mortgage. I am now working on building my savings. I don’t feel it is fair for me to pay half of the mortgage interest expense.
I don’t know what repair and maintenance costs should be expected from me, if I have no equity in his house. There are many points of view, none of which feels fair.
These are the options he set forth:
· I live in his house and thus get to rent mine out. Pay him half of what I net from that rental.
· Pay half of the actual costs of living expenses and upkeep on his house while I live there.
· Pay him what I pay to live in my current home for taxes, insurance, and utilities: $800/month.
What say you, Moneyist?
House Owner & Girlfriend
I’m sure your house is just as nice. And just because he believes you should pay half his costs, does not make it so. If you are paying no mortgage on your own home, I don’t believe you should pay one red cent more to live in his home.
That is to say, you should not come out of this arrangement paying more, just because (a) he would like you to live in his home and (b) he would like you to help him pay off his mortgage, or his tax and maintenance.
You both made different choices: Yours was to have a home that’s free-and-clear of a mortgage, so you can spend this time building up your savings for retirement and/or a rainy day.
You have worked hard to pay off your mortgage, and you have $50,000 in savings, less than 20% of your boyfriend’s savings. He has $150,000 left on his mortgage, and that’s his choice.
“If his aim is to find help to pay off half of his mortgage, he can find a tenant to do that for him. ”
You are not the answer to his long-term financial plans, you are his partner in life. If his aim is to find help to pay off half of his mortgage, he can find a tenant to do that for him. What do you expect of you? Forget what he expects.
By the way he is approaching this arrangement, it seems like he wants the equivalent of a detergent and a fabric softener — a girlfriend and a tenant in one handy bottle to keep his financial plans smooth and clean.
Bottom line: You should not compromise any plans to build your nest egg. The lady’s not for turning. Only acquiesce to his plan if — with the help of an actual tenant in your home — it helps you too.
In other words, the desired outcome for you is more important than the suggestions he has put forward. He could save $600 a month! That’s his business. Not yours. What do you want to have in your pocket every month?
Figure out what you want, and then work your way backwards based on that goal. For instance, if you can pay him $800 a month, charge $1,600 rent for your home, and put $800 towards your savings, do that.
You’ve come a long way. Don’t let these negotiations scupper that.
Check out the Moneyist private Facebook group, where we look for answers to life’s thorniest money issues. Readers write in to me with all sorts of dilemmas. Post your questions, tell me what you want to know more about, or weigh in on the latest Moneyist columns.
The Moneyist regrets he cannot reply to questions individually.
By emailing your questions, you agree to having them published anonymously on MarketWatch. By submitting your story to Dow Jones & Co., the publisher of MarketWatch, you understand and agree that we may use your story, or versions of it, in all media and platforms, including via third parties.
Also read:
I built a property portfolio with 23 units while we were dating. How much should I give to my fiancé in our prenup?
‘We will not outlive our money’: How can we give $10,000 to our nieces and nephews without offending the rest of the family?
‘S‘I hate to be cheap’: Is it still acceptable to arrive at a friend’s house for dinner with just one bottle of wine?
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Mobileye Global Inc. priced its initial public offering higher than its targeted range late Tuesday to raise nearly $1 billion, most of which will go to Intel Corp.
Mobileye priced its initial public offering at $21 late Tuesday, the company announced in a news release, after previously stating a targeted range of $18 to $20; shares are expected to begin trading on the Nasdaq under the ticker symbol “MBLY” on Wednesday. Intel
INTC,
will sell at least 41 million shares of Mobileye, which would raise $861 million, and also agreed to a $100 million concurrent sale of stock to General Atlantic, which would make the total raised at least $961 million.
Intel paid $15.3 billion to acquire Mobileye in 2017, and was reportedly aiming for a valuation as high as $50 billion when originally planning this IPO, but instead will settle for a basic valuation of roughly $16.7 billion. After a record year with more than 1,000 offerings in 2021, the IPO market has largely dried up in 2022.
Read: Mobileye IPO: 5 things to know about the Intel autonomous-driving spinoff
Underwriting banks — Intel listed two dozen underwriters, led by Goldman Sachs Group Inc.
GS,
and Morgan Stanley
MS,
— have access to an additional 6.15 million shares for overallotments, which could push the total raised higher than $1 billion and make Mobileye the second-largest offering of the year. Only two offerings thus far this year have raised at least $1 billion — private-equity firm TPG Inc.
TPG,
raised exactly $1 billion in January, and American International Group Inc.
AIG,
spinoff Corebridge Financial Inc.
CRBG,
raised at least $1.68 billion in September.
Intel will receive the bulk of the proceeds of the offering — after promising to make sure that Mobileye has $1 billion in cash and equivalents, the chip maker will take the rest of the proceeds for its own coffers. Wells Fargo analysts calculated that Mobileye will need about $225 million to hit that level, leaving at least $736 million for Intel before fees and other costs.
Intel will also maintain control of the company after spinning it off, keeping class B shares that will convey 10 votes for each share while selling class A shares that convey one vote per share. Intel will retain more than 99% of the voting power and nearly 94% of the economic ownership of the company, and the Mobileye board is expected to include four members with ties to Intel, including Chief Executive Pat Gelsinger serving as chairman of the board.
Read also: Intel files for Mobileye IPO, creating a share structure that will keep the chipmaker in control
Mobileye will continue to be led by founder Amnon Shashua, who served as chief executive before Intel acquired the company and stayed at the helm while it was part of the Silicon Valley chip maker. Shashua founded Mobileye in 1999 and turned it into a pioneer in the field of automated-driving technology and one of Israel’s most prominent tech companies.
Mobileye filed for the initial public offering at the end of September, when executives were still reportedly hoping for a $30 billion valuation.
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Might the bear market’s losses at its recent low have gotten so bad that it was actually good news?
Some eager stock bulls I monitor are advancing this convoluted rationale. The outline of their argument is that when things get bad enough, good times must be just around the corner.
But their argument tells us more about market sentiment than its prospects.
At the market’s recent closing low, the S&P 500
SPX,
had dropped to 25% below its early-January high. According to one version of this “so-bad-it’s-good” argument, the stock market in the past was a good buy whenever bear markets fell to that threshold. Following those prior occasions, they contend, the market was almost always higher in a year’s time.
This is not an argument you’d normally expect to see if the recent low represented the final low of the bear market. On the contrary, it fits squarely within the third of the five-stage progression of bear market grief, about which I have written before: denial, anger, bargaining, depression and acceptance.
With their argument, the bulls are trying to convince themselves that they can survive the bear market, rationalizing that the market will be higher in a year’s time. As Swiss-American psychiatrist Elisabeth Kübler-Ross put it when creating this five-stage scheme, the key feature of the bargaining stage is that it is a defense against feeling pain. It is far different than the depression and eventual acceptance that typically come later in a bear market.
Though not all bear markets progress through these five stages, most do, as I’ve written before. Odds are that we have two more stages to go through. That suggests that the market’s rally over the past couple of weeks does not represent the beginning of a major new bull market.
Further support for this bearish assessment comes from the discovery that the bulls’ argument is not supported historically. Only in relatively recent decades was the market reliably higher in a year’s time following occasions in which a bear market had reached the 25% pain threshold. It’s not a good sign that the bulls are basing their optimism on such a flimsy foundation.
Consider what I found upon analyzing the 21 bear markets since 1900 in the Ned Davis Research calendar in which the Dow Jones Industrial Average
DJIA,
fell at least 25%. I measured the market’s one-year return subsequent to the day on which each of these 21 bear markets first fell to that loss threshold. In seven of the 21 cases, or 33%, the market was lower in a year’s time.
That’s the identical percentage that applies to all days in the stock market over the past century, regardless of whether those days came during bull or bear markets. So, based on the magnitude of the bear market’s losses to date, there’s no reason to believe that the market’s odds of rising are any higher now than at any other time.
This doesn’t mean that there aren’t good arguments for why the market might rise. But the 25%-loss concept isn’t one of them.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com.
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The numbers: The S&P Global U.S. manufacturing sector rose slightly to 50.7 in October from 50.6 in the prior month, based on a “flash” survey.
The flash U.S. services sector index, meanwhile, fell to 46.6 from 49.3.
Readings above 50 signify expansion; below that, contraction.
Economists polled by the Wall Street Journal had expected manufacturing to rise to 51.8 in October and for the service sector to rise to 49.7.
Key details: In the service sector, the downturn was fueled by the rising cost of living and tightening financial conditions.
New orders in the manufacturing sector fell back into contraction territory in October. Output remained resilient due to firms eating into backlogs of previously placed orders, S&P Global said.
While price pressures picked up a bit in the service sector, the pace of the gain in inflation in the manufacturing sector was the slowest in almost two years.
Big picture: Talk of a recession sometime in 2023 has picked up in the last week. Many economists are sounding more bearish on the outlook, especially since the Federal Reserve is now seen raising its benchmark rate to 5%. However, on Monday, economists at Goldman Sachs said that talk over a recession was overblown.
What S&P Global said: “The US economic downturn gathered significant
momentum in October, while confidence in the outlook also deteriorated sharply,” said Chris Williamson, chief business economist at S&P Global Market Intelligence.
“Although price pressures picked up slightly in the service sector due to high food, energy and staff costs, as well as rising borrowing costs, increased competitive forces meant average prices charged for services grew at only a fractionally faster rate. Combined with the easing of price pressures in the goods-producing sector, this adds to evidence that consumer price inflation should cool in coming months,” he added.
Market reaction: Stocks
DJIA,
SPX,
were higher in early trading on Monday, while the yield on the 10-year Treasury note
TMUBMUSD10Y,
inched up to 4.24%.
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NASHVILLE, Tenn. — A mortgage industry group is expecting a recession to hit the U.S. economy.
“We’re forecasting a recession for next year,” Mike Fratantoni, senior vice president and chief economist at the Mortgage Bankers Association, said Sunday during the industry group’s annual conference in Nashville, Tenn.
“The upside of that potentially for the industry is, that’s the thing that’s likely going to bring rates down a little bit,” he added.
Also see: Mortgage bankers forecast rates to drop to 5.4% in 2023. Here’s what that means for home prices.
In a statement, Fratantoni said the MBA’s forecast calls for a recession in the first half of 2023, and predicts the unemployment rate will rise from 3.5% to 5.5% by the end of next year.
“We’re beginning to see some significant signs of softening in the labor market,” Frantantoni said.
He expects companies to no longer be scrambling to fill job openings, and that hiring will eventually cool off.
On average in 2023, expect the economy to lose 25,000 jobs per month, he said, and end the year with employment at 5.5%.
That’s in stark contrast to the latest unemployment rate in September, which was 3.5%, according to the Bureau of Labor Statistics.
“So a very, very different job market to today,” Frantantoni said. “I do expect the next couple of months are gonna be a pretty abrupt transition.”
With a recession on the horizon, expect mortgage rates to come down to close to 5.4% at the end of next year, he said, versus the 7%-plus rates that the market is seeing today.
“We are holding to our view that this is a spike right now, driven by financial-market dislocation, heightened level of volatility in the market and this global slowdown we’re about to experience, the likelihood of recession in the U.S. will begin to pull this number,” Fratantoni said.
AARTHI SWAMINATHAN
Given the massive rise in rates this year, with the 30-year fixed rate averaging 6.94% last week as compared to 3.85% a year ago, many potential home buyers have decided to wait as their projected monthly mortgage payments have become unaffordable.
Home sales have plunged, and are dragging down home prices. Sellers are also making more concessions in their attempts to woo buyers.
As a result of the slowdown, the MBA is expecting total mortgage origination volume to fall to $2.05 trillion in 2023 from the $2.26 trillion expected in 2022.
They’re also expecting purchase originations to drop 3%, and refinances by 24%.
Fratantoni also expects delinquencies to rise from 40-year lows.
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America’s high inflation rate will produce a 7% increase in the size of the standard deduction when workers file their taxes on their 2023 income, according to new inflation adjustments from the Internal Revenue Service.
It’s also going to pump up tax brackets by 7% as well, according to the annual inflation adjustments the IRS announced this week.
Many tax code provisions — but not all — are indexed for inflation, so the announcements are a recurring event. But when inflation is persistently clinging to four-decade highs, these annual adjustments carry extra significance.
“When inflation is persistently clinging to four-decade highs, these annual adjustments of approximately 7% for the standard deduction carry extra significance.”
Start with the standard deduction, which is what most people use instead of itemizing deductions.
The standard deduction for individuals and married people filing separately will be $13,850 for the 2023 tax year. That’s a $900 increase from the $12,950 standard deduction for the upcoming tax season.
For married couples filing jointly, the payout climbs to $27,700 for the 2023 tax year. That’s a $1,800 increase from the $25,900 standard deduction set for the upcoming tax year.
The increases in the marginal tax rates reflect the same 7% rise. For example, the 22% tax bracket for this year is over $41,775 for single filers and over $83,550 for married couples filing jointly. Next year, the same 22% bracket applies to incomes over $44,725 and over $89,450 for married couples filing jointly.
“The changes seem to be much larger than previous years because inflation is running much higher than it has in previous decades,” said Alex Durante, economist at the Tax Foundation, a right-leaning tax think tank.
The IRS arrives at its inflation adjustments by averaging a slightly different inflation gauge, the so-called “chained Consumer Price Index” instead of the widely-watched Consumer Price Index, Durante noted. That’s an outcome of the Trump-era Tax Cuts and Jobs Act of 2017, he added.
“The reason they do this is because the regular CPI is thought to overstate inflation because it doesn’t take into account the substitution that shoppers can make as cost rise,” Durante said. Shoppers substitute when they swap a more expensive item for cheaper one, and research shows many Americans are using the tactic.
The IRS inflation adjustments come after September CPI data last week showed inflation of 8.2% year-over-year, slightly off from 8.3% in August. Also last week, the Social Security Administration said next year’s payments would include an 8.7% cost of living adjustment.
“The payout on the earned income tax credit — geared at low- and moderate-income working families who have been hit hard by red-hot inflation — is also increasing. ”
The payout on the earned income tax credit is also increasing. The maximum payout for a qualifying taxpayer with at least three qualifying children climbs to $7,430, up from $6,935 for this tax year. The longstanding credit is geared at low- and moderate-income working families who have been hit hard by red-hot inflation.
More than 60 provisions are slated for an increase inline with inflation, but many portions of the tax code are not indexed for inflation. Depending on the circumstances, the taxes or the tax breaks kick in sooner.
Capital gains tax rules one example. The IRS lets a taxpayer use capital losses to offset capital gains taxes. If losses exceed gains, the IRS allows a taxpayer to deduct up to $3,000 in excess loses. They can then carry the remainder of the capital loses to future tax years. It’s been more than four decades since lawmakers last set the limit, according to Durante.
“While more than 60 provisions are slated for an increase inline with inflation, many portions of the tax code are not indexed for inflation. They include capital gains tax. ”
Given the stock market’s rocky downward slide this year, many investors might welcome a fast-approaching tax break — even if it only enables a $3,000 deduction.
At the same time, a married couple selling their home can exclude the first $500,000 of the sale from capital gains taxation, and it’s $250,000 for a single filer. It’s been that way since the exclusion’s 1997 establishment.
The once white-hot housing market may be cooling, but many sellers may still be facing the point when taxes kick in. The median home listing was over $367,000 as of early October, according to Redfin
RDFN,
The child tax credit is another example. After the payout to parents last year jumped to $3,600 for children under age 6 and $3,000 per child age 6 to 17, it’s back to a maximum $2,000. The credit’s refundable portion climbs from $1,500 to $1,600 during tax year 2023, the IRS notes.
Proponents of the boosted payouts and some Congressional Democrats want to revive the larger payments in negotiations tied to corporate taxes. The high costs of living are a strong reason to bring back the boosted credit, they say.
Related:
What smart strategies can lower your tax bill as year-end approaches? Read this before making any tax moves.
Three things the best 401(k)s offer that can help you save a lot more
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Some investors are on edge that the Federal Reserve may be overtightening monetary policy in its bid to tame hot inflation, as markets look ahead to a reading this coming week from the Fed’s preferred gauge of the cost of living in the U.S.
“Fed officials have been scrambling to scare investors almost every day recently in speeches declaring that they will continue to raise the federal funds rate,” the central bank’s benchmark interest rate, “until inflation breaks,” said Yardeni Research in a note Friday. The note suggests they went “trick-or-treating” before Halloween as they’ve now entered their “blackout period” ending the day after the conclusion of their November 1-2 policy meeting.
“The mounting fear is that something else will break along the way, like the entire U.S. Treasury bond market,” Yardeni said.
Treasury yields have recently soared as the Fed lifts its benchmark interest rate, pressuring the stock market. On Friday, their rapid ascent paused, as investors digested reports suggesting the Fed may debate slightly slowing aggressive rate hikes late this year.
Stocks jumped sharply Friday while the market weighed what was seen as a potential start of a shift in Fed policy, even as the central bank appeared set to continue a path of large rate increases this year to curb soaring inflation.
The stock market’s reaction to The Wall Street Journal’s report that the central bank appears set to raise the fed funds rate by three-quarters of a percentage point next month – and that Fed officials may debate whether to hike by a half percentage point in December — seemed overly enthusiastic to Anthony Saglimbene, chief market strategist at Ameriprise Financial.
“It’s wishful thinking” that the Fed is heading toward a pause in rate hikes, as they’ll probably leave future rate hikes “on the table,” he said in a phone interview.
“I think they painted themselves into a corner when they left interest rates at zero all last year” while buying bonds under so-called quantitative easing, said Saglimbene. As long as high inflation remains sticky, the Fed will probably keep raising rates while recognizing those hikes operate with a lag — and could do “more damage than they want to” in trying to cool the economy.
“Something in the economy may break in the process,” he said. “That’s the risk that we find ourselves in.”
Higher interest rates mean it costs more for companies and consumers to borrow, slowing economic growth amid heightened fears the U.S. faces a potential recession next year, according to Saglimbene. Unemployment may rise as a result of the Fed’s aggressive rate hikes, he said, while “dislocations in currency and bond markets” could emerge.
U.S. investors have seen such financial-market cracks abroad.
The Bank of England recently made a surprise intervention in the U.K. bond market after yields on its government debt spiked and the British pound sank amid concerns over a tax cut plan that surfaced as Britain’s central bank was tightening monetary policy to curb high inflation. Prime minister Liz Truss stepped down in the wake of the chaos, just weeks after taking the top job, saying she would leave as soon as the Conservative party holds a contest to replace her.
“The experiment’s over, if you will,” said JJ Kinahan, chief executive officer of IG Group North America, the parent of online brokerage tastyworks, in a phone interview. “So now we’re going to get a different leader,” he said. “Normally, you wouldn’t be happy about that, but since the day she came, her policies have been pretty poorly received.”
Meanwhile, the U.S. Treasury market is “fragile” and “vulnerable to shock,” strategists at Bank of America warned in a BofA Global Research report dated Oct. 20. They expressed concern that the Treasury market “may be one shock away from market functioning challenges,” pointing to deteriorated liquidity amid weak demand and “elevated investor risk aversion.”
“The fear is that a debacle like the recent one in the U.K. bond market could happen in the U.S.,” Yardeni said, in its note Friday.
“While anything seems possible these days, especially scary scenarios, we would like to point out that even as the Fed is withdrawing liquidity” by raising the fed funds rate and continuing quantitative tightening, the U.S. is a safe haven amid challenging times globally, the firm said. In other words, the notion that “there is no alternative country” in which to invest other than the U.S., may provide liquidity to the domestic bond market, according to its note.
“I just don’t think this economy works” if the yield on the 10-year Treasury
TMUBMUSD10Y,
note starts to approach anywhere close to 5%, said Rhys Williams, chief strategist at Spouting Rock Asset Management, by phone.
Ten-year Treasury yields dipped slightly more than one basis point to 4.212% on Friday, after climbing Thursday to their highest rate since June 17, 2008 based on 3 p.m. Eastern time levels, according to Dow Jones Market Data.
Williams said he worries that rising financing rates in the housing and auto markets will pinch consumers, leading to slower sales in those markets.
Read: Why the housing market should brace for double-digit mortgage rates in 2023
“The market has more or less priced in a mild recession,” said Williams. If the Fed were to keep tightening, “without paying any attention to what’s going on in the real world” while being “maniacally focused on unemployment rates,” there’d be “a very big recession,” he said.
Investors are anticipating that the Fed’s path of unusually large rate hikes this year will eventually lead to a softer labor market, dampening demand in the economy under its effort to curb soaring inflation. But the labor market has so far remained strong, with an historically low unemployment rate of 3.5%.
George Catrambone, head of Americas trading at DWS Group, said in a phone interview that he’s “fairly worried” about the Fed potentially overtightening monetary policy, or raising rates too much too fast.
The central bank “has told us that they are data dependent,” he said, but expressed concerns it’s relying on data that’s “backward-looking by at least a month,” he said.
The unemployment rate, for example, is a lagging economic indicator. The shelter component of the consumer-price index, a measure of U.S. inflation, is “sticky, but also particularly lagging,” said Catrambone.
At the end of this upcoming week, investors will get a reading from the personal-consumption-expenditures-price index, the Fed’s preferred inflation gauge, for September. The so-called PCE data will be released before the U.S. stock market opens on Oct. 28.
Meanwhile, corporate earnings results, which have started being reported for the third quarter, are also “backward-looking,” said Catrambone. And the U.S. dollar, which has soared as the Fed raises rates, is creating “headwinds” for U.S. companies with multinational businesses.
Read: Stock-market investors brace for busiest week of earnings season. Here’s how it stacks up so far.
“Because of the lag that the Fed is operating under, you’re not going to know until it’s too late that you’ve gone too far,” said Catrambone. “This is what happens when you’re moving with such speed but also such size, he said, referencing the central bank’s string of large rate hikes in 2022.
“It’s a lot easier to tiptoe around when you’re raising rates at 25 basis points at a time,” said Catrambone.
In the U.S., the Fed is on a “tightrope” as it risks over tightening monetary policy, according to IG’s Kinahan. “We haven’t seen the full effect of what the Fed has done,” he said.
While the labor market appears strong for now, the Fed is tightening into a slowing economy. For example, existing home sales have fallen as mortgage rates climb, while the Institute for Supply Management’s manufacturing survey, a barometer of American factories, fell to a 28-month low of 50.9% in September.
Also, trouble in financial markets may show up unexpectedly as a ripple effect of the Fed’s monetary tightening, warned Spouting Rock’s Williams. “Anytime the Fed raises rates this quickly, that’s when the water goes out and you find out who’s got the bathing suit” — or not, he said.
“You just don’t know who is overlevered,” he said, raising concern over the potential for illiquidity blowups. “You only know that when you get that margin call.”
U.S. stocks ended sharply higher Friday, with the S&P 500
SPX,
Dow Jones Industrial Average
DJIA,
and Nasdaq Composite each scoring their biggest weekly percentage gains since June, according to Dow Jones Market Data.
Still, U.S. equities are in a bear market.
“We’ve been advising our advisors and clients to remain cautious through the rest of this year,” leaning on quality assets while staying focused on the U.S. and considering defensive areas such as healthcare that can help mitigate risk, said Ameriprise’s Saglimbene. “I think volatility is going to be high.”
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People can contribute up to $22,500 in 401(k) accounts and $6,500 in IRAs in 2023, the IRS said Friday.
For 401(k)s, that’s an almost 10% increase from 2022’s contribution limit of $20,500. For IRAs, it’s a more than 8% rise from 2022’s limit of $6,000.
As added context, the inflation-indexed bumps tax year 2023 income tax brackets and the standard deduction worked to approximately 7%.
When the IRS increased the 401(k) contribution limits last year, it came to a roughly 5% rise.
“Given the inflation we have been experiencing recently, the early announcement of this increase is encouraging,” Rita Assaf, vice president of retirement products at Fidelity Investments, said after the IRS released the 2023 contribution limits.
Seven in 10 people are “very concerned” how inflating costs will impact their readiness for retirement according to a Fidelity study, Assaf noted. “Every dollar counts, and this increase will provide Americans with the opportunity to set aside just a bit more to help fund their retirement objectives,” she said.
The 2023 contribution limits that apply to 401(k)s — plus 403(b) plans, most 457 plans and the federal government’s Thrift Savings Plan — are even larger for workers age 50 and over.
Catch-up contribution limits rise to $7,500 from $6,500, the IRS said. Combine the catch-up contributions with the regular contribution limits, and workers age 50 and over can sock away $30,000 for retirement in these accounts during 2023, the agency said.
Tax rules can let people deduct contributions to traditional IRAs so long as they meet certain conditions, pegged to issues like coverage through a workplace retirement plan and yearly income. Above phase-out ranges, deductions don’t apply if a person or their spouse has a retirement plan through work, the IRS noted.
For 2023, a single taxpayer covered by a workplace retirement plan has a phase-out range between $73,000 and $83,000. That’s up from a range between $68,000 and $78,000 during 2022.
For a married couple filing jointly “if the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is increased to between $116,000 and $136,000,” the IRS said.
If an IRA saver doesn’t have a workplace plan but their spouse is covered, “the phase-out range is increased to between $218,000 and $228,000,” the agency noted.
There are also changes coming for the Roth IRA, which people fund with after-tax money and then can tap tax-free later.
Read also: Here’s when you should choose a Roth IRA over a traditional account
The Roth IRA contribution limits also climb to $6,500. Retirement savers putting money in their 401(k) can’t also put pre-tax money in a traditional IRA, but they can contribute to a Roth account.
Still, the eligibility to contribute to Roth IRA accounts is pegged to income, subject to phase-out ranges.
In 2023, the income phase-out range on Roth IRA contributions climbs to between $138,000 – $153,000 for individuals and people filing as head of household. (That’s up from a range between $129,000 and $144,000, the IRS noted.)
With a married couple filing jointly, next year’s phase-out range goes to $218,00 – $228,000. That’s a step up from this year’s $204,000 – $214,000 range.
The income limit surrounding the saver’s credit, which is geared toward low- and moderate-income households, is also getting a lift. The credit lets taxpayers claim 10%, 20% or one-half of contributions to eligible retirement plans, including a 401(k) or an IRA. The credit’s income limits are climbing, the IRS said.
The 2023 income limit will be $73,000 for married couples filing jointly, $54,750 for heads of household and $36,500 for individuals and married individuals filing separately, according to the IRS.
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Shares of Twitter plunged in premarket trade on Friday after a report Biden administration officials are considering subjecting some of Elon Musk’s ventures to national-security reviews.
Twitter
TWTR,
shares plunged 9% to $47.64 in premarket trade, below the $54.20 per share buyout price.
Bloomberg News reported late Thursday that some U.S. officials have become concerned in recent weeks by Musk’s Russia-friendly tweets and his threat to cut off Starlink satellite internet service to Ukraine. The Tesla
TSLA,
and SpaceX CEO’s pending $44 billion acquisition of Twitter has also reportedly drawn concerns because of its foreign investors, including a Saudi prince, Binance Holdings — a crypto exchange that was initially based in China — and Qatar’s sovereign wealth fund.
Citing anonymous sources familiar with the matter, Bloomberg said discussions are still in the early stages and officials are trying to figure out what regulatory tools are available to them. One option could be a national-security review by the Committee on Foreign Investment in the United States, the report said.
Separately, Bloomberg also reported late Thursday that Musk’s lawyers and bankers are preparing paperwork for the Twitter deal to be completed ahead of a Oct. 28 deadline, and that relations between Musk and Twitter have turned cordial rather than adversarial.
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You probably already know that because of market-capitalization weighting, a broad index such as the S&P 500
SPX,
can be concentrated in a handful of stocks. Index funds are popular for good reasons — they tend to have low expenses and it is difficult for active managers to outperform them over the long term.
For example, look at the SPDR S&P 500 ETF Trust
SPY,
which tracks the S&P 500 by holding all of its stocks by the same weighting as the index. Five stocks — Apple Inc.
AAPL,
Microsoft Corp.
MSFT,
Amazon.com Inc.
AMZN,
Alphabet Inc.
GOOG,
GOOGL,
and Tesla Inc.
TSLA,
make up 21.5% of the portfolio.
But there are other considerations when it comes to diversification — namely, factors. During an interview, Scott Weber of Vaughan Nelson Investment Management in Houston explained how groups of stock and commodities can move together, adding to a lack of diversification in a typical portfolio or index fund.
Weber co-manages the $293 million Natixis Vaughan Nelson Select Fund
VNSAX,
which carries a five-star rating (the highest) from investment-researcher Morningstar, and has outperformed its benchmark, the S&P 500.
Vaughan Nelson is a Houston-based affiliate of Natixis Investment Managers, with about $13 billion in assets under management, including $5 billion managed under the same strategy as the fund, including the Natixis Vaughan Nelson Select ETF
VNSE,
The ETF was established in Sept, 2020, so does not yet have a Morningstar rating.
Weber explained how he and colleagues incorporate 35 factors into their portfolio selection process. For example, a fund might hold shares of real-estate investment trusts (REITs), financial companies and energy producers. These companies are in different sectors, as defined by Standard & Poor’s. Yet their performance may be correlated.
Weber pointed out that REITs, for example, were broken out of the financial sector to become their own sector in 2016. “Did that make REIT’s more sensitive to interest rates? The answer is no,” he said. “The S&P sector buckets are somewhat better than arbitrary, but they are not perfect.”
Of course 2022 is something of an exception, with so many assets dropping in price at the same time. But over the long term, factor analysis can identify correlations and lead money managers to limit their investments in companies, sectors or industries whose prices tend to move together. This style has helped the Natixis Vaughan Nelson Select Fund outperform against its benchmark, Weber said.
Getting back to the five largest components of the S&P 500, they are all tech-oriented, even though only two, Apple and Microsoft, are in the information technology sector, while Alphabet is in the communications sector and Tesla is in the consumer discretionary sector. “Regardless of the sectors,” they tend to move together, Weber said.
Exposure to commodity prices, timing of revenue streams through economic cycles (which also incorporates currency exposure), inflation and many other items are additional factors that Weber and his colleagues incorporate into their broad allocation strategy and individual stock selections.
For example, you might ordinarily expect inflation, real estate and gold to move together, Weber said. But as we are seeing this year, with high inflation and rising interest rates, there is downward pressure on real-estate prices, while gold prices
GC00,
have declined 10% this year.
Digging further, the factors also encompass sensitivity of investments to U.S. and other countries’ government bonds of various maturities, credit spreads between corporate and government bonds in developed countries, exchange rates, and measures of liquidity, price volatility and momentum.
The largest holding of the Select fund is NextEra Energy Inc.
NEE,
which owns FPL, Florida’s largest electric utility. FPL is phasing-out coal plants and replacing power-generating capacity with natural gas as well as wind and solar facilities.
Weber said: “There’s not a company on the planet that is better at getting alternate (meaning solar and wind) generation deployed. But because they own FPL, some of my investors say it is one of the largest carbon emitters on the planet.”
He added that “as a consequence of their skill in operating, they re generating amazing returns for investors.” NextEra’s share shave returned 446% over the past 10 years. One practice that has helped to elevate the company’s return on equity, and presumably its stock price, has been “dropping assets down” into NextEra Energy Partners LP
NEP,
which NEE manages, Weber said. He added that the assets put into the partnership tend to be “great at cash-flow generation, but not on achieving growth.”
When asked for more examples of stocks in the fund that may provide excellent long-term returns, Weber mentioned Monolithic Power Systems Inc.
MPWR,
as a way to take advantage of the broad decline in semiconductor stocks this year. (The iShares Semiconductor ETF
SOXX,
has declined 21% this year, while industry stalwarts Nvidia Corp.
NVDA,
and Advanced Micro Devices Inc.
AMD,
are down 59% and 60%, respectively.)
He said Monolithic Power has been consistently making investments that improve its return on invested capital (ROIC). A company’s ROIC is its profit divided by the sum of the carrying value of stock it has issued over the years and its current debt. It doesn’t reflect the stock price and is considered a good measure of a management team’s success at making investment decisions and managing projects. Monolithic Power’s ROICC for 2021 was 21.8%, according to FactSet, rising from 13.2% five years earlier.
“We want to see a business generating a return on capital in excess of its cost of capital. In addition, they need to invest their capital at incrementally improving returns,” Weber said.
Another example Weber gave of a stock held by the fund is Dollar General Corp.
DG,
which he called a much better operator than rival Dollar Tree Inc.
DLTR,
which owns Family Dollar. He cited DG’s roll-out of frozen-food and fresh food offerings, as well as its growth runway: “They still have 8,000 or 9,000 stores to build-out” in the U.S., he said.
In order to provide a full current list of stocks held under Weber’s strategy, here are the 27 stocks held by the the Natixis Vaughan Select ETF as of Sept. 30. The largest 10 positions made up 49% of the portfolio:
| Company | Ticker | % of portfolio |
| NextEra Energy Inc. |
NEE, |
5.74% |
| Dollar General Corp. |
DG, |
5.51% |
| Danaher Corp. |
DHR, |
4.93% |
| Microsoft Corp. |
MSFT, |
4.91% |
| Amazon.com Inc. |
AMZN, |
4.90% |
| Sherwin-Williams Co. |
SHW, |
4.80% |
| Wheaton Precious Metals Corp. |
WPM, |
4.76% |
| Intercontinental Exchange Inc. |
ICE, |
4.52% |
| McCormick & Co. |
MKC, |
4.48% |
| Clorox Co. |
CLX, |
4.39% |
| Aon PLC Class A |
AON, |
4.33% |
| Jack Henry & Associates Inc. |
JKHY, |
4.08% |
| Motorola Solutions Inc. |
MSI, |
4.08% |
| Vertex Pharmaceuticals Inc. |
VRTX, |
4.01% |
| Union Pacific Corp. |
UNP, |
3.99% |
| Alphabet Inc. Class A |
GOOGL, |
3.03% |
| Johnson & Johnson |
JNJ, |
2.98% |
| Nvidia Corp. |
NVDA, |
2.92% |
| Cogent Communications Holdings Inc. |
CCOI, |
2.81% |
| Kosmos Energy Ltd. |
KOS, |
2.68% |
| VeriSign Inc. |
VRSN, |
2.15% |
| Chemed Corp. |
CHE, |
2.06% |
| Berkshire Hathaway Inc. Class B |
BRK.B, |
2.00% |
| Saia Inc. |
SAIA, |
1.97% |
| Monolithic Power Systems Inc. |
MPWR, |
1.96% |
| Entegris Inc. |
ENTG, |
1.93% |
| Luminar Technologies Inc. Class A |
LAZR, |
0.96% |
| Source: Natixis Funds | ||
You can click on the tickers for more about each company. Click here for a detailed guide to the wealth of information available free on the MarketWatch.com quote page.
The Natixis Vaughan Select Fund was established on June 29, 2012. Here’s a 10-year chart showing the total return of the fund’s Class A shares against that of the S&P 500, with dividends reinvested. Sales charges are excluded from the chart and the performance numbers. In the current environment for mutual-fund distribution, sales charges are often waived for purchases of new shares through investment advisers.
Here’s a comparison of returns for 2022 and average annual returns for various periods of the fund’s Class A shares to that of the S&P 500 and its Morningstar fund category through Oct. 18:
| Total return – 2022 through Oct. 18 | Average return – 3 Years | Average return – 5 Years | Average return – 10 years | |
| Vaughan Nelson Select Find – Class A | -20.2% | 11.8% | 10.8% | 13.0% |
| S&P 500 | -21.0% | 9.4% | 9.7% | 12.0% |
| Morningstar Large Blend category | -20.3% | 8.1% | 8.2% | 10.7% |
| Sources: Morningstar, FactSet | ||||
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The official definition of a bear market is a 20% or greater decline from an index’s previous high. Accordingly, the three major U.S. stock-market benchmarks — the Nasdaq
COMP,
the S&P 500
SPX,
and the Dow Jones Industrial Average
DJIA,
— are currently all in a bear market.
Based on my work with stock market strategist Mark D. Cook, a typical bear market goes through nine stages. Right now we are in Stage 4. Keep in mind that a bear market does not always follow these stages in the exact order.
1. Failed rallies: Failed rallies represent the first clue that a bear market is here. Failed rallies often appear before the market “officially” becomes a bear market. If the rally doesn’t have legs and cannot go higher for the next few days or weeks, it confirms that the bear’s claws have sunk in. Along the way, many failed rallies will fool bulls into thinking the worst is over. Watch the rallies for bear-market clues. The rally so far this week is an example. Now in its second day, a failure of this rally would confirm that stocks are not yet out of a bear market.
2. Low-volume rallies: Another bear market clue is that stocks move higher on low volume. This is a clue the major financial institutions aren’t buying, although algos and hedge funds might be. It’s easy for the algos to push prices higher in a low-volume environment, one of the reasons for monster rallies that go nowhere the following day (i.e. a “one-day wonder”).
3. Terrible-looking charts: The easiest way to identify a bear market is by looking at a stock chart. It goes without saying that the charts look dreadful, both the daily and the weekly. While rallies help relieve some of the pressure, they typically don’t last long.
4. Strong selloffs: It’s been a couple of years since markets have experienced extremely strong selloffs, but that record was broken the week of September 26 when the S&P 500 hit a new low for 2022. These strong selloffs are typical of a bear market, followed by rallies that don’t last (a roller-coaster that so far has played out during October).
5. Mutual-fund redemptions: During this stage, after looking at their quarterly and monthly statements, horrified investors throw in the towel and sell their mutual funds (also, some investors refuse to look at those reports). As a result, mutual fund companies are forced to sell (which negatively affects the stock market). Typically, when the indexes fall more than 20%, mutual fund redemptions increase.
6. Complacency turns to panic: As more investor money leaves the market, many investors panic. The most bullish investors are holding on for dear life but are buying fewer stocks. The most nervous investors sell to avoid risking precious gains.
7. All news is bad news: As the bear market pushes stock prices lower, it seems as if most economic data and financial news is negative. Many people become skeptical of the bullish predictions from market professionals, who earlier had promised the market would keep going up. In the depths of the worst bear markets, some bullish professionals are jeered or ignored. Even die-hard bulls are increasingly nervous as the market heads lower and lower (with occasional rallies along the way).
8. Bulls throw in the towel: As trading volume increases on down days, and some investors experience 30% or higher losses, they give up hope and sell. The market turns into a free-for-all as even the Fed appears to have lost control. Many in the media admit that a bear market has arrived.
9. Capitulation: After weeks and months of selloffs (and occasional rallies), many investors are panicked. Investors realize that it may take years before their portfolios will return to breakeven, and some stocks never will. In the final stage of a bear market, trading volume is more than three times higher than normal. Even some of true believers liquidate positions, as many portfolios are down by 40% or 50% and more. Almost every financial asset has fallen, with the exception of fixed income such as CDs and T-bills. Traders or investors who trade on margin feel the most pain.
Read: ‘Material risk’ looms over stocks as investors face bear market’s ‘second act,’ warns Morgan Stanley
This bear market is fairly young, but already there have been so many failed rallies that many investors are too afraid to buy. Some investors with cash are looking for bargains, but it takes nerves of steel to buy when everyone is selling.
One of the keys to success in the market is to buy what people don’t want. Here are several ideas of what to do (and it is not too late to act):
The length and volatility of every bear market is different. No one can predict how this one will turn out, but based on previous bear markets, there’s still a long way to go before it’s over.
Michael Sincere (michaelsincere.com) is the author of “Understanding Options” and “Understanding Stocks.” His latest book, “How to Profit in the Stock Market” (McGraw Hill, 2022), explores bull -and bear market investing strategies.
More: Could there be a stock market rally? Probably. Would it be the end of the bear market? Probably not.
Also read: Whatever you’re feeling now about stocks is normal bear-market grief — and the worst is yet to come
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The numbers: The National Association of Home Builders’ (NAHB) monthly confidence fell 8 points to 38 in October, the trade group said on Tuesday.
It’s the tenth month in a row that the index has fallen.
Outside of the pandemic, the October reading of 38 is the lowest level since August 2012.
A year ago, the index stood at 80.
The index’s ten-month drop is a new record. The index last fell for 8 months straight in 2006 and 2007.
Key details: All three gauges that underpin the overall builder-confidence index fell.
All four NAHB regions posted a drop in builder confidence, led by the south and the west.
It’s also likely that this year will be the first time since 2011 that single-family starts see a decline, the NAHB added.
Big picture: Builders continue to struggle to find buyers with the current rate environment.
Now they’re saying they’re worried about that depressed demand impacting supply moving forward.
Specifically, they’re concerned about housing affordability worsening, with potentially fewer new homes being built in the future.
Mortgage rates have doubled from last year, now exceeding 7%, which has considerably cooled buyer demand.
Home price growth is moderating, but prices have not come down substantially — yet.
The median sales price for a new home was $436,800 in August, according to the U.S. Census Bureau.
What the NAHB said: Builders are expecting single-family starts to fall for the first time in 11 years — and expect additional declines through 2023, said NAHB Chief Economist Robert Dietz, due to the Federal Reserve’s projected rate hikes to control inflation.
“While some analysts have suggested that the housing market is now more ‘balanced,’ the truth is that the homeownership rate will decline in the quarters ahead as higher interest rates, and ongoing elevated construction costs continue to price out a large number of prospective buyers,” he added.
“This situation is unhealthy and unsustainable,” Jerry Konter, a home builder and developer from Savannah, Ga. and the NAHB’s chairman, said in a statement.
“Policymakers must address this worsening housing affordability crisis,” he added.
What are they saying? “The housing sector – sentiment, building activity and sales – is collapsing under the weight of a rapid increase in interest rates and elevated prices, which are crimping affordability and demand,” Rubeela Farooqi, chief U.S. economist at High Frequency Economics, wrote in a note.
So expect building activity to be depressed, she added.
Market reaction: The yield on the 10-year Treasury note
TMUBMUSD10Y,
fell to 3.98% on Tuesday morning.
While the SPDR S&P Homebuilders ETF
XHB,
traded slightly higher during the morning session, and the big home-builder stocks, from D.R. Horton Inc.
DHI,
to Toll Brothers
TOL,
to Lennar
LEN,
edged higher.
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The wide-scale rollout of instant payments planned for August 2024 will require financial institutions to upgrade their payments systems, and the market participants may see fundamentals shift. Here we look at three evolutions and their impact on payments in Switzerland.
In August 2024, SIX SIC (Swiss Interbank Clearing) Phase 5 will roll out instant payments (IP). Banks will be required to upgrade their payments systems to allow for real-time settlement, fraud detection, and liquidity management. IP will reduce operational costs via automation and capture additional revenue from corporate clients and customers with high payments value and volume. As a result, greater customer satisfaction, economic benefits, and new service offerings are expected.
We look at three evolutions in which IP can change the payments landscape in Switzerland.
This blogpost is the first in our series dedicated to “The future of payments in Switzerland – strategic outlook for financial and payments services executives”.
Evolution 1: IP becoming the norm in Switzerland – Banks upgrade their operating models and increase automation
In the current system, inter-bank payments take at least one business day. The new IP system will enable immediate settlement, including payments of bills and large-value transactions. This will require banks to manage their liquidity in real-time and process related payments instantaneously, including exception handling, fraud detection, and regulatory compliance with AML regulations.
To establish their business case for IP banks must factor in upgrades to their systems and operating model and implement the required automation of their payment processes.
Savings are expected from reduced operating costs due to the enhanced automation of payment processes. To further support the business case, banks must analyse the pricing structure for their IP services and assess how to include them in retail account packages under predefined limits (in volume and value) while charging a convenience fee for transactions with higher volume or value. For corporate clients, additional sources of revenue can be found from use cases where IP packaged with cash management solutions can be sold at a higher value.
Evolution 2: IP acting as an enabler for point of sale and online payments – POS and e-commerce IP-enabled solutions
Retailers in Switzerland currently rely on card transactions and mobile payment methods such as TWINT for both point of sale and online transactions. The new IP technology will impact these payment methods: fintechs could be encouraged to build account to account payment offerings with IP charging lower fees. Switzerland’s payment processors (SIX and financial institutions) could respond to this threat by assessing whether combining a request to pay (R2P) service, such as eBill with IP should become a preferred solution, shifting payment at the point of sale to clients’ e-banking channels. To enable this a new solution for both online payments and point of sale (POS) systems would be designed.
Banks could also benefit from gathering data from IP about customer behaviour through data analytics of anonymised aggregated data.
Evolution 3: IP expediting new banking digital solutions – IP becomes an enabler for online offerings
For the retail market, there are currently already several digital banking and investment services, operating in Switzerland. Using IP for these services customer onboarding attrition can be reduced, given the ability to onboard and instantly fund a new account online. Fintech banking platforms in the Swiss market such as Neon, Yapeal, Revolut, N26 should consider its implementation. Traditional banks, such as Credit Suisse’s CSX, UBS’s 4Key, Bank Cler’s Zak and Post Finance, will need to assess how fintech’s use of IP could compete with their own digital offerings. or N26 and investment management fintechs such as Kaspar& and traditional banks digital offerings, such as Credit Suisse’s CSX, UBS’s 4Key, Post Finance and Bank Cler’s Zak should study how to optimize their customer journeys with IP to enable instant onboarding.
Similar evolution is expected on the corporate and private banking market: IP can enable solutions to be built by fintechs and banks to enable real-time cash management for corporates, funds, and high-net worth individuals powered by open banking platforms such as Swiss SIX’s bLink offering.
Finally, the ongoing work on central bank digital currencies (CBDCs) by both the Swiss central bank (Project Helvetia) and the European central bank (Digital Euro) is a long-term driver for Banks to assess how best to implement their payments operations and architecture to future-proof themselves for upcoming CBDC release: IP functionalities are a required step in that journey.
What now?
Each of the three evolutions aims to provide a better customer experience, new offerings, and optimized costs. Still, their success depends on the strategic outlook of the payments’ stakeholders in the Swiss market for the following years. First-mover advantage and studying a long-term payments strategy will support navigating payments challenges successfully:
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Lena Woodward
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Stock-market investors have been adjusting to the jump in interest rates amid high inflation, but they have yet to cope with profit headwinds faced by the S&P 500, according to Morgan Stanley Wealth Management.
“While a rate peak may solidify estimates for the equity risk premium and valuation multiples, equity investors still face the bear market’s second act — the earnings outlook,” said Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management, in a note Monday.
“They have been slow to recognize that pricing power and operating margins, which hit all-time highs in the past two years, are unsustainable,” she said. “Even without a recession, the mean reversion of profits in 2023 translates to a 10%-to-15% decline from current estimates.”
Unprecedented monetary and fiscal stimulus during the throes of the pandemic had led to the largest U.S. companies booking record operating margins that were 150 to 200 basis points above norms seen in the past decade, according to Shalett.
See: Stock market’s wild gyrations put earnings in focus as inflation crushes Fed ‘pivot’ hopes
She said that company profits may now be imperiled by slowing growth, with “demand skewing toward services” after pulling forward toward goods earlier in the pandemic, and a likely reversal in “extremely strong” pricing power as the Fed fights surging inflation with interest-rate hikes.
“Such risks are not discounted in 2023 consensus yet, constituting a material risk to stocks for the remainder of the year,” Shalett said.
While many sectors have discounted the potential drop in 2023 profits from current estimates that could stir headwinds even with no recession, “the megacap secular growth stocks that dominate market-cap indexes have not,” she warned. “And those indexes are where risk gets repriced in the bear market’s final stages.”
Morgan Stanley’s chief U.S. equity strategist Mike Wilson estimates as much as 11% downside from consensus estimates, with his base-case, earnings-per-share forecast for the S&P 500 for 2023 being $212, according to Shalett’s note.
U.S. stocks were bouncing Monday, with major stock benchmarks trading sharply higher in the afternoon, after sinking Friday amid inflation concerns as earnings season got under way. The S&P 500
SPX,
was up 2.7% in afternoon trading, while the Dow Jones Industrial Average
DJIA,
gained 1.9% and the technology-heavy Nasdaq Composite surged 3.5%, FactSet data show, last check.
In the bond market, Treasury rates were trading slightly lower Monday afternoon, after the 2-year yield hit a 15-year high and the 10-year yield notched a 14-year high on Friday, according to Dow Jones Market Data. Two-year yields ended last week at 4.507%, the highest level since August 8, 2007 based on 3 p.m. Eastern time levels, while the 10-year rate climbed to 4.005% for its highest rate since Oct. 15, 2008.
The yield on the 10-year Treasury note
TMUBMUSD10Y,
was down about 1 basis point Monday afternoon at around 4%, while two-year yields
TMUBMUSD02Y,
fell about five basis points to around 4.45%, FactSet data show, at last check.
Meanwhile, as investors capitulated to higher inflation, “peak policy rates moved up aggressively in the fed funds futures market, with the terminal rate now at nearly 5%, an aggressive stance that smacks of ‘peak hawkishness,’” according to the Morgan Stanley note.
“Critically, although the market is still pricing 1.5 cuts in 2023, the January 2024 fed-funds rate is estimated at 4.5%, a comfortable 100 basis points above our forecast” for core inflation measured by the consumer-price index, Shalett wrote.
“Consider locking in solid short-term yields in bonds and shoring up positions in high growth, dividend-paying stocks,” she said. “Short-duration Treasuries look attractive, especially because the yield is more than 2.5 times that of the dividend yield on the S&P 500.”
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Tesla shares could decline dramatically — and that could mean disaster for a number of stocks that have already seen deep share-price cuts, according to equity research firm New Constructs.
The research firm, which uses machine learning and natural language processing to parse corporate filings and model economic earnings, called the stocks in danger “zombie stocks,” and defined them as companies with poor business models that are burning cash at an alarming rate and are at risk of seeing their stock decline to $0 per share.
The research firm estimates there could be some 300 zombie companies across the marketplace.
“The Federal Reserve’s aggressive rate hikes so far in 2022 have ended the era of free money and exposed a worrisome dynamic throughout capital markets: zombie stocks,” wrote New Constructs CEO David Trainer, in a note.
See Now: Tesla earnings are coming, but do record deliveries mask a demand problem?
New Constructs does not define Tesla Inc.
TSLA,
as a “zombie stock,” citing CEO Elon Musk’s ability to raise capital, but does see the electric car manufacturer as a bellwether for the sector. “It shares many of the common characteristics of a zombie stock, such as an outrageous valuation and high cash burn,” wrote Trainer. “We believe Tesla’s unrelenting share price rise over the past three years – where investors completely ignored company fundamentals – inspired the birth of many of today’s zombie stocks.”
Tesla reports its third-quarter results after the closing bell on Oct. 19.
The company’s stock was trading around $220 on Monday, an increase of over 1,000% compared to three years ago. But Trainer feels that Tesla is at risk of falling more than 80% to $25 a share.
Tesla’s Optimus bot: ‘High school science project’ or robotics game changer?
Tesla’s stock has fallen 37.6% in 2022, outpacing the S&P 500 Index’s
SPX,
decline of 22.7%.
“Its valuation remains nosebleed high because the cash flow expectations baked into the stock price are unreasonably optimistic,” Trainer wrote. “Our message to investors is to take profits in Tesla and avoid zombie stocks at all costs.”
New Constructs recently added cloud-based communication company RingCentral Inc.
RNG,
to its list of “zombie” stocks. Other companies on the list are Freshpet Inc.
FRPT,
Peloton Interactive Inc.
PTON,
Carvana Co.
CVNA,
Snap Inc.
SNAP,
Beyond Meat Inc.
BYND,
Rivian Automotive Inc.
RIVN,
DoorDash Inc.
DASH,
Shake Shack Inc.
SHAK,
Chewy Inc.
CHWY,
Uber Technologies Inc.
UBER,
Robinhood Markets Inc.
HOOD,
Tilray Brands Inc.
TLRY,
Affirm Holdings Inc.
AFRM,
SunRun Inc.
RUN,
Blue Apron Holdings Inc.
APRN,
and meme stocks AMC Entertainment Holdings Inc.
AMC,
and GameStop Corp.
GME,
See Now: RingCentral added to ‘zombie’ stocks list by equity research firm New Constructs
“Investors are now fed up with these kinds of companies, especially amid this year’s stock market volatility,” wrote New Constructs’ Trainer. “If investors start to give up on Tesla and take profits on the stock, which is up over 1,000% over the past three years, that spells terrible news for all of the other zombie stocks that don’t have the cash-raising luxury that Tesla has.”
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I’ll be 57 next month and am divorced with three kids living with me. One is 28, she’s working, another is 21 and a senior in college (with a full scholarship) and the youngest is 15 (a sophomore in high school with a full scholarship).
I plan to retire at the end of next year with $25,000 in credit card debt and 15 more years to pay my mortgage. The credit cards have 0% interest. I have a good medical benefit when I retire and it will cover my two sons under 26 years old. My monthly expenses are $2,000, including life insurance, utilities, and a car payment.
My mortgage is around $4,000 monthly impounded. The interest rate is 2% until January 2022, then 3% until January 2023 and the remaining loan is 4.5%. Is it worth it to refinance to a lower rate? I also plan to just pay the principal and pay interest in December and April. I have two credit cards: one that totals $20,000, where the 0% promo ends in April 2021, and another with $4,500 where the 0% interest promo ends this December.
I work for the state and have a pension and 401(k) and 457 investments that total $110,000. I also have one month’s worth of expenses in an emergency fund. I can only apply for a loan to the retirement accounts while employed.
I would like to ask if retiring will be a good idea. If so, is it appropriate to take a loan with my investment to pay off the credit card debt before retiring? Based on our benefit, I don’t have to repay the debt (to the 401(k)) after my retirement unless I win the lottery or something. There won’t be a penalty. My annual gross income is $96,000.
I’m a cohabitant with my ex on the house but get no contribution from him at all. I am working with my lawyer to see if I have the right to kick him out of the house.
Please help.
Thank you.
CDT
Dear CDT,
You have a lot to juggle, so the fact that you’re reaching out to someone for some financial guidance should be deemed an accomplishment all its own!
The truth is, you may want to hold off on retiring if you can. Having $110,000 in retirement accounts is great, and you don’t want to have to start dwindling that down while also trying to manage a way to effectively pay down credit card debt and a mortgage. Should an emergency arise, taking a big chunk out of that nest egg could end up hurting you significantly in the long run.
“I think she needs to take a hard look at her income and expenses,” said Tammy Wener, a financial adviser and co-founder of RW Financial Planning. “When it comes to retirement, so many things are out of your control, like inflation and investment return. The one thing you do have control over is expenses.” Furthermore, your pension may be enough to maintain your lifestyle — though advisers wondered what exactly you would be getting from that pension every month — but you would still be better off with a larger nest egg to fall back on.
Say you retire next year after all, but you still have credit card debt and hefty bills to pay. Any retirement income you have with and outside of your current funds may not be sufficient for your current living expenses, and if in a few years you realize this, you could end up back in the workforce — though it may be hard to get the same or a similar job you already have.
Let’s look at your 401(k) and 457 plans for a moment. You said you could take a loan and based on your benefit you don’t need to pay it back, but you should be extremely cautious about this. With 401(k) loans, employees may be required to repay that loan if they’re separated from their employers, so this is a stipulation you should absolutely verify. If there was any misunderstanding as to how a loan is treated, that remaining loan would be treated as taxable income when you left your job, Wener said.
Financial advisers usually caution investors not to take loans and withdrawals from retirement accounts if they can avoid it, and in your case, this may be especially true as you plan to retire in the next year. When you take a loan, you may be paying yourself and your account back, but your balance is reduced by the amount of the loan, which means you could lose out on investment returns. In the midst of this pandemic, many of the Americans who took a loan or withdrawal regret it now, a recent survey found. “I would not recommend ‘swapping debt’ by taking a loan from her investments,” said Hank Fox, a financial planner. “Instead, she should pay whatever amount is due each month to avoid the finance charges and continue to pay-down the balances.”
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Also, consider what would happen if you continued to work: you’d still be able to contribute to a retirement account, boost your savings and, if applicable, reap the rewards with an employer match. You’d also narrow the amount of time you have between retirement and when you can claim Social Security benefits, Fox said.
Outside of the retirement accounts, you should try to build a “sizable” emergency fund, Wener said. Financial advisers typically suggest three to six months’ worth of living expenses, though you might want to strive for closer to six to offset any undesirable scenarios.
I’m not sure what the motivation was to retire next year, but if you can delay it, this may be the best solution. “The first thing I would recommend is that she reconsider retiring next year,” Fox said. “Since she will be 57 in November and assuming she is in good health, she should expect to be in retirement for 30 years or more.”
If postponing retirement is not an option, and it isn’t always, he suggests reducing or eliminating your mortgage, since it’s your largest expense by far. You could refinance, Wener said. Interest rates are very low these days, and while you may end up paying a little more every month for the next two years compared with that 2% rate you currently have, you’d end up paying the same and then less from February 2022 and on.
As for your credit cards, having a 0% interest rate is such a huge help in paying off debts faster, so you should try to extend that benefit, either by calling and asking about your options with your current credit card company or looking at alternative 0% interest cards.
A financial adviser — specifically, a Certified Financial Planner — could really help you crunch the numbers and find meaningful ways to make the most of the money you have now and will be getting in retirement, said Vince Clanton, principal and investment adviser representative at Chancellor Wealth Management.
An adviser can gather information on your current earnings and expenses, retirement savings, potential Social Security benefits and pension and create a financial plan to help you navigate retirement. “Voluntary retirement, and particularly early retirement, are very big decisions,” Clanton said. “It’s extremely important to know and understand all of the variables.”
Letters are edited for clarity.
Have a question about your own retirement savings? Email us at HelpMeRetire@marketwatch.com
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