“‘The Democrats should have never done it, the Supreme Court should have never approved it, and it’s going to lead to horrible things for so many people.’”
That was former President Donald Trump’s reaction to his tax returns being made public.
The Democratic-controlled U.S. House Ways and Means committee released six years of Trump’s tax returns on Friday, after several years of legal wrangling with Republicans opposed to the publication, in an effort to provide transparency and help improve tax laws. Experts will be looking closely at large business losses reported by Trump that significantly reduced his tax liability.
In his statement following the release, Trump countered that America’s partisan divide “will now grow far worse.”
“The radical, left Democrats have weaponized everything, but remember, that is a dangerous two-way street!” he added.
What’s more, the real estate mogul and former reality TV star turned commander-in-chief suggested the returns will demonstrate his business savvy. Trump and his wife, Melania, paid $0 in income taxes for 2020, according to a previous report released by the congressional Joint Committee on Taxation.
“The ‘Trump’ tax returns once again show how proudly successful I have been,” he continued, “and how I have been able to use depreciation and various other tax deductions as an incentive for creating thousands of jobs and magnificent structures and enterprises.”
So why were Trump’s tax documents released? House Ways and Means Committee Chairman Richard Neal (a Democrat from Massachusetts) said in his opening statement on Friday that, “A president is no ordinary taxpayer. They hold power and influence unlike any other American. And with great power comes even greater responsibility.”
He added that, “Our work has always been to ensure our tax laws are administered fairly and without preference, because at times, even the power of a president can loom too large.”
Looking at the worst-performing sectors, you might wonder why the consumer discretionary and communication services sectors have fared worse than information-technology, the core tech sector. One reason is that S&P Dow Jones Indices can surprise investors with its sector choices. The consumer discretionary sector includes Tesla Inc. TSLA, +0.70%
and Amazon.com Inc. AMZN, -1.17%,
which has fallen nearly 50% this year. The communications sector includes Meta Platforms Inc. META, -1.21%,
along with Match Group Inc. MTCH, +0.50%,
which is down 69% for 2022, and Netflix Inc. NFLX, -0.44%,
which is down 52% this year.
There have been many reasons easy to cite for Big Tech’s decline, such as a questionable change in strategy for Facebook’s holding company, Meta, as CEO Mark Zuckerberg has put so much of the company’s resources into developing a new world that most people don’t wish to enter, at least yet. Meta’s shares were down 64% for 2022 through Dec. 29.
You might also blame the Twitter-related antics and sales of Tesla shares by CEO Elon Musk for the 65% decline in the electric-vehicle maker’s stock this year. But Tesla had a forward price-to-earnings ratio of 120.3 at the end of 2021, while the S&P 500 SPX, -0.72%
traded for 21.4 times its weighted forward earnings estimate, according to FactSet. Those P/E ratios have now declined to 21.7 and 16.4, respectively. So Tesla no longer appears to be a very expensive stock, especially for a company that increased its vehicle deliveries by 42% in the third quarter from a year earlier.
Click on the tickers for more information about the companies.
Click here for Tomi Kilgore’s detailed guide to the wealth of information available for free on the MarketWatch quote page.
Another way of measuring the biggest stock-market losers of 2022
It is one thing to have a large decline based on the share price, but that doesn’t tell the entire story. How much of a decline have investors seen in the holdings of their shares during the year? The S&P 500’s total market capitalization declined to $31.66 trillion as of Dec. 28 (the most recent figure available) from $40.36 trillion at the end of 2021, according to FactSet.
Shareholders of these companies have suffered the largest declines in market cap during 2022.
Many homeowners are not interested in refinancing because of high-interest rates.
Due – Due
However, if you can reduce your current interest rate by at least 0.75 percentage points, refinancing tends to make sense. Let’s say that your average interest rate on your current mortgage currently is 3.3%. Considering current mortgage rates are almost double this figure, refinancing really isn’t a smart financial option.
Nonetheless, there are still some situations in which a refinance is the best option.
Over the past two years, homeowners have gained a large amount of equity. By refinancing with cash-out, the homeowner can access the equity and pay down higher-interest debt. Consider home equity loans and home equity lines of credit as other options for accessing home equity, so you can see what suits you best.
Homeowners who are nearing the end of their adjustable-rate loan’s fixed-rate period may also benefit from a refinance, even at today’s higher rates. When you switch to a fixed-rate loan, your monthly payments will remain steady and you won’t have to worry about periodic increases.
If a refinance sounds like the right move for you now but you aren’t sure where to start, following these steps can set you on the right path.
Another reason? Rates might lower. And, it appears we’re headed that way.
“If recent trends continue with respect to consistent declines in inflation amidst an increasing risk of recession, we may be near the peak rate for this cycle, now expected to be just over 5 percent,” says Mike Fratantoni, chief economist at the Mortgage Bankers Association.
So, if you are looking to refinance once rates lower, here’s how you can prepare.
Determine a refinancing goal.
If you are considering a refinance, you should determine why you are doing so. Specifically, if you’re refinancing, there should be a good reason why. It is possible, for example, to save money by getting a lower interest rate and a lower monthly payment.
As an alternative, you can refinance your mortgage if you’re comfortable making the same or higher payments. You can also use refinancing to consolidate your debts or to withdraw some equity to pay for repairs or emergency expenses.
When refinancing, it’s important to pinpoint what you’d like to achieve so that you don’t end up with the wrong loan. After all, each loan type offers different benefits.
If you want to guarantee a lower rate permanently, you may want to switch to a fixed-rate mortgage. Or, to pay off your mortgage faster, you may prefer a 15-year loan over a 30-year loan. And, it may also be possible to save on mortgage insurance if you switch from an FHA loan to a conventional mortgage if you have enough equity.
Have you recently been hit with major medical bills, unexpected home repairs, or other expenses that have strained your finances? With a cash-out refi, you can refinance your mortgage and take out more cash at the same time if you’ve built up enough equity.
Overall, in order to determine what type of mortgage product is right for you, you must determine what you want to accomplish with a refi. And, always see which option works best for you by weighing all the options.
Put your math skills to the test.
When you’ve determined your reason for refinancing, choose a loan that will enable you to reach your goal. Again, you may be better off refinancing if you want to reduce your monthly payment, pay your loan off faster, or save on interest. In contrast, if you want to take cash out or consolidate your debt, a cash-out refinance may be right for you.
Aside from the refinancing type, you should also consider the type of loan (adjustable-rate or fixed-rate mortgage), the term (length), and whether you want to offset closing costs or pay points to lower your rate.
Just like when you take out a mortgage loan, you must pay closing costs before your refinance is finalized. Refinance closing costs usually range from 3% – 6% of the loan amount. Your closing costs will, however, vary depending on where you live. Prior to applying for a refinance, make sure you can afford these costs, or ask your lender to roll them into your refinance loan.
In addition to closing costs, you may see the following fees:
Application fee. When you request a refinance, your lender may charge you an application fee. In order to refinance your loan, you’ll have to pay this fee, regardless of whether you are approved.
Appraisal fee. In most cases, your lender will require an appraisal before you can refinance. An appraisal assures the lender that your home’s value has not decreased since you bought it. And it also ensures that you don’t borrow more money than you can afford..
Inspection fee. Before you close on a refinance, some states require a special inspection (like a pest inspection). In addition, certain types of government loans require an inspection.
Attorney review and closing fee. Refinance documents may need to be reviewed by an attorney before closing in some states. You’ll have to pay the fees of your real estate attorney if you hire one.
Title search and insurance. Refinancing with a new lender that didn’t service your old loan may require another title search. A title insurance policy may also be required, which protects both you and your lender against other claims.
Identifying your break-even point will help you determine whether a refi is worthwhile. This is the period of time required for the savings to surpass the cost of the new loan. Break-even points can be calculated by multiplying the monthly savings by the loan closing costs.
Your break-even point, for example, would be after 50 months, or about 4 years if your closing costs are $5,000 and your monthly savings are $100. For homeowners who plan to stay in their homes longer than four years, refinancing may be a good idea.
With a mortgage refinance calculator, you can determine whether it’s right to refinance.
Keep an eye on rate reports.
Keep an eye on news reports about rate cuts and mortgage applications in order to be ahead of the game the next time rates drop. In the event of further drops, you may want to make your loan application sooner rather than later.
You can always ask your lender whether it’s a good time to lock. Have them walk you through various scenarios to determine whether they think rates are likely to go lower. And, it wouldn’t hurt to ask questions like:
“By locking now, what do I gain?”
“Do I have a chance of benefiting from refinancing in the future?”
Take a look at your credit history and score.
As with your original home loan, you must qualify for a refinance. A higher credit score will result in better refinance rates from lenders — and a greater chance of approval from underwriters.
Generally, for a conventional refinance, you’ll need a credit score of 620 or higher. But, in some cases, you can refinance with an FHA or VA mortgage with a credit score of 580. Borrowing amounts will be limited, though.
Before refinancing your mortgage with bad credit, spend a few months improving your credit score, if you can. For instance, while you’re waiting to refinance, try paying down some existing debt if your credit score isn’t good-to-excellent. In addition to raising your score, you’ll lower your debt-to-income ratio, too.
A lender also wants a good score and a clean credit history. And, they want to know if you can pay them back.
When it comes to cash-out refinances, though, DTI (debt-to-income) is key. The reason? You’re asking for a much larger loan, so you’ll have higher monthly payments. Having a lower DTI makes you look less risky.
While you wait to take advantage of the next interest rate drop, keeping your DTI low is a key factor for any refinance loan. Therefore, staying vigilant is the most effective way to prepare for the next rate decline. Keep track of your credit score and watch for rate drops. And talk to your lender too.
Do a home equity check.
The equity in your home is the value of your home minus what you owe on it. You can figure it out by checking your mortgage statement. You can then check online home search sites or talk to a realtor to see what your house is worth, such as Zillow’s home price estimate. Your home equity is what’s left over.
Say you still owe $250,000 on your house, but it’s worth $325,000. In this case, your home equity is $75,000.
It’s possible to refinance conventional loans with just 5% equity. But if you have at least 20% equity, you’ll get better rates and fewer fees. Even better? You won’t have to pay private mortgage insurance either.
Simply put, the more equity you have in your house, the safer the loan.
Shop multiple mortgage lenders.
You can save thousands of dollars by getting quotes from three or more lenders. To avoid high rates before your loan closes, discuss what is the right time to lock in your rate once you’ve selected a lender.
Aside from comparing interest rates, consider the fees associated with your new mortgage and whether they will be due upfront or included in the loan. There are times when lenders offer no-closing-cost refinances. In exchange, they charge higher interest rates or increase loan balances.
Gather your paperwork.
In most cases, refinancing your home requires similar paperwork as the original mortgage loan. Even before your lender asks for them, you might want to gather all of the necessary financial documents so the process runs quickly and smoothly.
Typically, you’ll need to provide:
Personal tax returns for the past two years
Business tax returns for the past two years — if you own more than 25% of a business
W-2s or 1099s for the past two years
Bank statements for the past two months
Payment proof for alimony or child support
In the case of most online applications, you will be able to link your bank accounts and upload your documents electronically. As soon as your initial application is reviewed by the lender’s underwriting team, you will be notified of what follow-up documents are required.
Prep your home for the appraisal.
To determine your home’s market value, your refinance lender will also request a home appraisal. Appraisals are important because they determine how much equity you have in your home.
As already mentioned, lenders will offer better rates if your home equity is high. Whether you can take cash out of your home if you pursue a cash-out refinance depends on how much equity you have.
When determining your home’s value, an appraiser takes several factors into account, such as its size and features, as well as its condition. Making some general improvements to your home to ensure it is in peak condition is not difficult — even if it’s not feasible to double its square footage before refinancing.
What is the most important way to make the most of your appraisal? Ensure your home complies with health and safety regulations, such as smoke and carbon dioxide detectors. This can result in extra fees, delays, or even ineligibility for the loan if you do not address these issues beforehand.
You’ll also want to spruce up the exterior of your home. Make sure your lawn is mowed, your garden is in order, and your children’s toys are tucked away before the big day.
Prepare your home as if it is about to be sold by staging it. You should repair broken windows, and holes in the wall, and eliminate any clutter in the home. You can boost the value of your house with even the smallest changes.
To help the appraiser compare your home with other similar properties, you may want to itemize any upgrades you have made. Furthermore, letting the lender or appraiser know about any significant improvements you’ve made since buying your house could result in a higher appraisal.
Get back to lenders as soon as possible.
You won’t know exactly how long it will take until you refinance. However, you can usually expect it to take 30 – 45 days. As such, be sure to respond to any inquiries from your lender as soon as possible so that your refinance goes without a hitch.
Remember, in the underwriting process, your lender might ask for more documentation about your credit, work, or finances. If the lender requests these documents, you should send them within a few days, and include your contact information in case they have further questions.
The lender will also send you a Closing Disclosure after they have reviewed your appraisal and underwritten your loan. You will find information about your closing costs, interest rate, and the final terms of your loan in your Closing Disclosure. It is your lender’s responsibility to give you at least three days to review your Disclosure after you have received it. Once you receive your Closing Disclosure, acknowledge receipt as soon as possible.
Lock in your rate.
The moment you’ve found a lender with the best terms and rate, lock it in. By locking in your interest rate, you’ll ensure that your rate won’t increase before you close.
In general, rate locks last between 15 and 60 days. With lenders taking a long time to close these days, you may want to consider locking in for a longer period of time. Rate locks may not be charged by all lenders, but some do. You can expect to pay 0.25% to 0.50% of your total loan amount in rate lock fees. You may also need to pay additional fees if your loan doesn’t close on time.
Timing is everything when it comes to a rate lock. To lock the rate for a certain period of time, consult your lender about how long they typically take to close.
Come to the closing with cash, if needed.
During the closing process, closing costs will be included in the closing disclosure, as well as the loan estimate. At closing, you may have to pay 3 to 5 percent of the total loan amount.
As a result, you might be able to finance the costs, which can run into a few thousand dollars, amortizing them over time. However, you’ll pay a higher interest rate or total loan amount for it, which amounts to more interest over time. You’ll probably be charged a fee for doing it, too.
In short, if you can afford to pay upfront, it makes more financial sense to do so.
Keep tabs on your loan.
Ensure you stay up-to-date on your mortgage by keeping copies of your closing paperwork in a safe place. Also, to keep up with your current mortgage payments, set up automatic payments. In fact, some banks offer lower rates if you enroll in autopay.
Upon closing or many years later, your lender or servicer may resell your loan on the secondary market. In that case, you’ll owe mortgage payments to a different company, so watch for mail notifying you of the change. Nevertheless, the terms themselves should remain the same.
FAQs
1. Is refinancing a smart idea?
To answer this question, keep your goals in mind. If you wish to access your equity, reduce your monthly payment, receive a lower interest rate, or repay your loan sooner, refinancing your home might be a wise choice.
2. Does refinancing always save money?
Sometimes, no.
When interest rates are higher than your current mortgage rate, refinancing may be more expensive than your original mortgage. Examine your current loan and refinance it to a mortgage that is in line with your budget.
3. How does refinancing affect my credit score?
When you refinance, the credit bureaus pull your full credit report and deduct points from your credit score. As such, refinancing may temporarily hurt your score. But it could eventually help. It usually takes 1 year for hard inquiries to show up on your credit report.
When you’re shopping for rates, make sure all lenders submit their inquiries within the same timeframe. A credit bureau will treat several inquiries as one if they’re within 14 to 45 days. You’re more likely to see your score drop if you have multiple hard inquiries.
4. What’s the difference between a rate-and-term refinance and a cash-out refinance?
Rate-and-term refinancing is when you change your interest rate, term, or switch from an adjustable-rate mortgage to a fixed-rate mortgage.
With a rate-and-term refinance, you pay off one loan with the proceeds of the new one. By doing this you can lower your interest rate or shorten the term of your mortgage to build equity faster.
You get more cash than you need to pay off your existing mortgage, closing costs, points, and liens compared to a cash-out refinance. You can spend the cash however you want. Your home usually needs to have more than 20 percent equity to be eligible for cash-out refinancing.
5. Is it necessary to have an attorney to refinance?
When refinancing a mortgage, some states require borrowers to have a lawyer review documents. If you live in a state where refinancing isn’t required, you might want to hire a real estate lawyer to protect your interests.
If there’s a silver lining to the current economic situation that features soaring inflation and falling stocks, it’s that savers can get more for their money.
Even after just a few months of rising interest rates, you can find online savings accounts yielding more than 3%. But that might not be good enough anymore.
“Rather than being grateful for yield, that’s going to change quickly into turning your nose up at yield,” says Matt McKay, a certified financial planner and partner at Briaud Financial Advisors in College Station, Texas.
The Federal Reserve continued to raise rates through the end of 2022, and yields on savings products are now high enough that they look like a safe haven compared with a stock market that’s in the red this year.
And that means certificates of deposits, or CDs, are back in the conversation — even if that comes with caveats.
Advisers still favor Treasury bills and notes and Series I savings bonds for getting the best combination of low risk and high yield, but some are looking more seriously at CDs now. And for the everyday investor doing it on their own, CDs offer an additional boost beyond a savings account without much effort.
“It’s good for anyone if they have cash sitting around, if you can pick up something — CDs, T-bills, whatever — it’s good to get something,” says McKay.
Remember CDs?
If you’re under 50, you might never have invested in a CD and have no memory of how investors used to build ladders of different maturities as a cornerstone of their portfolio.
“With younger clients, nobody ever talks about CDs — never, never, never,” says Dennis Nolte, a certified financial planner and financial consultant at Seacoast Investment Services in Orlando, Fla.
For some, however, CDs never went out of style. These promissory notes from banks, which have been around in the U.S. since the 1800s, come in maturities generally from three months to five years, in exchange for interest at maturity.
You’re locked into the time period or face surrender charges that vary, unless you choose a more flexible, lower-interest option. The laddering strategy consists of buying CDs at different maturities and then reinvesting as they each come due.
Over the past few years, CDs haven’t been worth it for most savers, who could get as much from a high-yield savings account without restrictions. The average five-year CD would have nabbed you nearly 12% in 1984, but now the average five-year rate is just 0.74%, according to Bankrate.com. Back in 1984, CDs were nearly 50% of deposits at FDIC-insured banks, with $1.24 trillion held in the first quarter of that year. In 2022, there’s nearly the same dollar amount, which amounts to just 6.3% of deposits.
With rates rising, you can find better-than-average deals, closing in on 4% at some banks or brokerages. Many have a $1,000 minimum purchase, but you can find fractional offers for as little as $100.
CDs versus Treasurys and I-bonds
Treasury bills and notes come in roughly the same maturities as CDs, and are yielding slightly more currently. They also have no state tax burden on gains.
You can buy directly at TreasuryDirect.gov, with a $100 minimum, but to sell, you have to transfer holdings to a brokerage. Or you can buy and sell through a brokerage, but your minimums may be $1,000.
For I-bonds, you can only buy directly at TreasuryDirect.gov, with a minimum of $25 and a maximum of $10,000 per person a year, with gifts allowed to others up to $10,000 per recipient. I-bonds are indexed for inflation, with rates that reset every six months, and today are yielding 6.89% through April 2023. The biggest caveat is that you are locked into one year, and then face a surrender penalty of three months of interest if you cash out before five years.
A strategy for today’s rising rates
If you are chasing yield and have money you don’t need for a year, then I-bonds are the place for the first $10,000.
“It makes sense to max out I-bonds before investing in CDs,” says Ken Tumin, founder of DepositAcccounts.com.
Just make sure you’re motivated enough to navigate a still-wonky website and keep track of the investment on your own, because it won’t align with any of your other accounts. McKay had a client who was eager to jump into I-bonds, and he was mad at first that McKay hadn’t recommended it. “But then he called to complain, saying this is terrible, it’s so difficult,” he says.
If you have funds beyond that for savings, consider Treasury bills or notes because the rates are higher, says Tumin. Then consider CDs. That’s what Nolte is doing with some clients, particularly older ones who have past experience with them.
“Why not get something guaranteed? It’s maybe not keeping pace with inflation, but you’re not losing principal,” says Nolte.
CD rates move more slowly than other products, so even after the next rate hike, this strategy would still apply. But already Tumin sees investors ready to lock into long-term CDs, anticipating a recession and a drop in interest rates. If rates subsequently fall, and CDs lag, they would eventually end up with a price advantage over Treasury investments. Then people like McKay will be advising clients to buy in earnest.
“That’s when CDs become most attractive — as soon as rates peak or there are cuts [in rates],” says McKay.
Got a question about the mechanics of investing, how it fits into your overall financial plan and what strategies can help you make the most out of your money? You can write me at beth.pinsker@marketwatch.com.
Opinions expressed by Entrepreneur contributors are their own.
Forecasters are growing increasingly confident that a large-scale economic downturn is imminent. In a recent Bankrate survey, economists placed a 65% chance of a recession in 2023. Meanwhile, a mid-November American Association of Individual Investors survey showed nearly twice as many investors predict that the stock market will go down in the next six months than those who think it will rebound.
One of the latest economic watchers to sound the alarm is Bloomberg, whose forecast models show a 100% chance of a recession. All this is to say that it’s nearly impossible to know exactly when a global recession will begin — or how long it will last.
But while past performance does not guarantee future results, historical data can help investors predict how certain assets might hold up in times of turmoil. As we head into the New Year, here’s why you might want to consider real assets to help safeguard your portfolio from the uncertainty ahead.
Historically speaking, stocks and bonds tend to have a negative correlation with each other, meaning if stocks take a turn, bonds should still hold their value and vice versa. Typically, the two act as a hedge against one another. That’s not necessarily the case in today’s environment.
Following the Fed’s decision to begin raising interest rates, coupled with growing fears of a potential recession, both stocks and bonds have experienced massive sell-offs this year. As a result, the values of both assets have dropped in tandem; year-to-date, the S&P 500 is down nearly 18% while the Bloomberg U.S. Aggregate Bond Index has surrendered about 13%.
As two of the most common asset classes gear up to finish the year with net losses — which would be the first time since 1969 — traditional portfolios may be in for a painful drawdown.
Across the board, investors are increasingly looking for non-correlated assets to help cushion their portfolios in times of volatility.
Real assets, such as real estate, infrastructure and farmland, have historically low or negative correlations to traditional stocks and bonds, as well as to each other, meaning they are not often exposed to speculative trading in public markets. In the last three decades, farmland, for example, has had a -0.06 correlation to stocks and -0.24 to bonds, according to research from my own firm, FarmTogether.
As a result, these assets can offer welcome diversification for investors looking to create distance between their portfolios and the markets.
Capital preservation
For nearly 30 years, real assets have provided similar or higher average annual returns than stocks, and with much lower volatility, resulting in historically higher risk-adjusted returns. From 1991 to 2021, average annual real estate returns had a standard deviation of 7.73%, while S&P 500’s was over 16%. Meanwhile, farmland’s standard deviation was just 6.75%.
This stability is largely driven by a host of factors, including real assets’ intrinsic value, comparatively lower level of uncertainty around future cash flows and long-term structural trends driving values upward. The demand for necessities, like shelter, food and energy, for example, is inelastic, meaning it tends to remain consistent throughout the year. In turn, the value of these assets is not likely to experience swings like those seen with the markets.
During the 2008 Global Financial Crisis, the Dow Jones dropped 54%. By comparison, gold values actually increased in value by 4%. Today, despite stocks and bonds both showing negative returns this year, the NCREIF Real Estate and Farmland indices have returned around 9% and 6% year to date, respectively.
In addition to their physical value, many real assets have the potential to deliver passive income through operating or rental income. Global real estate has historically generated an annual cash yield of 3.8%, while infrastructure investments have yielded 3.3%. Farmland cash receipts from the sale of agricultural commodities are forecast to be up $91.7 billion in 2022, to $525 billion, a 21.2% increase from last year.
While inflation cooled to 7.7% in October, the inflation rate is not projected to return to the Fed’s 2% target until the end of 2025, with some econometric models still showing 3%+ inflation through 2024. With many signs pointing to continued inflation, investors may find refuge in real assets.
The value of real assets is ultimately derived from their physical characteristics, meaning they’re more likely to retain long-term value than other, more traditional investments.
But this unique quality of real assets is even more attractive when you combine the limited supply of natural resources with the rising demand from a growing population, which just topped 8 billion people last month. With stable supply-demand dynamics, real assets are well-positioned to increase in value year after year.
Also, because real asset returns are inherently tied to commodity prices, which tend to move in lockstep with inflation, these investments have had a historically positive relationship to inflation indices like the Consumer Price Index (CPI). Simply put, when the CPI rises, so too should the value of your investment; over the last 20 years, real assets have historically outperformed traditional investments in inflationary environments.
Preparing for a potential recession
In an increasingly uncertain market, real assets can present an attractive opportunity for investors in 2023 and beyond. By expanding into real assets, investors have the potential to help spread overall investment risk, generate historically attractive returns and help hedge against persistent inflation.
And thanks to the rise of real asset investment managers in recent years, investors now have access to a wide variety of investment channels and diverse opportunities.
With headlines warning of a possible recession and layoffs picking up, experts recommend that you try to put away the money you’d usually put toward your student debt each month.
Certain banks and online savings accounts have been upping their interest rates, and it’s worth looking around for the best deal available. You’ll just want to make sure any account you put your savings in is FDIC insured, meaning up to $250,000 of your deposit is protected from loss.
And while interest rates on federal student loans are at zero, it’s also a good time to make progress paying down more expensive debt, experts say. The average interest rate on credit cards is currently more than 19%.
If you have a healthy rainy day fund and no credit card debt, it may make sense to continue paying down your student loans even during the break, experts say.
That’s because months during the government’s payment pause still count as qualifying payments for those programs, and since they both result in forgiveness after a certain amount of time, any cash you throw at your loans during this period just reduces the amount you’ll eventually get excused.
Even though there’s some uncertainty around the date that federal student loan bills will pick up again, you want to be prepared for whenever they do.
You can compare how much your monthly bill would be under different repayment plans using one of the calculators at Studentaid.gov or Freestudentloanadvice.org.
If you’re unemployed or dealing with another financial hardship, you might want to put in a request for an economic hardship or unemployment deferment. Those are the ideal ways to postpone your federal student loan payments, because interest doesn’t accrue.
If you don’t qualify for either, though, you can use a forbearance to continue suspending your bills. Just keep in mind that with forbearance, interest will rack up and your balance will be larger — possibly much larger — when you resume paying.
Higher education expert Mark Kantrowitz had previously recommended that federal student loan borrowers refrain from refinancing their debt with a private lender while the Biden administration deliberated on how to move forward with forgiveness. Refinanced student loans wouldn’t qualify for the federal relief.
Now that borrowers know how much in loan cancellation is on the table — if the president’s policy survives the Supreme Court — borrowers may want to consider the option, Kantrowitz said. With the Federal Reserve expected to continue raising interest rates, he added, you’re more likely to pick up a lower rate with a lender today than down the road.
Still, Kantrowitz added, it’s probably a small pool of borrowers for whom refinancing is wise.
Your rate doesn’t matter if you lose your job, have sudden medical expenses, can’t afford your payments and find that defaulting is your only option.
Betsy Mayotte
president of The Institute of Student Loan Advisors
Those include borrowers who don’t qualify for the Biden administration’s forgiveness — the plan excludes anyone who earns more than $125,000 as an individual or $250,000 as a family — and those who owe more on their student loans than the administration plans to cancel, he said. The latter borrowers may want to look at refinancing the portion of their debt over the relief amounts, he added.
Still, borrowers should first understand the federal protections they’re giving up by refinancing, warns Betsy Mayotte, president of The Institute of Student Loan Advisors.
For example, the U.S. Department of Education allows you to postpone your bills without interest accruing if you can prove economic hardship. The government also offers loan forgiveness programs for teachers and public servants.
“Your rate doesn’t matter if you lose your job, have sudden medical expenses, can’t afford your payments and find that defaulting is your only option,” said Mayotte in a previous interview about refinancing.
Contributing to a 401(k) may be one of the smartest things you can do to set yourself up for a comfortable retirement in your golden years.
However, unlike simply stashing money in a savings account, you can only put so much into your 401(k) retirement plan each year due to 401(k) contribution limits.
Unfortunately, things get a little more complex because the government changes the contribution limits for 401(k)s yearly. Here, you’ll get all the necessary information about 401(k) contribution limits for 2023.
What are 401(k) contribution limits?
Put simply, 401(k) contribution limits are federally capped maximum contribution amounts that you can put toward a 401(k) retirement plan. In other words, you can’t funnel every extra dollar you have in your salary toward your 401(k) plan beyond your annual contribution limit.
There are tax advantages for retirement plans, and higher-paid workers can afford to allocate more funds toward 401(k) and other plans. Limits are put in place to prevent these wealthy individuals from disproportionately benefiting from these plans, which offer tax advantages at the expense of the U.S. Treasury.
When you invest in a 401(k), you put money toward your future by:
Giving your money to the managers of a 401(k) retirement plan.
Those managers then use that money to invest in various stock market assets, like mutual funds.
401(k) managers traditionally invest in relatively safe, slow-growth assets that aren’t ideal for earning a lot of money quickly. But they are beneficial to you in ensuring you have enough money to enjoy your golden years.
Plan limits prevent individuals from gaming the system, especially by taking advantage of employer-matched contributions.
The IRS also does this to prevent highly compensated employees (HCEs) from taking advantage of employee contributions to inflate their after-tax savings or to scheme the income tax system.
Many 401(k) plans allow your employer to match your contribution to a set limit (usually a certain percentage or dollar amount).
For instance, if an employer volunteers to match your 401(k) contribution up to 3%, and you earn $2,000 every month for your salary, you can put 6% of that salary’s value toward your 401(k), or about $120.
If there weren’t any compensation limits, people could try to take more money from their employers by contributing more and more money into their retirement accounts.
To recap, 401(k) contribution limits stop people from taking advantage of 401(k) plans and their monetary benefits. However, contribution limits for 401(k)s don’t usually stay the same. Instead, they change continuously to keep up with inflation and other economic circumstances.
Do These Limits Apply to Other Retirement Plans?
Yes. Generally, 401(k) contribution limits apply to any other “defined contribution plans.”
These are plans that have defined contribution limits or policies, and they include:
403(b) plans, which are retirement plans typically used by nonprofit and educational workers.
457 plans, which local and state government employees use.
Thrift Savings Plans, which the federal government offers.
401(k) contribution limits for 2023
With that said, it’s essential to know the 401(k) contribution limits for 2023 so you can plan for how much you’ll invest or how much you’ll deduct from your employment paychecks.
Here’s a breakdown of the 2023 401(k) income limits:
$22,500 — maximum salary deferral or automatic contribution limit for workers.
$7,500 — maximum catch-up contributions for any workers aged 50 and up.
$66,000 — total contribution limit for the year overall.
$73,500 — total contribution limit, including the catch-up contribution mentioned above.
In other words, you can divert a certain percentage of your salary with each paycheck up to $22,500 plus $7500 if you are 50 or older. However, your employer can contribute extra money to your 401(k) up to a maximum of $66,000.
How did 401(k) contribution limits change from 2022?
Because inflation has affected the US economy, the 401(k) contribution limits above have changed from 2022.
For instance, the 2022 salary deferral limit for workers was $20,500, representing a $2,000 increase in 2023. Similarly, the catch-up contribution limit for all workers 50 and older was previously $6,500 but is now $7,500.
The total contribution limit was $61,000 and $67,500 for total contribution limits and total contribution limits plus catch-up contributions, respectively. As you can see, the 401(k) contribution limits changed for 2023 by adding a few thousand dollars here and there.
It’s not a massive change, but if you invested early and wisely, that money could be worth hundreds of thousands or millions of dollars by the time you withdraw it after retirement.
Employer contribution limits for 2023
In most 401(k) plans, employers contribute to their employees’ retirement plans up to a certain amount. Employers have much higher maximum contribution limits.
The maximum amount you can contribute to a 401(k) plan (between you and your employer) is $66,000 in 2023. This limit was $61,000 in 2022.
Because of this, employers can contribute much more money to your 401(k) plan than you can, but this isn’t typically what happens. Instead, most employers offer relatively meager or moderate 401(k) matching contributions.
Don’t expect to add $66,000 to your 401(k) plan yearly. However, if an employer does offer a retirement benefit to this effect, consider taking them up on a job offer to maximize your retirement savings.
Are there differences between traditional and Roth 401(k) contribution limits?
No. Whether you have a traditional 401(k) or a Roth 401(k), your contribution limits are the same. The only difference between these two types of 401(k) retirement plans is whether you are taxed on your contributions or tax on your withdrawals.
Your contributions are tax-deferred with a traditional, employer-sponsored 401(k) plan, and you can deduct those contributions from your gross income each tax year. This elective deferral may let you max out your contributions each year.
However, when you withdraw money from your traditional 401(k), you must pay taxes on those contributions.
If you end up in a higher tax bracket when you retire because of how much money you have saved up, you could have to pay much more in taxes than if you had initially paid taxes on your deductions.
Roth 401(k) plans are the opposite. With a Roth 401(k), you pay taxes on any of your retirement plan contributions in the tax years you earn them. In exchange, you don’t have to pay any taxes on your Roth 401(k) withdrawals later down the road.
Therefore, Roth 401(k) plans are usually more profitable and affordable in the long run, but they place more of a financial burden on you in the short term. But remember, there aren’t any changes or differences in contribution limits between both plan types.
What is the ideal amount to contribute to your 401(k) plan?
Generally, you should contribute as much to your 401(k) plan as possible up to the contribution limit. But the ideal retirement contribution percentage can vary depending on your age, the cost of living, and your personal finances.
For example, it may be a good idea to contribute between 10% and 15% of all your gross income toward retirement. You can contribute this amount toward a 401(k) or a 401(k) combined with an IRA (individual retirement account) in your 20s and 30s.
If you are behind in retirement savings in your 40s or 50s, consider contributing more to your 401(k) account. If you’ve already hit your 401(k) plan limit, look into alternatives like IRAs or Roth IRAs.
Both IRAs and Roth IRAs also have contribution limits. But IRA contribution limits are separate from your 401(k) contribution limits. For instance, if you can only contribute $22,600 to your 401(k), you can still contribute another $6500 toward your IRA (the contribution limit for traditional IRA and Roth IRA accounts in 2023).
Don’t forget Social Security, too. Depending on how many calendar years you worked and your taxable income, you could receive additional funds in retirement.
Summary
Contribution limits for 401(k) plans have increased since 2022. Since these limit changes are meant to keep up with inflation, that’s a good thing for millions of Americans who rely on 401(k)s to help them save money for retirement.
Still, there’s much more to saving successfully for retirement than simply putting cash in your 401(k).
When it comes to retirement, saving sooner is better than saving later. But if you’ve already maxed out your 401(k) or don’t have the option to use a 401(k), you’ll have to turn to an IRA or individual retirement account.
Traditional IRAs are just one of your options, however. You can instead put money into a Roth IRA. Financial advisors can help you navigate the ins and outs; however, knowing about Roth IRA withdrawal restrictions and annual contribution limits is essential before investing in this type of account.
This article will explain a Roth IRA, how it works and how you can start one at the earliest opportunity.
A Roth IRA is a type of individual retirement account. As a tax-advantaged individual retirement account, Roth IRAs allow you to contribute after-tax dollars. The best way to understand a Roth IRA is to compare it to a traditional IRA.
A traditional IRA is a tax-deferred account. You contribute money to a regular IRA pre-tax, so you don’t have to pay income taxes on any of those contributions (lowering your gross income).
You can deduct contributions from your IRA each tax year. However, when you withdraw money from your regular IRA, you must pay taxes on those withdrawals since they are no longer tax-deductible.
A Roth IRA is the opposite. You contribute money to the Roth IRA and are taxed on those contributions, just like the rest of your regular income.
However, since that money is taxable income, you don’t owe any taxes when you withdraw money from your Roth IRA. You walk away with more money in Roth IRA income than traditional IRAs.
You can still only take penalty-free withdrawals (or qualified distributions) after you are 59 1/2 years old, according to the SIPC. Still, Roth IRAs are excellent for securing tax-free income when you’re older, regardless of filing status. Roth IRAs are also FDIC-insured in most cases, usually up to $250,000.
Roth IRAs are primarily advantageous if you think you’ll be in a higher tax bracket when you withdraw your money (which is true for many Americans). For instance, if you don’t have much money in your 20s and 30s but earn much more in your 60s, you’ll have to pay more taxes on your withdrawals if you use a traditional IRA.
A Roth IRA allows you to circumvent this downside and have more retirement savings for your golden years. Thus, opening a Roth IRA at a trusted brokerage could be a great way to enjoy tax-free growth of your savings.
How does a Roth IRA work?
A Roth IRA works very similarly to a traditional IRA. You sign up for a Roth IRA account at a financing institution, like Fidelity or Vanguard, and regularly contribute to the account.
Depending on your preferences, you can select your investments individually or have a fund manager take care of them. You can find a Roth IRA from many different financial sources, including:
You have access to many different investment options through a Roth IRA, even if you do a Roth IRA conversion from another account.
Note that all standard Roth IRA contributions have to be made in cash. Therefore, you can’t contribute money to your Roth IRA in the form of property or securities; you have to report those contributions, so they’re taxed according to your tax rate.
Just like regular IRAs, Roth IRA investments grow tax-free. Notably, Roth IRAs are much less restrictive compared to other retirement accounts. You can maintain your Roth IRA indefinitely, and unlike traditional IRAs, there aren’t any required minimum distributions (RMDs).
The early withdrawal penalty for this type of IRA is the same as with a standard IRA, even if you have a brokerage account handle it.
It depends. If your Roth IRA is at a bank, it may be classified under a separate insurance category compared to regular deposit accounts. Because of this, insurance coverage for most IRA accounts isn’t as comprehensive or robust.
That said, the Federal Deposit Insurance Corp. (or FDIC) does provide insurance protection worth up to $250,000 for both traditional and Roth IRAs. Note that account balances are combined instead of protected individually, however.
Contribution rules for Roth IRAs
Roth IRAs, like other IRAs and retirement accounts like 401(k)s, have contribution limits. Roth IRA contribution limits prevent account holders from investing too much money into their accounts at once.
For instance, in 2023, the total yearly contribution you can make to a Roth IRA is $6500 if you are under 50. If you are 50 or older, you can contribute another $1500 to your account as a catch-up contribution.
Withdrawing from a Roth IRA
Just like a traditional IRA, Roth IRAs have specific rules around withdrawals. Specifically, you cannot withdraw any earnings from your Roth IRA without incurring fees unless you are 59 ½ or older.
Note that that’s not the same thing as contributions; you can withdraw contributions (such as the original amount of money you put into the account) at any point. This earnings withdrawal limit prevents people from using their Roth IRA as a traditional investment or stock trading account.
Since most people retire around 59 ½, the government charges a 10% penalty and other taxation fees if you withdraw any earnings or gain money from your Roth IRA early.
In addition, there’s a “five-year rule” to keep in mind. If you start your Roth IRA late in life, you can withdraw your earnings tax-free only if you withdraw that money five years after your first contribution to any Roth IRA under your name.
The five-year time clock begins with your first contribution to any Roth IRA, not just the one from which you want to withdraw funds.
Of course, there are some exceptions to these rules. You could avoid the 10% taxation and penalty rate if you use the earnings from your Roth IRA to buy a home for the first time. But in this case, you can only take out $10,000.
Furthermore, if you have a permanent disability or pass away, you or your beneficiary can take money out of your Roth IRA.
Bottom line: Try to plan that won’t be withdrawing money from your Roth IRA until you retire.
Cryptocurrencies, but remember that the IRS does not let you contribute cryptocurrency directly to your Roth IRA (unless you use a new type of Bitcoin IRA)
Many people open Roth IRAs in conjunction with a 401(k) or instead of traditional IRAs, as Roth accounts offer particular advantages. Some of these include:
No minimum distributions are required: You don’t have to contribute a certain amount each year when you have a Roth IRA.
No income tax for inherited Roth IRAs: Therefore, if you pass your Roth IRA to an error or beneficiary, they can also get tax-free withdrawals (provided that you meet the five-year rule).
Easier withdrawals: With a Roth IRA, you can withdraw any contribution money without taxes or penalties (though you may face penalties if you withdraw investment earnings before the age of 59 ½).
Flexible contribution schedules: You can decide how much you contribute to a Roth IRA and when.
Plenty of time to add contributions: You have until the tax deadline each year to contribute more money into your Roth IRA to reach the $6500 limit.
Extra savings for retirement: You can combine your Roth IRA contributions with a 401(k) retirement plan.
Tax-free distributions: After you’ve held your Roth IRA for five years and are 59 ½ years old, you can take any distributions, including investment earnings, from your Roth IRA without paying federal taxes.
Open at any age: Anyone can open a Roth IRA at any age, provided they have earned income.
How can you start a Roth IRA?
Knowing how to start one for yourself and your retirement future is essential, given the benefits and importance of a Roth IRA.
Check eligibility
Your first step is ensuring you are eligible to open a Roth IRA account. Note that you must have earned some income for the current tax year — this does not include any inheritance money you may have received from others.
Furthermore, income limits may prevent you from opening a Roth IRA. For instance, in the 2023 tax year, the income “phase-out” range (the income bracket allowed to make reduced contributions) is $138,000 and $153,000 as an individual or $218,000-$228,000 as a couple filing jointly.
Remember, too, that there are limits on how much you can invest into your Roth IRA each year.
Your next step is finding the right investment platform to open a Roth IRA. Practically every stock investment company offers Roth IRA accounts. If you already have a 401(k) or traditional IRA account, you can open a Roth IRA at the same organization, which may be easier than finding another organization.
Regardless, if you find a good platform or financial institution, ask questions like:
Whether there are fees to open or maintain your account (such as annual fees).
What kind of customer service the company provides.
What types of investments the company offers for your Roth IRA.
Whether it costs money to trade with your IRA, which could be important if you plan to buy and sell stocks or securities with your account.
Examples of institutions that offer Roth IRAs include Fidelity Investments, Vanguard and Charles Schwab.
Apply for a Roth IRA
Now it’s time to complete the necessary paperwork and apply for a Roth IRA. You can usually do this online or in person if there’s a local branch of your financial institution nearby.
In any case, you’ll need a few pieces of key information to complete the process:
Your Social Security number or SSN.
Your driver’s license or some other type of photo ID.
The bank routing number and checking or savings account number that you want to use to contribute money to your account.
The name and address of your employer.
The name, address and Social Security number for your plan beneficiary; this is the person who can receive money in your Roth IRA if you die.
Choose your investments
After opening your Roth IRA, you get to pick your investments. Most financial institutions have advisors to help you choose suitable investments for your portfolio based on your goals.
For instance, if you want to grow your Roth IRA slowly but surely, your investment advisor may recommend that you choose safe investments.
If, on the other hand, you are young and looking to save aggressively, they may recommend more aggressive, risky investments since you have time to make up for any lost income.
Because many people live longer than before, it may be wise to keep many stocks in your portfolio as you age. Since you live longer, it could be wise to continue holding assets in your Roth IRA even after you retire so you can continue making money to pull from.
Now, you have to make regular contributions to your Roth IRA. Remember, there are no limits on when you can make contributions; you just have to contribute up to the limit to maximize your portfolio’s growth.
As you can see, there’s a lot to like about Roth IRAs, and getting one started is just as easy as starting a traditional IRA. Consider your options carefully before contributing to any retirement account, as the penalty for withdrawing ahead of retirement can make switching your plans more costly than you think.
Harris Kupperman, the president of Praetorian Capital, made a couple of interesting calls heading into 2022. He predicted that stocks of the giant tech-oriented companies that led the bull market would be sold off, and that oil prices would continue to rise through the end of 2022.
The first prediction came true, while the second one for oil prices fizzled. After rising to $130 in March, oil prices have fallen back to where they started the year. Then again, that second prediction still could have made you a lot of money because the share prices of oil companies kept rising anyway.
That leads to a new prediction for 2023 and a related stock screen below.
Here’s a chart showing the movement of front-month contract prices for West Texas Intermediate (WTI) crude oil CL.1, -0.62%
since the end of 2021:
FactSet
Even though Kupperman didn’t get his oil price call right, the energy sector of the S&P 500 SPX, -1.20%
was up 60% for 2022 through Dec. 27, excluding dividends. That is the only one of the 11 S&P 500 sectors to show a gain in 2022. And the energy sector is also cheapest relative to earnings expectations, with a forward price-to-earnings ratio of 9.8, compared with 16.7 for the full S&P 500.
WTI pulled back from its momentary peak at $130.50 in early March, but that didn’t reverse the long-term trend of low capital spending by oil and natural gas producers, which has given investors confidence that supplies will remain tight.
Vicki Hollub, the CEO of Occidental Petroleum Corp. OXY, -3.50%
— the best-performing S&P 500 stock of 2022 — said during a recent interview that there was “no pressure to increase production right now,” citing a $40 per barrel break-even point for oil prices.
At the end of November, these 20 oil companies stood out as reasonable plays for 2023 based on expectations for free-cash-flow generation and dividend payments.
For this next screen, we are only looking at ratings and consensus price targets among analysts polled by FactSet.
There are 23 energy stocks in the S&P 500, and you can invest in that group easily by purchasing shares of the Energy Select SPDR ETF XLE, -2.24%.
We can expand the list of large-cap names by looking at the components of the iShares Global Energy ETF IXC, -1.91%,
which holds all the energy stocks in the S&P 500 plus large players based outside the U.S.
Prices on the tables in this article are in local currencies.
IXC holds 51 stocks. To expand the list for a stock screen, we added the energy stocks in the S&P 400 Mid Cap Index MID, -1.24%
and the S&P Small Cap 600 Index SML, -1.89%
to bring the list up to 91 companies, which we then pared to 83 covered by at least five analysts polled by FactSet.
Here are the 20 companies in the list with at least 75% “buy” or equivalent ratings that have the most upside potential over the next 12 months, based on consensus price targets:
In the U.S., credit scores can affect every aspect of someone’s life. This three-digit number can determine the interest rate you get on a mortgage, the APR you receive on a credit card and the rates you pay for car and homeowner’s insurance.
There are three major credit bureaus — Experian, Equifax and Transunion — which collect information on an individual’s credit use. This information is then recorded in a credit report, and a three-digit credit score is calculated using one of two major scoring models, FICO and VantageScore.
Most scores range from 300 to 850 with higher scores indicating that a borrower is lower risk and more likely to make on-time payments. FICO uses factors like payment history, amounts owed, credit mix, length of credit history and new credit.
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Lenders have always needed a way to determine a borrower’s creditworthiness, and credit scores were a faster, easier way to do so.
Yet are these three-digit numbers really a foolproof way of figuring out someone’s creditworthiness? What happens to people who don’t have credit scores or those who have poor scores?
Barbara Kiviat, assistant professor of sociology at Stanford, explains that while credit scores are meant to predict whether or not someone will default on a loan, these scores don’t reflect why someone has defaulted.
For example, someone may fail to pay their credit card bill in full during an economic downturn or a job loss but this doesn’t necessarily mean they’ve been irresponsible with their credit. Credit scores are supposed to show how creditworthy someone is, but they can be a flawed measure of creditworthiness because they don’t account for the many factors that affect someone’s ability to repay their debt.
“If you look at credit scores from the perspective of other social actors, like policymakers or consumer advocates, why someone does or does not repay might start to have more bearing on how you make sense of credit scores,” says Kiviat.
The credit scoring system can also reflect and even worsen existing racial and wealth inequality.
As Kiviat writes, “it is harder to maintain good credit when one faces precarious work, has no wealthy family members to turn to in emergencies, is sold predatory loans, and otherwise experiences the disadvantages minorities in the U.S. disproportionately do.”
For racial minorities, a lack of a credit score or a credit file that’s too thin to be scored can mean a lack of access to credit. This leads many to rely on cash or loans with high APRs, creating a vicious cycle where people end up with high-interest debt that’s hard to pay off and which may ultimately hurt their credit scores.
A 2010 CFPB report found that a more significant percentage of Black and Hispanic individuals (15%) are credit invisible, or unscorable, compared to White and Asian individuals (9%). Furthermore, a larger percentage of credit-invisible individuals reside in low-income neighborhoods (30%) than in high-income ones (4%).
“It’s important to note that credit scores didn’t create some of the social economic disparities,” Sally Taylor, vice president and general manager at FICO, told CNBC. “They simply reflect the social economic disparities that are out there…”
One proposed solution to make more people’s credit visible is to include alternative forms of data on credit reports. For example, mortgage payments are included on your credit report while rental payments are typically not. Therefore, the system benefits homeowners but not renters.
Experian Boost was launched in 2019 and uses data not typically collected on people’s credit reports such as on-time utility, streaming subscription and telecom payments. It’s a free service and it only considers positive payment history, so late payments on added accounts won’t negatively affect your score. It also recently added the ability to include rent payments in the calculation of your credit score.
However, the use of alternative data could come with drawbacks. Just as homeowners are prone to falling behind on mortgage payments during a recession, renters are too. If credit bureaus or policymakers aren’t careful, including alternative data could end up hurting the people that it’s supposed to help the most.
Another proposed solution is using cash-flow data from people’s bank accounts for underwriting, yet more research is still needed.
“Credit underwriting with cash-flow data involves using financial data insights from a bank account or other types of transaction accounts to evaluate consumers and small businesses for credit,” says Melissa Koide, CEO of FinRegLab.
FinRegLab looked at data from six non-bank financial services providers, such as Petal and Kabbage, and found that cash flow data for underwriting worked as well as traditional credit scores, and primarily benefited borrowers who were credit invisible or who had poor credit scores.
And of course, while the credit reporting system is error-free for the majority of people, many still have mistakes on their reports that could affect their credit scores, according to Aaron Klein, senior fellow in Economic Studies at the Brookings Institution.
A recent survey done by Consumer Reports found that more than one-third of people who checked their credit report found an error, the majority of which were related to an individual’s personal information, such as an incorrect name or address. This leaves consumers with the responsibility of checking their credit reports and scores for errors.
Credit reports became available to consumers for free in 2003. People can access one free credit report from each of the main credit bureaus once a year through annualcreditreport.com, which is authorized by federal law.
Consumers can also check their credit scores for free throughout the year using resources provided through credit card issuers. For example, people can use Chase Credit Journey or CreditWise from Capital One to find out their VantageScore® 3.0 credit score, even if they don’t have any credit cards.
Information about CreditWise has been collected independently by Select and has not been reviewed or provided by Capital One prior to publication.
Cost
Credit bureaus monitored
Credit scoring model used
Dark web scan
Identity insurance
Getting your FICO score can be a bit trickier. People can access it through Experian or a lender that partners with FICO. If you want to get it through a card issuer, you’ll need to be a Discover member in order to use Discover Credit Scorecard which provides free FICO scores.
And in Washington, there’s been some political appetite for reform but not enough for change.
Congresswoman Ayanna Pressley (D-MA) has spearheaded The Comprehensive CREDIT Act of 2021 which would reform the dispute process for mistakes on credit reports and would require that credit reporting agencies provide a free score to consumers once a year.
Credit scores provide an easy way for lenders to determine whether a borrower is creditworthy. However, the credit scoring and reporting systems can function imperfectly, leaving many of the most marginalized without credit scores or with poor credit scores. This can harm people’s ability to gain access to credit.
While there’s no consensus on how credit reporting and scoring can be more inclusive, some have proposed using alternative data or cash-flow data to underwrite decisions. Furthermore, policymakers have been considering how to make it easier for people to access their credit scores and resolve mistakes on their credit reports.
Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
What fresh shenanigans and money dilemmas enthralled readers in 2022?
Another year of broken promises, dodgy dealings and moving letters about how to get back on one’s feet after divorce, unemployment and even a 15-year abusive relationship.
The most widely-read Moneyist of 2022, however, was actually one of the shortest letters from someone called ‘Surprised Sister.” The answer, as is often the case, was not so simple, nor so short.
My response: There are times to contest a will: a parent who was being controlled by a new friend or greedy child, and/or someone who was forced to change their will when they were not of sound mind.
But her own legal advice notwithstanding, I suggested she should accept your brother’s wishes. Feeling aggrieved that she did not inherit his estate is not enough to break his will.
Separate the emotions from the finance, and the answer often reveals itself. But there were others that ran the gamut from romance to stocks. They other most-read columns are an eclectic bunch:
It would be nice to offer to take the booze off the check, you were a non-drinker, would you speak up at one drink or two or three, if your date split the entire bill 50/50?
The financial intricacies of dating are like an onion that can be peeled ad infinitum. We’ve had plenty to chew over. Paying for one of your date’s drinks is OK, paying for two is pushing it.
“The Other Brother” wrote that his father offered three children a choice: stocks or cash. The other two siblings took the cash. He took the cash. The stock soared. Dems are the breaks.
Her siblings could have chosen stocks over cash, but they wanted immediate gratification. That was their decision, and they are going to have to take ownership of their choice and live with it.
They have been in a 20-year relationship and have a 10-year-old child. “Not on the Deed” said she and her partner have had several tense “discussions” about adding me to the deed.
I told her that her contribution to your partnership is valuable, her sense of worth is valuable, and her role as a homemaker and a mother is also valuable. Yes, he should add her.
Even amidst the fights over inheritances, some breaches of social and financial etiquette seem so bizarre some people might think, ‘That behavior is too outrageous to be believable.”
The letter writer received free theater tickets, they split the bill 50/50 even though her friend had a cocktail, and she paid $10 for parking. Is he obliged to take her out again? No-can-do.
Another dating story, this time where the guy chose a fancy restaurant and, as the date wore on, things took a turn for the worst, at least in the letter writer’s eyes: She was asked to split the bill.
What if they didn’t get along? What if he was an abortion-rights supporter and she was anti-abortion? What if he was a Republican and she was a Democrat? Or vice-versa? Always be prepared to pay.
You can email The Moneyist with any financial and ethical questions related to coronavirus at qfottrell@marketwatch.com.
Check out the Moneyist private Facebookgroup, where we look for answers to life’s thorniest money issues. Readers write 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.
Car repossessions have grown less common in the past two years, but those days may be over. Credit rating agency Fitch Ratings says repossession rates have nearly returned to pre-pandemic levels. Some analysts fear they could grow from there. For the lowest-credit consumers — those who make up the subprime loan market — the repossession rate is now higher than it was in 2019.
Repossessions fell for a combination of reasons. Lenders grew more lenient with late payments, confident that the pandemic was a temporary disruption. They knew they’d likely make more money by giving people time to adjust than by seizing back cars to sell at lower prices. Government stimulus programs also helped many Americans stay afloat.
But economic conditions have begun to change.
High monthly payments meet recession warnings
Skyrocketing car prices have left consumers with more debt for the same cars. According to the Consumer Financial Protection Bureau, loans that started in 2021 and 2022 have proven particularly hard to afford.
Loans taken out in those years performed worse than earlier loans “because those consumers had to finance cars once the supply chains were jammed and the prices started to go up,” says Ryan Kelly, acting auto finance program manager for the bureau. The average monthly payment for a new car bought last month is now a shocking $762.
“Those consumers got hit with inflation twice,” Kelly says. “First, when they had to finance a car after the prices went up, and then when they had to put gas in the car after the Russia-Ukraine conflict started.”
Jeremy Cross, the president of repossession firm International Recovery Systems, calls the last two years “a recipe for disaster.”
He explains, “Over the last two years, vehicle prices were inflated because there was no new car supply.” But Americans had saved money staying at home under lockdown, and some spent it on more expensive cars.
Now “the volume is picking up, and the remaining companies that are still performing repossessions are very busy,” Cross says. He thinks lenders are preparing for a new wave of repossessions in 2023 and 2024 because they’re beginning to offer his company new incentives “jockeying for position,” knowing that repossession firms will have more business than they can handle.
Cox Automotive analysts predict that long-term through 2025, repossessions will remain at or below historical norms. But between now and then, we could see a peak. (Cox Automotive is the parent company of Kelley Blue Book.)
Restaurants are set to become the biggest winners of a holiday season that could turn out to be the most normalized since the onset of the pandemic.
That’s according to a new Mastercard SpendingPulse survey released on Monday, which showed spending at dining establishments surging 15.1% over the 2021 holiday period. Total retail expenditures for the Nov. 1–to–Dec. 24 period in 2022 rose 7.6%, with in-store spending up 6.8% and online spending up 10.6%.
Restaurant spending beat out several other categories, such as apparel, where spending was up 4.4% from 2021, and electronics and jewelry, where a respective 5.3% and 5.4% less were spent, and department stores, which saw spending rise 1%.
“This holiday retail season looked different than years past,” said Steve Sadove, senior adviser for Mastercard and former CEO and chairman of Saks Inc. “Retailers discounted heavily but consumers diversified their holiday spending to accommodate rising prices and an appetite for experiences and festive gatherings postpandemic.”
Government data for November showed consumer spending was up just 0.1%, reflecting cautiousness among households and price cutting by retailers to lure those hesitant shoppers in. But the data also showed more spending on holiday recreation and travel, expected to go in the books as a busy season even if deadly winter storm may have wreaked havoc on the plans of many Americans over the Christmas weekend.
Of course, even as some merrymakers felt confident enough to make more plans and see more friends and family this year, the virus of course continues to cause illness and death. The U.S. reported 70,000 newly diagnosed cases for the first time since September on Thursday, while 422 people died of COVID-19 on Wednesday.
The Mastercard SpendingPulse data measure in-store and online retail sales for all payment forms and are not inflation-adjusted.
As for the companies that might be benefiting from that increased traffic, the year-end cheer probably won’t be enough to make a dent in what has been a difficult year with would-be consumers juggling worries over inflation, rising interest rates and a war in Europe.
The Invesco Dynamic Leisure & Entertainment exchange-traded fund PEJ, +0.79%,
whose holdings include Chipotle Mexican Grill CMG, +0.32%,
McDonald’s MCD, +0.68%
and First Watch Restaurant Group FWRG, +0.42%,
has gained 6.5% to date in the fourth quarter and is down 20% for the year as of Thursday. The broad benchmark S&P 500 SPX, +0.59%
is poised for a nearly 20% loss in 2022.
Chandra Sahu, 25, left a job in investment banking during the so-called Great Resignation last year, eager to find work that offered more flexibility. The New York City resident said she looked for work that fulfilled her “top priorities,” allowing her to demonstrate her “agency and creativity,” and landed at a startup.
“I wanted to work in a space where I was working closely with a team, where it still had kind of that rapid energy that you have in banking, but super-focused on a user and a problem space,” Sahu said.
Being able to pursue her interests outside of work was also important to Sahu. “I’ve really tried to prioritize making space for habits in my life, and ultimately lead to the kind of life I want to live,” she said.
Prioritizing quality of life for employees is one of the biggest career trends of 2022, said management consultant Christine Spadafor. “For many companies, this is going to be a culture shift,” she said. “It’s really looking at employees more holistically.”
“It means putting a human face on the human capital,” Spadafor added. “It’s not just thinking about the work that they do, but rather thinking about their financial well-being, their social well-being meaning with friends and family, their physical well-being and what’s gotten a lot of attention, and understandably so, is your mental health well-being, as well.”
Yet after the Great Resignation, many workers went through what has been called the “Great Regret” —admitting they should have stayed put, a workplace dilemma of 2022 that some experts say may change in the year ahead.
“You’re seeing a little more hesitancy to make moves; people are … maybe digging in a little bit,” said William Crawford Stonehouse III, founder and president of Crawford Thomas Recruiting in Orlando, Florida.
Despite a spate of layoffs at large, high-profile companies, many employers need to retain productive workers. “The unemployment rate is still so low that if you talk to 10 medium [size] business owners in America right now, they’ll all tell you there’s a position that they would absolutely hire someone on board if they could find the person,” said Stonehouse.
Chandra Sahu’s job gives her the flexibility to work remotely. Without a commute she has more time to pursue other interests.
Sahu said she wasn’t worried about finding a new job when she left investment banking in 2021. She was ready for a change. The startup she joined was acquired by social media company Pinterest earlier this year. She landed a coveted product manager position there in less than six months and still finds time for yoga, reading and other interests every week.
“It’s been amazing to take a step back and figure out how to orient my life around the choices I want to make, while still having the kind of rigor in my job that I think I really love,” she said.
Sahu’s job changes may reflect another trend some workplace management experts call a “career correction.” Instead of “quiet quitting” — or doing the bare minimum on the job — workers are intentionally switching from a culture that is quick to praise working long hours to one that puts more value on employees’ lives outside of work.
The data is so strong that people want a bit more flexibility.
Tina Paterson
consultant and author
“Individuals certainly are trying to exercise their right to find employment anywhere that meets their needs: their family needs, their work needs, their location needs — all of that,” said Christie Smith, global lead of Accenture’s Talent & Organization Practice.
From “shift shock,” when a new job is very different than what you were led to believe, and “boomerang employees” who return to jobs they left, to “career cushioning” by adding new skills and reigniting your network after “loud layoffs” at high-profile companies, this year’s buzzwords for common workplace dilemmas may fade.
Yet, a new outlook for employers will endure. “The trend will continue to be an emphasis on talent,” Smith said. “The right skills, and getting those, top getting that talent into the right positions within organizations.”
Recognizing employees’ need for flexibility will be essential to filling roles.
“Fully in the office is a thing of the past, and the leaders who are hanging on to that model are going to lose the war for talent,” said Tina Paterson, a Melbourne, Australia-based consultant and author of “Effective Remote Teams.”
“Great employees always have options — and the data is so strong that people want a bit more flexibility, whether that’s hybrid or fully remote, in terms of where they work,” she added.
Sahu echoes the sentiments of many other younger workers, saying senior managers can show they understand and value their employees’ needs through their own actions.
“Making space for your kids or your hobbies, or your life that is protected, tells other folks that that is a regular habit that a successful leader can have,” she said.
Elon Musk has been trying this week to defend Tesla’s abysmal stock performance in 2022. The electric vehicle giant has seen its stock plummet by 61% this year, making it the 11th-worst performing stock in the S&P 500 in 2022.
“As bank savings account interest rates, which are guaranteed, start to approach stock market returns, which are *not* guaranteed, people will increasingly move their money out of stocks into cash, thus causing stocks to drop,” Musk tweeted.
You might expect that Tesla’s stock drop has wiped out more investor wealth than any other stock in the world this year. But you would be wrong.
If we look at declines in market capitalization — the value of companies’ common-shares outstanding — Tesla TSLA, -1.76%
has been the fourth worst-performing stock in the benchmark S&P 500 this year, as of 1 p.m. ET on Dec. 21:
On a percentage basis, all these stocks have performed worse than the full S&P 500, which has fallen 19%, excluding dividends.
Amazon.com Inc. AMZN, +1.74%
has erased more shareholder wealth than any other publicly traded company in 2022. In total, investors in Amazon have lost $804.6 billion this year. The stock is down 48% in 2022.
Apple Inc. AAPL, -0.28%
and Microsoft Corp. MSFT, +0.23%
have also suffered larger market-cap declines than Tesla, by virtue of their sheer size.
The companies have different fiscal and annual period ends, but if we look at data for the past three reported quarters and compare to the same period a year earlier, here’s how the four stack up:
Company
Ticker
Change in sales for three quarters from year-earlier period
Change in EPS for three quarters from year-earlier period
Amazon showed a net loss of $3 billion for the first three quarters of 2022 as the company neared the end of its extraordinary multiyear effort to build out its warehouse and fulfillment infrastructure. For the first three quarters of 2021, the company booked $19 billion in profits. When announcing Amazon’s third-quarter results CEO Andy Jassy said the company was working methodically toward “a stronger cost structure for the business moving forward.”
The incredible growth of Amazon’s cloud business has stalled and disappointed the expectations the company had nurtured on Wall Street. The Amazon Web Services business is facing increasing competition from the likes of Microsoft and its customers are pulling back. Meanwhile, retail sales have also come in weak going into the Christmas and holiday season.
Amazon’s stock has declined 22% since it closed at $110.96 on Oct. 27, right before it disappointed investors not only with its third-quarter results, but with its outlook: It expects to break even during the holiday quarter. Analysts polled by FactSet had previously expected a profit of more than $5 billion.
Tesla stands in contrast to Amazon, as you can see on the table above. Its sales grew by 58% during the first three quarters of 2022 from the year-earlier period and its earnings per share rose nearly threefold.
This has been a year of significant declines for shares of giant tech-oriented companies, especially those that had traded at lofty price-to-earnings valuations — that group includes Amazon and Tesla. In fact, these companies have given up all their pandemic era gains int he stock market.
But with Tesla’s results so outstanding through the first three quarters of 2022, it raises the question: How much of the drop in the electric car makers share price was tied to Musk’s actions as CEO of Twitter, which he acquired on Oct. 27 after a monthslong saga? And how much of a relief rally, if any, might there be for Tesla if Musk, as expected, steps down as Twitter CEO?
How about some bottom-feeding?
Here’s the same list of 10 stocks in the S&P 500 that have seen the largest declines in market cap this year, with a summary of analysts’ ratings, consensus price targets and declines in their forward price-to-earnings ratios:
Cheesecake Factory appears to be “running the same play,” wrote J.P. Morgan analyst John Ivankoe in a recent restaurant industry outlook. I don’t think he meant it as a compliment—the stock, he noted, trades where it did in 2004, adjusted for splits.
Why the long stall-out? My first thought was that maybe hitting the mall for a hypercaloric sit-down meal off a menu the size of a Gutenberg Bible has fallen out of favor over the years. But no: Sales have bounced back and then some from the Covid pandemic, with plenty of takeout business and dessert orders. The average
Cheesecake Factory
(ticker: CAKE) restaurant does more than $10 million in yearly sales, or twice as much as an Olive Garden.
When you can’t send a check but don’t want to rely on something as insecure as cash, a money order could be just the ticket.
It’s essential to know how to send and fill out a money order step-by-step in case you ever need to pay a bill, send money to a relative or transfer money discreetly from one place to another.
What is a money order?
A money order is very similar to a check. It allows you to send or receive payments securely, unlike cash.
However, money orders are prepaid. Instead of money leaving your account when someone catches a check, money leaves your account the minute you fill out a money order and deposit it at an appropriate institution.
When should you use a money order?
It can be wise to use a money order whenever you need to pay someone securely but can’t use a smartphone app like MoneyGram, online platform, check or cash (or you don’t want to use any of those methods).
This form of payment is accepted practically anywhere because they are automatically prepaid, so there’s no risk of the money “bouncing,” which can happen with a check. Furthermore, there’s no identity theft risk, like when you wire money from a checking account.
You can use a money order when you need to:
Send money to a family member or friend.
Pay a bill for your business.
Receive money from your workplace or someone else.
However, remember that you can only send $1,000 in a single money order. You can send multiple money orders in the same shipment, though.
Banks and other financial institutions can offer this personal finance service, just like they can send cashier’s checks and personal checks. Other financial institutions also provide money orders, including credit unions such as Western Union or anywhere you can have a bank account or get a credit card/debit card.
Fortunately, filling out a money order is very straightforward and not at all difficult. You can get a money order from a location that sells them, such as pharmacies (including Walmart and CVS) or, more commonly, any of the 31,300 United States Postal Service retail offices. Conveniently, you can also send money orders from U.S. Postal Service offices.
Note that purchasing a money order involves a fee. The fee can vary from place to place; for instance, Walmart usually charges one dollar to send a money order, whereas the USPS can charge anywhere from $1.65 to $2.20 depending on how much you need to send.
You’ll need a few pieces of information to fill out a money order:
The payee’s name.
The payee or recipient’s address.
The payment amount.
Your name and current mailing address.
The reason or billing account number for the money order.
You don’t need to list the issuer of the money order or the location of the post office/convenience store from which you send it on the memo line.
Step 1: Fill in the recipient’s name
Once you have a money order, write the name of the person to whom you are paying money in the “pay to the order of” or “pay to” fields, depending on which field your money order has. You should include the full name of the recipient or the full name of the business you are paying.
Step 2: Add your address
The next step is to add your address to the purchaser’s address field. This is the address of the person purchasing the money order — in this case, you. You’ll also add the payee’s address.
Step 3: Fill in the “memo” field
Then you need to fill in the “memo” field. This is a line or field where you can describe what you’ll use the money order for. If you’re using it to pay a bill, you’ll put the billing account number in this field.
Step 4: Sign your name
Last, you must sign your name on the front of the money order where it is indicated. When signing the purchaser’s signature, leave the back of the money order blank. That’s where the payee or recipient will endorse it, similar to endorsing a check.
There you have it — it should only take you a few minutes to fill out a money order from start to finish, provided you have all the necessary information.
Where and how to deliver a money order
After you have filled out the money order, detach the receipt. The receipt is vital for your records and allows you to track whether the recipient ever cashed the money order.
Hand-deliver the money order to the recipient or mail it to your recipient using the postal service of your choice. Only the recipient will be able to cash it.
Remember that, unlike a check, whatever money you have designated for the money order will be gone from your account before the recipient cashes the money order.
Can you cancel a money order?
Yes. To do this, you should immediately contact the person or party that issued the money order (i.e., USPS or Walmart). Ask for a cancellation request form and fill it out.
You’ll need to have your receipt from the money order and show it to do this. Then you’ll have to pay a fee to cancel the money order. This process is the same if you want to replace the money order or get a cash refund.
What else do you need to know about filling out money orders?
Now you know how to fill out a money order step-by-step. Money orders can be critical financial tools from time to time, and they can come in handy if you need to send funds securely and quickly from one place to another.
Student loan borrowers protest the GOP outside the Republican National Committee’s offices in Washington, D.C,. for denying student loan relief to 40 million borrowers on Nov. 18, 2022
Paul Morigi | Getty Images Entertainment | Getty Images
In August, Biden announced that tens of millions of Americans would be eligible for cancellation of their education debt: up to $20,000 if they received a Pell Grant in college, a type of aid available to low-income families, and up to $10,000 if they didn’t. Individuals who earned more than $125,000, or families making more than $250,000, were excluded from the relief.
Since then, Republicans and conservative groups have filed at least six lawsuits to try to kill the policy, arguing that the president doesn’t have the power to cancel consumer debt without Congress and that the policy is harmful.
The Biden administration insists that it’s acting within the law, pointing out that the Heroes Act of 2003 grants the U.S. secretary of education the authority to waive regulations related to student loans during national emergencies. The country has been operating under an emergency declaration due to Covid since March 2020.
The battle has made its way through the courts, and now the nine justices of the U.S. Supreme Court have scheduled their high-profile legal arguments over the plan for the end of February.
Here’s what you need to know about the two cases that will be heard.
On Sept. 29, six Republican-led states filed a lawsuit against the president’s student loan forgiveness plan, arguing that Biden was vastly overstepping his authority. The states — Nebraska, Missouri, Arkansas, Iowa, Kansas and South Carolina — allege that the debt relief “is not remotely tailored to address the effects of the pandemic on federal student loan borrowers, as required by the HEROES Act.”
However, the Biden administration insists that the public health crisis has caused considerable financial harm to student loan borrowers and that its debt cancellation is necessary to stave off a historic rise in delinquencies and defaults. It will likely stress this concern to the justices.
The GOP states also argue that loan forgiveness will disrupt their entities that profit from the defunct Federal Family Education Loan (FFEL) program. Under that program, which was eliminated in 2010, the government guaranteed the loans by private banks and nonprofit lenders. Although the U.S. Department of Education has moved to a system in which it directly lends to students, millions of borrowers continue to owe on commercially held FFEL loans.
The states point out that a major loan servicer headquartered in Missouri, the Missouri Higher Education Loan Authority, or MOHELA, would lose revenue under the plan because the Biden administration had initially told borrowers they could transfer their loans from the FFEL program to the main federal loan program to qualify for its forgiveness.
The second legal challenge the Supreme Court will consider in February was backed by the Job Creators Network Foundation, a conservative advocacy organization.
In that lawsuit, filed on Oct. 10, two plaintiffs say they’ve been harmed by “this arbitrary executive overreach,” according to a press release by the foundation.
One plaintiff, Myra Brown, says she is left out of the president’s relief because she has commercially held loans. The other plaintiff, Alexander Taylor, says he’s not entitled to the maximum forgiveness amount of $20,000 because he didn’t receive a Pell Grant when he was in college.
The lawsuit says the president’s policy violated the Administrative Procedure Act’s notice and comment procedure, not allowing plaintiffs to weigh in on the shape of forgiveness.
In response, the Biden administration is likely to argue that the Heroes Act of 2003 grants the education secretary the authority to make changes to federal student loan programs during national emergencies without first taking input from the public, Kantrowitz said.
The Heroes Act, he said, “explicitly waives the APA requirement for a notice and comment period.”
“All the administration needed to do is publish the waivers in the Federal Register, which they did,” he said.
The Biden administration has already denied that its policy will cause harm to the plaintiffs in the lawsuit, arguing that, to the contrary, its plan “will cost respondent Brown nothing and relieve respondent Taylor of $10,000 in debt.”
The numbers: Consumer spending rose a tepid 0.1% in November, suggesting greater caution by households and heavy discounting in the holiday shopping season.
Analysts polled by The Wall Street Journal had forecast a 0.2% increase.
Key details: Americans spent less on goods in November, especially new cars and trucks. Higher interest rates have put a dent in car sales while excess inventories forced companies to cut the prices of other products.
Consumers may have also started their holiday shopping early, economists say. Spending rose a sharper 0.9% in October.
Spending on services, meanwhile, increased again. Americans are spending more on things like recreation and travel and not buying as many goods as they were during the pandemic when they were cooped up at home.
The U.S. savings rate rate edged up to 2.4% last month from 2.2%, which was the second lowest savings rate on record going back to 1959.
Households have dipped into their savings to support their spending habits because incomes are not rising as fast as inflation.
Big picture: Consumer spending is the main engine of the economy, but it might be starting to sputter in the face of rising interest rates. The Federal Reserve has jacked up rates to try to tame inflation.
What’s likely to keep spending going up for the time being is a strong jobs market. If layoffs increase and unemployment rises, however, the economy is bound to suffer.
Higher borrowing costs depress the economy by making it more expensive to buy a home or car or take out a loan.
Looking ahead: “It seems reasonable to expect people to become more cautious, now that they have run down about half of their accumulated pandemic savings, and labor market conditions are softening,” said chief economist Ian Shepherdson of Pantheon Macroeconomics.
Market reaction: The Dow Jones Industrial Average DJIA, +0.53%
and S&P 500 SPX, +0.59%
were set to open higher in Friday trades.
The benchmark S&P 500 Index has finally fallen below the 3900- to 4100-point trading range.
The move prompted an immediate reaction down to 3800, the next support level. (To see my suggestion for a so-called Santa Claus rally, please see the next item, below.)
Frankly, I would have expected more selling after the S&P 500 SPX, -2.32%
broke a support level of that magnitude (perhaps a move to 3700).
So, 3700 is the next support level, and then there is support at the yearly lows near 3500. On the upside, there is now resistance in the 3900-3940 area.
The larger picture is that SPX is still in a downtrend, and that the last rally failed in early December right at the downtrend line that defines this bear market. The declining 200-day moving average (MA) was also in that same area, near 4100.
We are closing our positions in the McMillan Volatility Band (MVB) buy signal that occurred in early October, and we will now wait for a new signal to set up. If SPX were to close below the lower -4σ Band (currently at 3760 and declining), that would be the first step toward a new buy signal. That does not appear to be imminent.
Equity-only put-call ratios continue to rise and, thus, remain on sell signals. There has been some relatively heavy put buying in stock options over the past few weeks, and that has been a major contributing factor in the rise in the put-call ratios. These ratios are rather high on their charts, so they are considered to be in oversold territory. However, “oversold” does not mean “buy.”
After the market broke below 3900, breadth was poor for the next two days. That pushed the breadth oscillators — which were already on sell signals dating back to December 5th — into oversold territory. We are now watching to see if they can generate buy signals. In fact, the NYSE breadth oscillator did generate a buy signal as of December 21st, but the “stocks only” oscillator has not. We generally require that any signal from this indicator (which is subject to whipsaws) persist for at least two consecutive days before considering it to be an actionable signal.
New 52-week highs on the New York Stock Exchange have lagged for some time again, and thus the “new highs vs. new lows” indicator remains on a sell signal.
So, the above indicators are relatively negative, but that is contrasted by the CBOE Volatility Index VIX, +15.50%
indicators, which are more bullish. The VIX “spike peak” buy signal of December 13th remains in place. Moreover, the trend of VIX buy signal, which is a more intermediate-term signal, remains in place. VIX would have to rise above 26 to cancel out these buy signals.
The construct of volatility derivatives remains bullish. That is, the term structures of the VIX futures and of the CBOE Volatility Indices slope upward. Moreover, the VIX futures are all trading at a premium to VIX. January VIX futures are now the front month, so we are watching for a warning sign, which would come if Jan VIX futures rose above the price of Feb VIX futures. That is not in danger of happening at this time.
The seasonal patterns that supposedly “rule” between Thanskgiving and the beginning of the new trading year have not worked out this year. The last of those patterns is yet to come, though — the Santa Claus rally — and it may still be able to salvage something for the bulls.
In summary, we continue to maintain a “core” bearish position and will continue to do so as long as SPX is in a downtrend. We will trade confirmed signals from our other indicators around that “core” position.
New recommendation: Santa Claus rally
The Santa Claus rally is a term and market seasonal pattern defined by Yale Hirsch over 60 years ago. It has a strong track record. The system is simple: The market rises over the last five trading days of one year and the first two trading days of the next year — a seven-day period.
This year the system begins at the close of trading on Thursday, December 22nd (today). However, if that period does not produce a gain by SPX, that would be a further negative for stocks going forward.
At the close of trading on Thursday, December 22nd,
Buy 2 SPY Jan (13th) at-the-money calls
And Sell 2 SPY Jan (13th) calls that are 15 points out of the money.
There is no stop for this trade, except for time. If the SPDR S&P 500 ETF Trust SPY, -2.29%
trades at the higher strike while the position is in place, then roll the entire spread up 15 points on each side. In any case, exit your spreads at the close of trading on Wednesday, January 4th (the second trading day of the new year).
Follow-up action
All stops are mental closing stops unless otherwise noted.
We are using a “standard” rolling procedure for our SPY spreads: in any vertical bull or bear spread, if the underlying hits the short strike, then roll the entire spread. That would be roll up in the case of a call bull spread, or roll down in the case of a bear put spread. Stay in the same expiration, and keep the distance between the strikes the same unless otherwise recommended.
Long 2 SPY Jan (20th) 375 puts and Short 2 Jan (20th) 355 puts: this is our “core” bearish position. As long as SPX remains in a downtrend, we want to maintain a position here.
Long 1 SPY Jan (6th) 408 call and short 1 SPY Jan (6th) 423 call: this trade is based on the MVB buy signal, which was established on October 4th. We have already rolled up a couple of times and taken some profit out of the position. Close the remaining spread now.
Long 2 KMB Jan (20th) 135 calls: we rolled this position up last week. The closing stop remains at 135.
Long 2 IWM Jan (20th) 185 at-the-money calls and Short 2 IWM Jan (20th) 205 calls: this is our position based on the bullish seasonality between Thanksgiving and the second trading day of the new year. We will adjust this position if IWM rallies during the holding period, but initially there is no stop for the position, so the entire debit is at risk.
Long 2 PSX Jan (20th) 105 puts: we intended to hold these puts as long as the weighted put-call ratio remains on a sell signal. However, the put-call ratio has rolled over to a buy signal, so exit these puts now.
Long 2 AJRD Jan (20th) 52.5 calls: AJRD received an all-cash takeover offer of $56, so exit these calls now. Do not sell them below parity.
Long 1 SPY Jan (20th) 402 call and Short 1 SPY Jan (20th) 417 calls: this spread was bought at the close on December 13th, when the latest VIX “spike peak” buy signal was generated. Stop yourself out if VIX subsequently closes above 25.84. Otherwise, we will hold for 22 trading days.
Long 1 SPY Jan (20th) 389 put and Short 1 SPY Jan (20th) 364 put: this was an addition to our “core” bearish position, established when SPX closed below 3900 on December 15th. Stop yourself out of this spread if SPX closes above 3940.
Long 2 PCAR Feb (17th) 97.20 puts: these puts were bought on December 20th, when they finally traded at our buy limit. We will continue to hold these puts as long as the weighted put-call ratio is on a sell signal.
Lawrence G. McMillan is president of McMillan Analysis, a registered investment and commodity trading advisor. McMillan may hold positions in securities recommended in this report, both personally and in client accounts. He is an experienced trader and money manager and is the author of the best-selling book, Options as a Strategic Investment. www.optionstrategist.com
