Donna Cournoyer, Author at Moore Advisors

Donna Cournoyer In Reading Recommendations

100 is the New 65

There are many facets to longevity.

A philosophical (and perhaps scary) part is that it raises issues associated with our own mortality. A promising development is that doctors and scientists are discovering new approaches that increase the likelihood of living longer and healthier lives.

A practical component is that longevity is a key input into the financial planning equation. A longer life implies a greater need for resources to support that life.

I’ve previously recommended Dr Peter Attia’s book Outlive: The Science and Art of Longevity.

For this month, journalist Wiliam J. Kole provides other viewpoints on longevity, in his book The Big 100: The New World of Super Aging.

Chapters include:

How Science Lengthens Our Lives
The Luck of the DNA Draw
Growing Old in a Youth-Obsessed Society
Exceptionally Old, With Extreme Influence
Who Will Care for Us, and Who Will Pay

For those of you who’d like a more in-depth preview, or prefer listening to reading, you can hear Kole discuss his ideas on longevity, and provide some interesting anecdotes, in the October 20 edition of WBUR’s On Point podcast entitled: 100 is the New 65: The New World of Super Aging.

Donna Cournoyer In College Planning

It’s a Wrap: Finishing Up College Applications

Admissions Applications

Some congratulations are in order if you’re helping a high school senior through the college application process: you’ve made it this far.

There have been college visits, checklists, discussions, applications, essays, and life sprinkled in the mix over the last year as college admissions activities and “to-do” lists have ramped up, especially this fall.

While the upcoming decision time can be emotionally challenging – given that choosing a college is one of the biggest financial decisions many families will make – this busy, stressful fall phase of active work is almost done!

As many schools have an early action or early decision date of November 1 or November 15, your student may have already submitted many of their applications. If this is the case, it’s a good idea to ride that momentum and finish up with any pending applications soon.

Encourage your student to complete their remaining applications on their school list.

Even if a college has a rolling deadline, or an early 2024 deadline, it is best to apply as soon as possible.

While the expected notification dates of acceptance vary from school to school, it’s good to know the following: the earlier your student applies, the sooner admissions staff likely will read the application and send out notification. College financial aid staff typically review applications for financial aid after acceptance.

The FAFSA: Free Application for Federal Student Aid

While the Department of Education has yet to release the opening date of the FAFSA application for the 2024-2025 academic year, it is still expected to open in December.

The fact that the FAFSA form is opening later for this year only, due to major changes in the form (it usually opens on October 1 for the following fall) is more reason to complete it as soon as it is released.

Schools will have a shorter timeline to review applications and prepare offer letters.

It is my recommendation that every student complete the FAFSA form.

Even if you think your student will not be eligible for need-based aid (free grants and scholarships), you and your student should complete the FAFSA form. Some schools will offer a free grant or scholarship even if your student doesn’t qualify for need-based funds, just because the form was completed.

There are also some schools that require completion for merit scholarships (awarded by admissions based on the student’s admissions application).

How to Get a Jump on Completing the FAFSA Form

Create your FSA ID

Create your FSA ID here: Create FSA ID
Get updates and FAFSA information here: Federal Student Aid
Both student and parent will need to create an ID
You can take these steps now and keep credentials in a safe place until the FAFSA opens

Gather required information to reference when completing the FAFSA, including:

2022 Federal Tax Return – in most cases, you will be required to give consent to the IRS and use the (FTI) Federal Tax Information-Module. Eligibility will not be calculated without consent. This is consent for tax information, NOT to contribute to college costs.
2022 W-2’s and 1099’s
Account Statements – Checking and savings accounts, brokerage accounts
Child support received – if applicable
Social Security #’s – be sure to double check these- it is a common mistake to transpose numbers or use the wrong one

For more information on the new 2024-2025 FAFSA changes and Early Decision, see my October blog- College Application Marathon: Fall’s Final Sprint

Once your student finishes their applications, hopefully your whole family will be able to find time to relax and enjoy the holidays!

And, as a reminder, be sure to check your email regularly for notifications from the schools.

Donna Cournoyer In Financial Planning

The Catch on Catch-Ups: 401k Update

SECURE 2.0 was a package of legislation signed into law in December 2022 as a follow-up to the Setting Every Community Up for Retirement Enhancement Act of 2019 (aka SECURE 1.0).

There has been some confusion since the passage of SECURE 2.0 regarding the new treatment of 401(k) contributions for older workers.

Upon passage of the legislation, it was assumed that beginning in 2024, employees who are 50 and older, and whose annual pay exceeds $145,000, would need to make catch up contributions only to a post-tax Roth 401(k). Currently, the maximum allowable 401(k) contribution from employees is $22,500, and the catch up is $7,500, for a total of $30,000 for employees 50 years and older.

The administrative aspects of this impending change caused concern by the administrators of 401(k) plans. The IRS recently provided guidance to clear up the ambiguity. Now, the IRS Is giving two years of administrative relief so payroll providers and others have extra time to implement the change.

For employees who are 50 and older, if your income exceeds $145,000, you can continue to make your catch-up contributions into a pre-tax (traditional) 401(k) account in 2024 and 2025.

Starting in 2026, catch-up contributions for 401(k) plans will need to be made after tax and directed to a Roth version of the 401(k).

Donna Cournoyer In Investment Strategy

The Meaning of Magnificence (Stocks) and 5% (Bonds)

The financial markets have been influenced by two major themes in 2023.

For stocks, Artificial Intelligence (AI) has captured the imagination and the dominance of large technology companies has been a driving force.

For bonds, concern about inflation and the Federal Reserve’s reaction to it has been behind the persistent rise in interest rates. Read on for a discussion of what these themes mean for your investments.

Stocks: Less Magnificent

The seven largest technology companies in the US have been cheekily labeled the Magnificent Seven. Some may recall the film from 1960 by the same name, a Western about seven American gunslingers.

The 21^st century capital markets version casts Alphabet (aka Google), Amazon, Apple, Meta Platforms (aka Facebook), Microsoft, Nvidia, and Telsa as the lead characters.

Year-to-date, the M7 are up about 80% on average. This compares to a gain of 10.6% for the S&P 500 Index, which is the benchmark for the 500 largest companies in the US.

Over the past five years, the M7 surged more than 200%, compared to about 27% for the S&P 500 (statistics courtesy of Clearnomics). Also worth noting is that the M7 comprise nearly 30% of the S&P 500 index.

Another way to think about the M7 phenomenon: if all the stocks in the S&P 500 were given the same weight – equally weighted, instead of weighted by the market capitalization, or relative size of each company’s stock – the stock market performance thus far for 2023 would be negative 2.5%. Which means that, on average, it really hasn’t been a great year for stocks.

As you might expect, legions of analysts and strategists have been diligently analyzing and prolifically prognosticating about this M7 phenomenon. In summary, the message from Wall Street: AI is a special technological development that will change the world.

These are great companies that make ingenious products, and they likely will continue to generate gigantic revenues and prodigious profits for the foreseeable future. However, “greatness” and “ingenuity” appears to be reflected in the M7 stock prices – and then some.

The chart below is an example of wonky Wall Street stock market research (this one produced by Richard Bernstein Associates and reproduced by Bloomberg). At a quick glance it might be hard to decipher, but upon closer study it highlights three important points about today’s stock market:

Big tech stocks (M7) are quite expensive relative to other stocks (red dot)
Non-tech stocks are much more reasonably priced (black dot)
Interest rates affect what people think the “fair value”, or reasonable price, should be for stocks (dotted line thru the blue dots)

A few additional notes on the above chart:

1. About the P/E: S&P 500 12-month Forward Price / Earnings Multiple (vertical axis): The Price / Earnings Multiple (P/E) is one standard metric used by analysts when trying to determine the relative value of a stock. It is the price paid for each $1 of earnings. Based on years of historical data, paying about $16 per share for each dollar per share of earnings a company produces is viewed as a reasonable price, or fair value.
2. About Fair Value: The idea of fair value, or the reasonable price to pay for stocks, depends upon what part of the market you’re looking at. Faster-growing segments, like technology, command a premium to slower-growing areas, like utilities. Fair value also moves around as interest rates change.
3. Interest Rates & Stock Prices: Last year, when interest rates were 2%, the P/E for the S&P 500 Index was around 18. Today, with interest rates at 5%, the fair value P/E is about 15, and the market trades at 19. This valuation metric says the stock market has some room to fall, given the current level of interest rates.
4. Magnificent 7:The P/E for the M7, at 28, is very high relative to the rest of the stock market, so theoretically there’s a lot of room for these seven stocks to fall.
5. Non-Magnificent 493:The P/E for the remaining 493 stocks in the S&P 500, at 16, is much closer to fair value, and therefore today is viewed as much more reasonably priced.
6. About the Data: Scatter plot uses 20 years of monthly data (from 2003 – 2023)

For investors who have diversified stock allocations – including significant weights to non-technology stocks, small company stocks, and foreign stocks – portfolio performance in 2023 will likely be underwhelming when compared to a benchmark like the S&P 500, or high-fliers like the M7.

While this may be perceived as disappointing, keep in mind that segments of the market fall in and out of favor over time.

Viewed through another lens, stock price declines can present opportunities. Famed stock picker and Newton, MA native Peter Lynch, said in a recent Barrons’s interview: “I love it when stocks go down.”

The bottom line for stock-market investors: the best way to avoid the market-timing pitfall (and the outsized ups and downs that come with it) and enjoy the benefits of long-term, risk-controlled compounding, is to be well-diversified.

What happens in the near term to an individual stock or concentrated group of stocks can be noteworthy and interesting.

But what matters more for your financial wellbeing is how stocks can contribute to your diversified portfolio and your broader financial plan over the long term.

Bonds: 5% is the New 2%

A mere 22 months ago, all Treasury bonds were yielding 2% or less (most much less). The one-year Treasury note yielded about 0.5%. Today, it yields 5.5%. But talking in percentage points can be abstract.

What does the big move in interest rates mean for folks who invest in bonds?

There are two main pieces of the bond puzzle for investors to think about: income and price. Providing concrete examples might be helpful in putting the effects of interest rate increases into perspective.

The Price Piece

You may have a general understanding of the price / yield relationship when it comes to bonds.

You can validate that interest rates have been going up by checking out what’s on offer at your local bank: savings accounts and CDs pay more today, and mortgages cost a lot more.

If you hold individual bonds, or a typical bond fund in your brokerage account or IRA, you’ve probably noticed that the prices are lower today when compared to last month or last year.

The reason is this: as new bonds are issued at current interest rates (which are higher than in the recent past), old bonds, which pay a fixed rate of interest through their coupons, must adjust.

The adjustment mechanism is the price of the bond (or bond fund). The price of old bonds will fall to a level that makes their yield comparable to the yield offered by new bonds.

The table below shows how bonds are expected to perform over the course of the next year given various scenarios for changes in interest rates.

Note that bp is ‘basis point’, or 1/100 of a percent. A 300-basis point fall (last column) is a three percentage point decrease from the current level of interest rates. As interest rates fall, bond returns go up. As rates rise, bond returns go down.

One takeaway from the table is that for holders of high-quality short-term bonds (like US Treasuries) it is now difficult to envision an environment where returns for the next 12 months could be negative.

Even if Treasury bond interest rates were to climb to 8% (from today’s 5%), the 12-month return would still be positive for holders of short-maturity bonds. This is because: 1. Short-term bond prices are less sensitive to interest rate movements; and 2. Income from coupon payments more than offsets the negative price adjustment.

For holders of longer-maturity bonds, an interest rate decline would translate to big gains.

But interest rate risk cuts both ways. If rates were to climb by another 1.5 percentage points or more during the next year, it would mean additional losses for holders of intermediate and long-maturity bonds.

The pain for current bond holders has occurred as prices have fallen to adjust to higher interest rates. But the good news is that higher interest rates offer protection against future interest rate increases and price declines. And higher interest rates mean more yield, and therefore more income.

The Income Piece

The pleasure related to bonds is that investors now can reinvest at higher interest rates (compared to the recent past) and therefore earn more money over time.

To put this into perspective, if you invested $100,000 into the 1-Year Treasury in January 2022, you would have collected $500 in interest by the time the bond matured one year later.

Today, if you purchase a one-year Treasury note, you’ll earn about 5.5% in interest, which, on a $100,000 investment, translates to earnings of $5,500. In the span of just under two years, the expected return on short-term Treasuries has increased 11-fold.

This income component of bonds is the straightforward part of the bond puzzle.

The Whole Puzzle

The tough part is that investors holding bonds as part of a balanced portfolio have experienced losses as interest rates climbed. This has unquestionably been painful.

The good news is that you can expect to receive a lot more income from your bond investments, and this income helps to mitigate the downside of interest rate risk.

The bottom line for bond investors: taking some degree of interest rate risk is reasonable for most investors, most of the time. The amount of risk each individual investor should take depends upon their personal circumstances and market conditions.

At this point, given current market conditions, a prudent approach is to err on the side of caution.

Today, one-year Treasury notes yield about 5.5%, and 10-Year Treasuries yield 4.9%. Though the yields are close, the interest rate risk is very different. Some of the better deals, and higher yields, are currently in short-term bonds.

Investors get paid to wait and see how the inflation environment, and the interest rate environment, will unfold in the months ahead.

Donna Cournoyer In Market Updates

October 2023 Market Recap: Interest Rate Specter

The unrelenting increase in Treasury bond yields and the stubborn inflation situation spooked the stock market in October. Hostilities in the Middle East and the fractious political environment in the US have also heightened investors’ concerns.

The negative financial market trends from August and September continued through most of October.

Stock returns fell again, further eroding a strong advance during the first half of 2023. The S&P 500 Index, which tracks the largest stocks in the US, slid into correction territory during the last week of the month (a decline of more than 10% from a recent peak) before ending the month on a more positive tone.

For October, the S&P 500 index of large company US stocks declined by 2.1%. Foreign stocks declined by 2.9%. Bonds took a beating last month, too: the Bloomberg US Aggregate Bond Index fell by 1.6%.

Below is a Summary of October Returns.

Year-to-date, stocks are holding onto gains. As of October 31, US stocks gained 10.6% and foreign stocks were up 3.8%. Bond returns year-to-date remain in the red: through the end of October, the major US bond market index declined by 2.6%.

Donna Cournoyer In Reading Recommendations

Extremely Online

I don’t get out often. But when the opportunity presents itself, I value direct social interaction with the group I’m with. Recently, I visited my son in Chicago. We got together in a hip hotel lobby bar near the University of Chicago to catch up and enjoy one another’s company before dinner.

As I scanned the crowd in the bar, I expected everyone to be similarly engaged. But probably half the patrons were engaging virtually on mobile phones, rather than actually with the people they were standing or sitting near.

This struck me as curious. And was a reminder of how powerful the allure of online platforms can be.

In an effort to better understand the power of the online platform by learning more about the people who’ve been successful in creating compelling content, I’m planning to read Extremely Online: The Untold Story of Fame, Influence, and Power on the Internet.

Author Taylor Lorenz is a Washington Post reporter, prior New York Times reporter, and social media editor, who’s viewed as an authority on internet culture.

I’m always reticent to recommend something I haven’t yet delved into myself. But the subject matter is timely from a personal perspective, and this book will be released during the first week of October.

If you decide to dive in, please let us know what you think.

-RK

Donna Cournoyer In Financial Planning

Medicare Update: Enrollment Is Open

Medicare open enrollment period starts October 15 and continues through December 7 each year. During this period, Medicare enrollees can make certain changes in their coverage. Here is what we know about Medicare costs for 2024.

Everyone who has Medicare coverage (Traditional Medicare or Medicare Advantage) gets Medicare Part A free, but pays for Medicare Part B.

The Centers for Medicare & Medicaid Services (CMS) hasn’t said yet how much the base cost of Part B will cost in 2024, but the annual Medicare Trustees report in March forecast the monthly price to rise from $164.90 to $174.80, a 6% increase, in 2024.

Here are a few things to keep in mind:

If you are on Traditional Medicare and plan to stay on Traditional Medicare:

You may be able to lower your annual drug costs by switching to a different Plan D. For example. there are 24 Part D drug plans in Massachusetts, and each has a different premium, deductible, co-pay, and formulary (list of covered drugs).’

To compare plans, go to the Medicare.gov site and set up your account. In the “What do you want to do?” section, select “Open all options”, then “Find health & drug plans.”

If you want to switch from Medicare Advantage to Traditional Medicare:

Some people switch from Medicare Advantage to Traditional Medicare because they don’t like the restricted network of an Advantage plan, or because frequent copays for services have become expensive.

You can switch from a Medicare Advantage plan to traditional Medicare during the Medicare Open Enrollment period, or during the Medicare Advantage Open Enrollment Period (January 1 to March 31).

If you make this change and you want drug coverage, be sure to sign up for a Medicare stand-alone prescription drug plan (Plan D), unless you have creditable drug coverage from another source. If you do not, and you decide to sign up for Part D coverage later, you may face a penalty for late enrollment.

And if you want a Medicare Supplement Plan (or Medigap Plan, which covers most out of pocket costs) you’ll need to sign up for that then, too.

In most states, Medigap insurers are not required to sell you a policy if you don’t meet the medical underwriting requirements. If you are able to enroll outside of your open enrollment period, you might have to pay higher premiums.

MA residents note, though: You can join Medicare Supplement plans without the need for medical underwriting at any time of the year in Massachusetts, and you cannot be denied coverage nor be charged more due to your age or health status.

Will I have to pay more for Medicare because of my income?

Some people pay more for Medicare Part B and Part D based on income. This additional payment is called IRMAA (Income-Related Monthly Adjustment Amount).

Your tax return for 2022 will be used to determine whether you will be subject to an IRMAA charge for 2024. If you retired in or after 2022, or had another life-changing event (e.g., marriage, divorce, death of spouse, etc.) you can file form SSA-44 to request that your IRMAA amount be reduced or eliminated.

IRMAA charges have not been released yet for 2024, but are expected to be about 6% higher than in 2023.

If you have questions or would like help evaluating your Medicare options, please let us know.

-SM

Donna Cournoyer In College Planning

College Application Marathon: Fall’s Final Sprint

As October arrives, your high school senior is likely deep into the college application process, and now the college application marathon turns into a final finishing sprint.

This time in your student’s life can seem pressure-packed and overwhelming.

Together you’re trying to find the perfect college fit that will allow them to pursue their educational and extracurricular goals in a way that can be supported by your family’s finances.

Keeping on top of the application process, including deadlines, may relieve some of that pressure. Below are some suggestions that you might find helpful.

Refine the List

Now is the time to refine your student’s school list. Take a realistic look at the options. In addition to that school at the top of your student’s wish list, do you have some options that are likely to be more affordable, and at least one or two where your student is “likely” to be accepted?

Know the Options

The college admissions “game” has gotten more complex and is defined by detailed applications, multiple essays, different application types and different deadlines for each school! Early Accept, Early Accept II, Early Decision, Early Action, and additional points such as “restricted” are possible options for applicants

Be sure to know the options and deadlines for each school on your student’s list and make an informed and timely decision on how your student will apply.

It is a good idea to consider the Early Action applications which are not binding, (when you do not have to commit to attending if you are accepted). Applying early will usually result in an earlier notification to the student. If you know the student will apply to the school, why not get the application in as soon as possible, and get notified early of the decision?

Be sure to work with your student on getting the applications done not only by the deadline, but a little ahead, so you all can be a little less stressed when completing them.

Words of Caution on Early Decision Applications

You should be well-informed about electing Early Decision because:

It is a binding agreement with the college or university. Most often, you have no idea if the student will receive any financial aid or a merit scholarship before you commit to attending the school if the student is admitted. It usually limits the student to other early applications as well.
Not every school keeps their Net Price Calculator (NPC) up to date and some do not include merit scholarships in the estimate, even if they do offer them. At the very least, you should complete the NPC on the school’s website to get an idea of eligibility.
You will need to be prepared to pay whatever the cost is to you. It’s possible that you won’t be offered aid and will have to pay full price.

Although many schools state a student’s eligibility does not depend on when they apply, most schools do not have unlimited funds. Getting applications done early for admissions and financial aid will give your student the best opportunity for maximizing their eligibility for scholarships and aid.

The College Essay

Hopefully your student has worked over the summer on their college essay.

Understand what your student’s best positioning is and be sure to have your student weave a good narrative into their essays that accompany the application.

Many schools have a holistic approach to the application review, and this is an area where your student can really shine. Admissions representatives love to hear stories that bring a student’s application to life.

Test Scores

Decide on whether to submit the SAT / ACT test scores. Many schools are still test optional. If you and your student do not feel the scores are indicative of their ability, consider not submitting if scores are not required and if your student is very strong in other areas such as GPA, involvement in groups and activity, and other accomplishments.

If you have questions specific to a school, do not be shy about calling the school and reaching out. They have an enrollment goal to achieve, and admissions folks are generally helpful in guiding you along the way to submitting your application.

Final Notes

Take it easy on yourself and your student during this time. Try to find ways to keep calm, take breaks, and remember: the ultimate goal is to get them off to college next year, and they will make it!

In my experience when working with families, most often the student ends up where they were meant to be in the end.

If you need some hourly college planning advice, you may contact Donna on our website.

While the FAFSA release date is still expected to be December, it has not yet been announced. You can register for an FSA ID and complete the FAFSA here when the application opens.

We will post updates on the FAFSA release date when they are available.

-DC

Donna Cournoyer In Personal Data Security

How to Respond to a Personal Data Breach

October is National Cybersecurity Awareness Month. In the spirit of promoting greater awareness of how to protect your data (see Personal Data Defense article from September), below are some tips on what to do if you are hacked.

Confirm the Breach: verify whether your personally identifiable information (PII) has indeed been compromised; check for unusual account activity, notifications from financial institutions, or alerts from the compromised service or organization.
Change Passwords: if the breach involves an online account, change the password immediately; use a strong, unique password for each account, and enable multi-factor authentication (MFA) where available.
Contact Affected Institutions: if your financial accounts or credit cards are involved, contact your bank or credit card company to report the incident; they can help you monitor your accounts for unauthorized transactions.
Credit Freeze / Alerts: consider placing a credit freeze on your credit reports with the major credit bureaus (Equifax, Experian, and TransUnion); this restricts access to your credit report, making it more challenging for identity thieves to open new accounts in your name. Alternately, you can place a fraud alert on your credit reports, which requires creditors to take extra steps to verify your identity before granting credit.
Monitor Your Accounts: continuously monitor your bank, credit card, and other financial statements for unusual or unauthorized transactions. Review your credit reports regularly to check for fraudulent accounts or activity.
File a Police Report: if you believe your identity has been stolen, file a police report; this documentation may be required by banks, creditors, or other organizations to prove that you’re a victim of identity theft.
Report to Government Agencies: contact the Federal Trade Commission at gov to report the identity theft or data breech; they provide resources and guidance for victims.
Notify Creditors and Utility Companies: inform your creditors and utility companies about the situation; they can help you investigate and resolve fraudulent accounts or charges.
Update Online Accounts: review your online accounts, including email and social media, for any signs of unauthorized access; change passwords and enable MFA where possible.
Document Everything: keep a detailed record of all communications and actions taken regarding the breach; this documentation may be necessary for resolving any issues that arise later.

If you’ve managed to avoid being hacked, that’s certainly a good thing! But knowing what to do if your data security is breached can save you time, aggravation, and money.

-RK

Donna Cournoyer In Economy

Thick, Slick, and Rising: What’s Behind the Recent Climb In Oil Prices?

Unlike other commodities, we are constantly reminded of the direction in which the price of oil is headed when we fill up our gas tanks (for those of us who are still driving combustion-engine automobiles). Higher oil prices have a direct effect on our personal budgets and can be a source of financial anxiety when the oil price climbs quickly.

The chart below illustrates the recent oil price climb – up more than 25% during the last three months, which has pushed the price of gas at the pump to well over $4.25 per gallon, for mid-grade fuel, in Massachusetts.

The recent oil price climb may be acting as an anxiety accelerant for some, so taking a closer look at oil market dynamics might help alleviate these concerns. The information presented below comes by way of Clearnomics, an economic research firm.

Rising energy prices are a direct burden on consumers and businesses who spend more on gasoline and other fuels, putting upward pressure on headline inflation. This also indirectly raises prices on all goods and services as production and transportation costs rise, potentially impacting core inflation.

Thus, higher oil prices effectively function as a tax which can slow economic growth and impact corporate profitability.

Why have oil prices risen in recent months?

First, the U.S. economy has been much steadier than expected. Weakness in oil prices earlier this year partly reflected fears around an imminent recession. The fact that a recession has not materialized has helped to propel oil prices higher.

Second, Saudi Arabia and Russia recently announced that oil production cuts of 1.3 million barrels per day would be extended until December. This amounts to 1.3% of global production – not an insignificant sum – and adds to previous cuts.

The two countries are among the largest in OPEC+ and have led other cuts in order to prop up oil prices, as well as in response to slower GDP growth and weakness in China. Some economists estimate that this could result in a global deficit of more than 1.5 million barrels per day in the fourth quarter of 2023.

It’s important to maintain perspective around these cuts. The relevance of OPEC as a price-setting cartel has declined over the past decade, partly because cuts by each country are voluntary and difficult to enforce, and because the U.S. has become the top producer of oil in the world.

U.S. oil production is nearly back to its pre-pandemic level of 13 million barrels per day. While there are many nuances in terms of the types of oil produced and consumed in the U.S., Europe, and elsewhere, the fact that the U.S. has been a “swing producer” has shifted the dynamics of the energy markets considerably.

Another tailwind for oil prices is declining oil inventories. For instance, the Strategic Petroleum Reserve (SPR), a large emergency supply of oil in the US, is at its lowest level since the mid-1980s.

This is primarily because oil was drawn from the SPR to offset high prices last year when gasoline was averaging more than $5 per gallon nationwide. The federal government would need to purchase 376 million barrels of oil to restore the SPR to its 2010 peak level. While there is no set timeline for doing so, this deficit naturally places upward pressure on oil prices.

So it seems like events are conspiring to keep the price of oil higher for longer. How worried should we be about higher oil prices?

According to David Kelly, Chief Global Strategist at JP Morgan Asset Management, “investors should probably not worry too much about the recent spike in oil.”

Kelly, who presents his research team’s findings frequently to the advisor community, contends that, barring some further shock, there should be limited upside to energy prices from here.

The main reason: signs of slower economic activity around the world, according to JP Morgan. The global composite purchasing managers index (calculated from regular surveys filled out by big businesses) hit its lowest level in seven months in August, with outright declines in manufacturing and a moderation in services growth.

Both China and Europe are seeing very sluggish growth, offsetting strength in India and Japan. And JP Morgan is expecting the pace of economic growth to slow in the US as we move into 2024. All of this should dampen the demand for oil and gas, as should longer-term investment in energy transition.

So for those among us who experience oil-related anxiety, taking a few deep breaths, and anticipating less acute pressure on oil-market dynamics in the months ahead, may help.

-RK

Donna Cournoyer