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Donna Cournoyer
In College Planning

The Landscape Looks a Lot Different Today (Even Compared to a Few Years Ago)

Our colleague and college specialist Donna Cournoyer contributed the following update for college planning, as a follow-up to her April article, Shifting the “Dream School” Mindset

There are many factors that shape the philosophies, policies, and practices of colleges throughout the US. However, the overarching key factor is this: colleges are businesses that need revenue to exist.

Most of this revenue comes in the form of tuition and housing fees that families pay each year. And of course, fundraising and building upon existing endowments are significant contributors, too.

Endowments are permanent funds, used as a self-sustaining funding source for the school’s mission, including funding for scholarships and grants for students.

However, endowments are invested funds and only a small portion is consumed each year. In many cases most universities spend only the interest that accrues annually from the investments.

The need for colleges and universities to enroll a certain number of students each year, in order to stay within their operating budgets, drives institutional goals and determines how the schools market to students they want to attract.

The Enrollment Cliff

Another factor driving the enrollment policies of universities is the significant decline in the number of college-bound students expected in the years ahead.

This drop in predicted enrollment is a function of a declining birth rate; fewer high school graduates choosing to go to college (related to price and value perception, among other reasons); and predicted lower high school graduation rates.

This puts a lot of pressure on colleges and universities to meet their enrollment goals each year, in an environment where it’s getting harder and harder to do.

How Colleges Entice Students

Marketing is a large expense at many colleges and universities. Schools want to entice students by creating beautiful grounds, building new dorms, providing the latest technology in classrooms, and guiding families on tours where they aim to make an emotional connection with the student.

Schools market to all students and families on the tours – even the ones who cannot afford to attend.

Think about this: as has been a common practice for decades, many families create a list of schools based on perceived elite status, reputation, location, aesthetics, amenities, and, of course, academic programs. Sometimes, price is considered before visiting. But often it isn’t.

Then families visit their chosen schools, where tour guides aim to make that highly charged emotional connection with the student (and the student’s family). They are often very successful. When you come down to it, this is the process of the sale, and tour guides are selling the school to the student.

What happens next?

The student makes a snap decision to attend one of the visited schools based on feeling and emotion (I have seen this many times in my experience working at a university) and ultimately the family agrees.

Cost might not even have factored into the decision, and this can have far-reaching financial implications for the student and parents.

Consider this: the four-year sticker price for many schools now totals nearly $400,000, which is very close to the current median price for existing-home sales in the US, according to the National Association of Realtors.

In a Bloomberg article from September 26, columnist Charlie Wells said something that resonates with me as a college planner and financial advisor:

“Financial advisers say having a budget and setting expectations is crucial to avoiding disappointment — or mountains of debt — later. (Just think: Would you let your 16-year-old decide which house you were going to buy after one walk-through? School choice is not so different.)”

Looking at a family’s plan to pay for college is intertwined with many factors including the ways in which colleges aim to attract and solidify commitments from students to attend their school.

When planning your strategy for choosing and paying for college, remember these key points:

  • Rankings: Some of the factors that have been touted for years about U.S. News and World rankings, for example, are starting to take a back seat as many people no longer believe they are relevant to deciding on a college.
  • Elite Status: Studies have shown that WHERE a student goes to college is not a significant factor in their success.
  • Apply to Competing Schools: This may give you a chance to leverage offers from one school to gain additional funds from another, as many schools will “match offers” to get a student to commit.
  • Set Financial Expectations: Have a Financial Plan and start early. Discuss together as a family what are the realistic and agreed upon financial strategies: How much are parent(s) willing and able to contribute? Will anyone need to borrow? What is the student’s responsibility? Do this BEFORE visiting and applying to schools.
  • Merit Scholarships and Financial Aid: Research the financial health of the school, along with their policy and average amounts of aid and merit scholarships. This is not always transparent so call the Admissions staff to ask for average, if necessary.
  • Appeals: While not everyone’s favorite process, often students may benefit from appealing their offer. Remember, schools need to make their enrollment, so offering additional incentives is a way in which they aim to do so.

One of my goals as a college financial planner is to help shift how parents perceive “what is the best school for my student”.

I’ve observed that families with well-planned strategies that consider the current landscape of college admissions are more likely to conclude their college search confidently, and are more successful in ensuring that, in the end, their college dollars are well-spent.

-DC

Donna Cournoyer
In Financial Planning

Medicare Brief: What to Know Prior to Open Enrollment

Our colleague and MFA founder Susan Moore contributed the following update on Medicare.

Medicare open enrollment period starts October 15 and continues through December 7.

During the open enrollment period, Medicare enrollees can make certain changes in their coverage. Here are some of the changes you might consider during this enrollment period:

  • If you’re enrolled in original (traditional) Medicare, change your Part D drug plan
  • If you’re enrolled in Medicare Advantage, switch to a different Advantage plan
  • Switch from original Medicare to Medicare Advantage
  • Switch from Medicare Advantage to original Medicare – but note below that limitations apply in some states

This year’s enrollment period may be one of the more significant in Medicare’s 59-year history due to some of the changes that are coming. Here is what we know about Medicare changes and costs for 2025.

Medicare Part D

Most Advantage plans include drug coverage at no extra cost, but many people on original Medicare buy a stand-alone Part D plan for drug coverage. While the average projected monthly Part D premium will decrease to $46.50 from $53.95 in 2024, some plans have announced significant increases in premiums.

For this reason, it’s especially important this year to shop for your Plan D coverage. You may be able to lower your annual drug costs by switching to a different Plan D.

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.”

One of the bigger developments for 2025 is a new, $2,000 cap on out-of-pocket drug costs. It applies to drug coverage through both stand-alone Part D and Advantage plans.

But it only applies to covered drugs, so it’s really important to make sure your plan covers the specific medications you take. Approximately 1.5 million Medicare beneficiaries have drug costs that exceed that amount, so this change will be a big help to them.

Switching to a Different Medicare Advantage Plan

Medicare Advantage plans are also seeing big changes. Insurers are facing increasing cost pressures, and many will push higher expenses onto members.

Enrollees may see changes in out of pocket costs. Although the average monthly premium for all Advantage plans is likely to drop slightly, it’s important to pay attention to changes in copays, deductibles, and other benefits (e.g., dental, vision, health clubs, etc.)

Switching from Medicare Advantage to Original Medicare

Some Advantage plans may even exit the market next year. If your Medicare Advantage plan is being eliminated, you must actively enroll in a new plan to stay in the Advantage program.

If you don’t make a choice, you will automatically be placed in traditional Medicare for 2025 and have the chance to buy a Medigap supplement plan without going through an underwriting process.

Normally in most states (except during a narrow period when you first enroll in Medicare,) when someone switches from Advantage to original Medicare, they must pass underwriting to buy a Medigap supplement plan. (MA, CT, ME and NY do not allow Medigap insurers to require underwriting for those who switch.)

If you switch from Medicare Advantage to original Medicare because your insurer exited the market, you will not have to undergo underwriting in order to obtain a Medigap plan.

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

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 (except MA, CT, ME, and NY) Medigap insurers are not required to sell you a policy after your first year on Medicare if you don’t meet the medical underwriting requirements. In that situation, they can deny coverage or charge higher premiums.

Medicare Part B

Everyone who has Medicare coverage (original 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 be in 2024, but the annual Medicare Trustees report in March forecast the monthly price to rise from $174.70 to $185.00, a 6% increase, in 2025.

Income-Related Monthly Adjustment Amount (IRMAA)

Some people pay more in IRMAA charges for Medicare Part B and Part D based on income.

Your tax return for 2023 will be used to determine whether you will be subject to an IRMAA charge for 2025. If you retired in or after 2023, 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 2025 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 Economy

Presidential Polls & Policy Update

We are now one month away from the next Presidential election, and the race continues to look like it will be very close.

What the Polls Say

The Economist forecasting model, which we’ve been following, has shown no change during the past month. The projection as of October 4 shows Harris leading by 274 electoral votes to 264, with 270 electoral votes required to win.

Source: The Economist

The Economist also keeps a running average of national head-to-head polls, which gives a sense of how the race is progressing. In early September, Harris was ahead 49% to 47%. This margin has expanded slightly in favor of the Democrat, and as of early October was 50% to 46%.

Interestingly, during his previous two presidential campaigns, Trump never led in general-election polling averages. In 2016, he trailed Clinton by four percentage points on election day. In 2020, Trump’s deficit was eight percentage points.

The seven swing states, where the race likely will be decided, remain highly competitive according to the latest forecast from The Economist.

Currently, Democrats seem to have a slight edge in Michigan, Nevada and Wisconsin. Republicans have the lead in North Carolina, Georgia, and Arizona. And Pennsylvania appears to be a virtual dead heat.

Policy Points

While it’s unclear who will be sitting in the Oval Office in mid-January 2025, we can take a closer look at the two parties’ tax and spend proposals to get a better understanding of candidate and party priorities, and the future impact on Federal finances.

The bottom line is that both candidates’ proposals are out of balance (in terms of dollars and cents) and will continue the trend of running large deficits and push the US further into debt.

From what has been revealed so far, the impact on the deficit and debt looks to be less bad under Harris.

The two charts below, courtesy of Michael Cembalest of JP Morgan Asset Management, show the fiscal impact of the tax and spend policies of each candidate.

Harris’ fiscal policies take a standard redistributionist approach, where there are an additional $1.3 trillion of taxes on the wealthy and $2.8 trillion of taxes on corporations over a 10-year period.

This revenue would be used to extend tax cuts for people earning less than $400,000 in income and for a variety of entitlements for families and home buyers.

The Harris tax and spend plans will have about a $1.5 trillion net negative impact on the deficit, compared to the baseline forecast of the Congressional Budget Office.

Source: JP Morgan Asset Management

The fiscal impact under Trump would likely be two to three times worse than under Harris and translate to a $4 trillion net negative impact on the deficit, compared to the baseline forecast of the Congressional Budget Office.

Trump is proposing large tax cuts, including extending all the individual and business tax cuts initiated in 2017 that are set to expire in 2026; eliminating taxation on Social Security benefits; and repealing the cap on the State and Local Tax (SALT) deduction.

Also, further cuts to the corporate income tax rate have been floated. The cuts are to be partially offset by revenue raised from tariffs and a repeal of clean energy subsidies.

Source: JP Morgan Asset Management

Jason Furman, Harvard professor and former chair of the White House Council of Economic Advisors, recently noted that “the first modern presidential race between two candidates with undergraduate degrees in economics hasn’t thrilled economists”.

Both candidates’ plans pose longer-term risks to the US economy by further expanding the Federal deficit, but regarding this measure of risk, the scales are currently tipped toward Trump.

Apart from a widening budget deficit, a major risk under the Harris proposal is that higher corporate tax rates could push businesses to relocate headquarters out of the US to save on taxes.

This activity, known as “corporate inversion”, has slowed meaningfully since the Federal corporate tax rate dropped to 21% from 35% in 2017.

A major risk under the Trump proposal is the re-ignition of inflation from higher prices that are likely to result from tariffs on imports and potential retaliation from other countries.

It is worth noting that estimates of the fiscal impact of the Democrat and Republican policy proposals vary widely.

For example, the Committee for a Responsible Federal Budget, a nonpartisan group that favors lower deficits, estimates an even larger negative fiscal impact from both red and blue party policy proposals than what the JP Morgan analysis shows.

A Republican sweep or a Democratic sweep of the executive and legislative branches would probably result in more caution in the markets, as investors wait to see the scope and speed of enactment of new policies.

But the most likely outcome in the coming election is some kind of split government.

If this were to happen, neither candidate’s proposals likely would be passed into law as currently articulated. And divided government tends to have fewer negative implications for investors.

-RK

Donna Cournoyer
In Economy

The “Shake It Off” Economy

Taylor Swift’s mega hit Shake It Off is a decade old this year. Over the course of ten years, the songwriter-musician-performer has gone from sensation to superstar. Her net worth, too, has gone from sensational to off the charts.

In addition to the financial benefits that have accrued to her personally, the demand created by The Eras Tour (149 concerts over 20 months spanning 5 continents) has had a meaningful economic impact. Swiftonomics refers to Taylor’s economic influence.

For example (according to Investopedia) ahead of her six concerts in Los Angeles, the California Center for Jobs & the Economy estimated the tour would result in a $320 million increase to the LA County GDP.

The Center also expected The Eras Tour would increase area employment by 3,300 and local earnings by $160 million.

Despite (or more likely because of) her success, there are haters. Imagine!

Like Taylor Swift, the US economy has been creating jobs and facilitating profits for companies since the last downturn in 2020.

The most recent jobs report, released by the Labor Department on October 4, showed US employers added more than a quarter million jobs in September, “blowing past expectations” according to the Wall Street Journal.

Nonetheless, the US economy still has its “haters”, too.

Bill Dudley, a well-respected economist and former head of the Federal Reserve Bank of New York, had been one of the haters, but has recently shaken off his negative outlook.

Dudley wrote an editorial published by Bloomberg on October 3, where he stated: “I’ve been too pessimistic about the risks of a so-called hard landing (recession) for the US economy” and “a recession remains very much in doubt.”

Dudley went on to highlight the following positives:

  • The economy retains considerable forward momentum: “Growth in the second quarter was revised up to a 3.0% annualized rate, and the Federal Reserve Bank of Atlanta’s GDPNow estimate for the third quarter is currently 2.5%”
  • The labor market is holding together quite well: “Although the unemployment rate has risen above 4% from a low of 3.4% in 2023, the increase has mainly been driven by rapid growth in the labor force rather than permanent job layoffs”
  • Financial conditions have improved: “Although monetary policy remains tight by almost anyone’s standard (interest rates are high), financial conditions have eased massively over the past year (stock prices have soared and bond yields have declined)”

Dudley concludes with the following: “What does this mean for financial asset prices? As I see it, a soft-landing scenario (lower growth but no recession) implies a buoyant stock market.”

I concur with Dudley: a strong US jobs market and declining interest rates are supporting economic expansion and higher stock prices.

Absent a nationwide catastrophe, or an about-face on key government policies, it’s reasonable to expect more of the same in the coming months: more economic growth, more US profit growth, and satisfactory returns from the financial markets.

For those concerned about the potential impact of the presidential election on the economy and financial markets, it may be helpful to consider the following chart that shows the direction of the stock market during US presidential administrations from Roosevelt to Biden, courtesy of Clearnomics.

Source: Clearnomics

The stock market, like the US economy, has experienced long-term growth under both major political parties, and has the propensity to “shake it off” when it comes to dealing with adverse conditions.

It is not the case that the market or economy turns down when a particular political party is in office This is because the underlying drivers of market performance – including economic cycles and company earnings – are far more important than who occupies the White House.

-RK

Donna Cournoyer
In Market Updates

September 2024 Market Recap: Quarterly Market Review

As we head into the last three months of 2024, the US Presidential election is a major source of uncertainty, and elevated geopolitical tensions are a cause for serious concern.

However, the rally in stock prices continued in the third quarter, and bonds showed a measure of resiliency, too.

A main mover of financial asset prices has been the anticipation of short-term interest rate reductions by the US Federal Reserve. In mid-September the Fed took action and lowered its target rate by 0.5% to a range of 4.75% to 5%.

The US economy, which has exhibited better-than-expected growth, has underpinned the stock rally. And bonds have done better because inflation has come to heel.

For the month of September, US large-company stocks rose by 2.1%; small-company stocks gained 1.9%, foreign stocks climbed by 0.8%, and bonds returned 1.3%.

The moves were more pronounced for the three-month period ending September 30: US large-company stocks rose by 5.8%; small-company stocks gained 9.1%, foreign stocks climbed by 6.8%, and bonds returned 5.3%.

Here’s a snapshot of stock and bond performance for the last six quarters:

US Stocks = S&P 500 Index; US Bonds = Bloomberg US Aggregate Bond Index

-RK

Donna Cournoyer
In Behavioral Finance, College Planning

The Path to Independence

Many clients wonder how their own finances will change as their children become independent young adults.

Where do parents draw the financial line with their children? What steps can parents take now, and in the future, to help keep themselves on track for personal and financial success as their children become independent young adults?

Our friends at fpPathfinder, a financial planning research organization, have put together a checklist (lick on the picture to enlarge and download) to ensure that you’re addressing critical planning concerns during your child’s transition into adulthood.

Topics on the ‘Path to Independence’ checklist include:

  • Do you have access to your child’s important records?
  • Is your child still able to be on your health insurance?
  • Are you planning to help your child with large upcoming expenses?
  • Do you need to review your taxes might change once your child becomes independent?
  • Are you concerned that your child is (or will be) fiscally irresponsible?
  • Are you concerned about your child’s actions or behaviors causing future liability issues for you?
  • Do you need to review your budget and expenses once your child leaves the house?

You can click on this link or on the image below to download the two-page checklist.

-RK

Donna Cournoyer
In College Planning

Seniors: A Financial Aid & Admissions Checklist + Tips for College Applicants

Our colleague and college specialist Donna Cournoyer contributed the following update for college planning

Senior year for a high school student and their family is usually quite busy. Settling into the new school year schedule and activities begins in earnest as Labor Day brings summer to a close.

Organization can keep a college-bound senior and their family on top of the to-do’s and deadlines, ensuring this last leg of college preparation and the application phase goes smoothly.

To help in this effort, I’ve provided need-to-know information in the following five sections:

  1. Key Considerations for High School Seniors
  2. FAFSA Application Form Availability & Deadlines
  3. FAFSA Formula & Net Price Calculator
  4. Merit Scholarships
  5. The Fall Checklist

Key Considerations for High School Seniors

Eligibility for financial need-based Federal financial aid from the US Government and need-based grants and aid from US colleges is based on the Federal FAFSA application (Free Application for Federal Student Aid) and its formula.

This includes free grant money from the government such as the Pell Grant, the colleges’ free grants, Federal Subsidized student loans and the Federal Work Study program.

The following link to studentaid.gov website runs through the Types of Federal Student Aid.

Eligibility for the student is determined by the financial aid office at the college or university to which the student is applying.

Even if you are likely not eligible for financial aid and need-based funds, I strongly recommend that everyone complete the FAFSA form.

Schools often award some free grant money to students for completing the FAFSA form regardless of eligibility and some schools require it for the student to be considered for a merit scholarship, even though those are not based on financial need.

FAFSA Application Form Availability & Deadlines

The traditional opening date of the FAFSA form is October 1 for the following academic year. (October 1, 2024, for the 2025-2026 year).

However, last fall due to major changes in the form for the first time in many years, there were many hiccups and delays from the Department of Education and the 2024-2025 application did not open until January 1, 2024. From there, issues continued for months.

In August, The Department of Education announced that the FAFSA is expected to open for testing with a limited set of students and institutions on October 1. The DoE also stated they will make the application available to all students on or before December 1.

Be sure to check the financial aid pages on the websites of your college list to keep up with the opening date of the FAFSA and each school’s required forms, and check online on the Federal Student Aid website- look for “2025-26 FAFSA form” here: FAFSA.

For schools on your list check to see if any also require the CSS Profile

FAFSA Formula & Net Price Calculator

The FAFSA formula uses some key figures to determine a student’s eligibility for financial aid, some key elements in that formula are:

  • Parents’ Adjusted Gross Income (AGI)
  • Parents’ Taxes paid
  • Parents’ investments OTHER than personal retirement accounts. (not including accounts such as your IRA, 401(k), etc.)
  • Number of family members

Another way to estimate financial aid ahead of access to the FAFSA and college financial aid letters is to use each college’s Net Price Calculator.

  • The simplest way to find a school’s Net Price Calculator is to search the name of the college followed by “npc”, such as: yourschoolnpc.
  • Keep in mind that they do not all include merit scholarship estimates, which will help your net cost if the student is awarded one with admission to the school.

Merit Scholarships

Merit Scholarships are school-awarded scholarships NOT based on the FAFSA form and financial need.

Merit Scholarships (also called Academic Scholarships) are based on the student’s overall admissions application which includes GPA, essays, possibly SAT or ACT scores and interviews, and any other requirements from the admissions office.

Schools usually have a range of amounts they may offer students, and Merit Scholarships are usually awarded for four years and may have a GPA requirement for continued eligibility. Each school will have different criteria and amounts available according to their own policies. Eligibility is determined by the admissions office.

Be sure to get your admissions applications and the Common App done early, to help put yourself in the best position to be awarded a merit scholarship. And make a list of the application deadlines for each school you are applying to.

The Fall Checklist

  • Deadlines: Make a list of deadlines for admissions and financial aid for your college list
  • FAFSA: Watch for the opening of the FAFSA and complete as soon as possible
  • Net Price Calculator: Estimate Your Net Cost for schools on your list (use NPCs for now, and merit and financial aid offers later)
  • Your Budget: Estimate how much you are able and willing to spend and / or borrow for your student’s education
  • Complete the Common App/Admissions Applications Early: Be sure to get applications done early. Early applicants are likely to receive decisions the earliest.
  • SAT/ACT: Decide if your student will submit scores and/or retake any tests.
  • Engage with your Admission Representatives: For your top schools reach out to your admissions counselors and let them get to know you so they can advocate for your admission and merit scholarship.
  • Make Another School Visit: If you are having trouble narrowing your list, or deciding which school is at the top, try to visit the school again. It is also good to tour when students are there.
  • Make a List of Pros and Cons for Each School: Look at programs, school size, student resources and activities, location, cost estimate and of your important decision factors for your college choice. This is helpful as you start applications, and the process gets closer to decision making time.

If you are interested in some guidance, we offer hourly college planning services, and a complimentary 30-minute consultation to discuss your personal situation. You can schedule an appointment here on our website: Schedule an Introductory Meeting.

Good luck and have a great year, seniors! 

Donna Cournoyer
In Economy

Presidential Polls & Tax Policy Points

We are now a little more than two months away from the next US Presidential election. Many of our clients are interested in following the contest, and the Presidential race currently looks like it will be close.

In their US Election 2024 section, The Economist magazine publishes a daily update on the Presidential polls. I like following this format because it’s assembled by a respected organization domiciled outside of the US.

Based on The Economist model, the latest projection, from August 30, shows Harris winning by 274 electoral votes to 264, with 270 electoral votes required to win.

Source: The Economist

From the perspective of the possible impact on personal finances, tax policy marks one of the bigger gaps between Democrats and Republicans.

Many provisions in the 2017 tax law, which reduced taxes, are scheduled to expire in 2026 if Congress takes no action.

Candidate Trump wants the 2017 law made permanent, while Candidate Harris has pledged no tax hikes on those making less than $400,000.

Below are other tax ideas that Harris supports (source is The Kiplinger Tax Letter):

Tax ideas for individuals, supported by Harris:

  • Bring back the top 39.6% income tax rate for people making $400,000 or more (currently the top tax bracket is 37%)
  • Hike the 3.8% net investment income surtax to 5% for $400,000 earners
  • For taxpayers filing Jointly with incomes over $1,000,000, long-term capital gains tax would be imposed at ordinary tax rates up to 39.6% (44.6% with the 5% Net Investment Income tax added in); for separate filers, the income breakpoint is $500,000
  • Tax unrealized gains upon death, with capital gains and losses reported on the decedent’s final income tax return, with a $5 million lifetime gain exclusion
  • Apply a 25% minimum income tax on the ultrarich (those with $100 million in wealth); this tax would apply to unrealized capital gains
  • Bring back expansions to the child credit: boost to $3,600 per child (from current $2,000), with monthly payments and full refundability
  • A new one-time credit of $6,000 per child claimed in the first year of the child’s life
  • Give first-time home buyers a credit of up to $10,000
  • Allow more people to get credits for buying health insurance through the Health Insurance Marketplace
  • Make tipped income tax free

Tax ideas for businesses, supported by Harris:

  • Raise the 21% corporate tax rate to 28%
  • Increase the 15% alternative minimum tax on large corporations to 21%
  • Quadruple the 1% excise tax on stock buybacks by publicly held firms

It’s likely that additional tax ideas will be floated by both campaigns in the weeks ahead.

It’s also important to recognize that, regardless of who becomes 47th US President, the composition of the House and Senate will be critical in determining which policy proposals actually become law.

-RK

Donna Cournoyer
In Economy

Interest Rate Showdown

In poker, the “showdown” is a situation where, if more than one player remains after the last betting round, remaining players expose and compare their hands to determine the winner.

The showdown for interest rates occurred on August 23 in Wyoming – absent horses, cowboy hats, pistols, and booze.

The Jackson Hole Economic Symposium is an annual three-day international conference hosted by the Federal Reserve Bank of Kansas City at Jackson Hole, Wyoming.

The keynote speaker is the Chair of the Federal Reserve Board of Governors (the leader of the Fed), whose comments typically focus on the US economy and monetary policy.

This year, Fed Chair Powell played the interest rate showdown during his Jackson Hole speech, when he said:

  • “my confidence has grown that inflation is on a sustainable path back to 2%”
  • “we (the Fed) do not seek or welcome further cooling in the labor market”
  • “the time has come for (interest rate) policy to adjust”

What gives the Fed Chair such confidence? Pandemic-driven inflation peaked at 9% in 2022, but has declined since, and recent readings show inflation has dropped below 3%.

The chart below shows the Consumer Price Index since 1965. According to this data series, inflation had ticked down to 2.9% in July.

Source: New York Times

Along with inflation, the jobs market has cooled, too – meaning jobs are still available, but harder to find now than a year ago.

Borrowing costs at their current level may be unnecessarily high, pressing down too much on the economy and inflation. Concerns about the possibility of an economic slowdown are likely behind the Fed’s signaling of future interest rate reductions.

So, the parlor game played by Wall Street people, where prognosticators pontificated and professionals speculated on the direction of interest rates, ended with the Jackson Hole speech.

What’s important to bear in mind is that the Fed has direct control over the overnight cost of funding for big banks (the Fed Funds rate) which is a very short-term interest rate.

The Fed Funds rate then affects other interest rates, such as the Prime Rate, which sets the cost of borrowing for consumers.

Currently, the Fed Funds target rate is 5.25% – 5.5%, and the Prime rate, which is usually about 3 percentage points higher than the Fed Funds target rate, is 8.5%.

The decline in short-term interest rates will begin soon, and most likely on September 18, when the Federal Reserve concludes its next board meeting.

Fed Funds futures contracts are financial instruments which allow Wall Street traders to speculate on what the Fed Funds target rate will be next month, or next year.

Fed Fund futures now anticipate a steady decline in short-term interest rates during the next 15 months.

These contracts currently anticipate Fed Funds declining in September, continuing to fall during the next sixteen months, and dropping by 2 percentage points from today’s level, to around 3.5% by the end of 2025.

What does this mean for Main Street people?

  1. It will get cheaper to borrow money (mortgage rates have already started to drop)
  2. “Safe” returns from CDs and High Yield savings accounts will start to come down
  3. Lower interest rates should provide a tailwind for stocks

Fixed rate mortgages have already begun to decline. The average 30-year mortgage was over 8% in late 2023. Today the mortgage rate sits at 6.5%. As short-term rates and the Prime Rate fall, it’s reasonable to expect that mortgage rates will continue to decline, too.

For savers, there is likely limited time to earn 5%+ yields on CDs, High Yield savings, and Money Market accounts. If you’re counting on that income to meet expenses, you should expect to receive less of it in the months ahead.

Since short-term rate declines should proceed at a measured pace, short-term yields above 4% should be around for a bit longer. But expect those yields to fall below 4% by the end of 2025.

For stockholders, the impending interest rate declines should be beneficial. Typically, a Fed easing cycle is a tailwind for stocks when the economy is growing (no recession, like today’s environment) at the time of the first rate cut.

The chart below shows that on average, stocks have significant gains during the year after the Federal Reserve reduces interest rates.

Source: Edward Jones

The chart measures time along the horizontal axis in weeks prior to and following the first “Fed cut”, or reduction in short-term interest rates by the Federal Reserve.

Stock market performance has been much less satisfactory when interest rates are declining during recessionary times.

-RK

Donna Cournoyer
In Market Updates

August 2024 Market Recap: Smooth Slide into September

The thrill of sliding down a water slide happens at the beginning. Initially, there is a sharp, breathtaking decline, followed by a level area that is quick and smooth, after which the rider is deposited into a refreshing pool.

While less than a perfect analogy for financial market activity in August, the water slide comes close.

Stocks fell at a breathtaking clip early in the month, declining by 6% in the first three trading days (see our August Mid-Month Update for more details).

But the fast ride down leveled out, and ultimately stock prices moved back up. For stock investors who maintained their investment strategy, August results were pleasing.

US Large Company stocks rose by 2.3%, and foreign stocks increased by 3.3%. Technology stocks did less well, climbing by 1%.

US small-company stocks struggled, dropping by 1.7%, following a stellar performance in July. Stocks generally have now risen for four straight months, with the last monthly decline occurring in April.

Thus far in 2024, financial market returns have been constructive: Technology, 20.5%; US Large Company, 19.3%; Foreign, 12.1%; US Small Company 10.2%. Bonds returned 1.5% in August and are up 3.2% year-to-date.

Positive stock market returns likely are one factor influencing consumer confidence, as recent data show an upward shift in sentiment.

The Conference Board, a New York-based research organization, said on Tuesday that its consumer confidence index rose in August from July, matching its highest level since February.

Other consumer confidence polls, such as the University of Michigan’s consumer sentiment gauge, and a recent Wall Street Journal survey, point in the same direction.

Below is a snapshot of financial market performance for August.

-RK

US Small Co = Russell 2000 Index; Foreign Stocks = MSCI EAFE Index; US Bonds = Bloomberg US Aggregate Bond Index; US Large Co = S&P 500 Index; Tech Stocks = Russell 1000 Technology Index

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