7 Money Moves to Help Enhance Your Cash

Raymond James

Retirement & Longevity

Sometimes savings can be easier to find if you know where to look.

Beyond the generic advice of “saving more,” these nuanced strategies can help your cash flow. Here are some tips:

1. Find your match. Take advantage of employer matching so you don’t leave money on the table. If they match 3%, you’ve covered 6% of your retirement savings goal when you add in your contribution. While the specifics vary, many companies will match whatever you contribute to the retirement plan (up to a certain percentage of your income).

Bonus: If you’re already doing this, try increasing your savings rate by 1% a year. Whether in an IRA, 401(k) or some other dedicated account, this small change means you’ll be at 15% within 10 years (without even feeling it).

2. Dig deeper for savings at work. Investigate additional savings and see if your employer offers a corporate profit-sharing plan, employee stock purchase plan, which empowers you to purchase your employer’s stock at a discount, or employee stock ownership plans, which provides company stock at no cost as part of overall compensation.

3. Crusade for cash back. Befriend credit cards that reward you for every swipe and/or deposit cash back into your retirement account. But remember, this perk is only for disciplined spenders who pay off their balances religiously. Otherwise, interest fees could swallow your rewards whole.

4. Negotiate like a ninja. From cable bills to phone plans, many recurring expenses can be lowered with a simple ask or negotiation. Channel your inner deal-maker and watch the savings pile up.

5. Create challenges for yourself. Go further than "set it and forget it" savings mode, by setting monthly challenges like cooking at home one more night a week or canceling a barely-used subscription. Reward yourself for reaching these goals, but redirect those rewards to your cash stash instead.

6. Automate your savings. Make saving effortless by setting up automatic transfers from your checking or savings account to your retirement account. Choose an amount you won't miss, and watch your cash grow steadily over time. Paying yourself first keeps you on track and ensures that you’re investing consistently, regardless of market fluctuations.* And, when you put money aside in tax-deferred accounts, such as a 401(k) or a traditional IRA, you can also cut your tax bill.

7. Combine your financial accounts. This may help you take advantage of potentially lower fees. Don’t assume a bank is your only choice for check writing, and consider applying whatever savings you achieve to your retirement fund.

The secret here is to find strategies that work with your savings style. By taking a little time to think outside the savings account box and get creative, you can watch your financial flexibility increase.

Next Steps:

• Reach out to your company’s human resources leader to ask about investing opportunities.

• Set aside 30 minutes to identify financial accounts that can be automated for savings.

• Review your subscriptions and make a plan to cancel those unused or no longer needed.

*This strategy does not assure a profit and does not protect against loss. It involves continuous investment regardless of fluctuating price levels of such securities.

Investors should consider their financial ability to continue purchases through periods of low-price levels.

Investing involves risk, including the possible loss of capital. There is no assurance that any investment strategy will be successful. Withdrawals from tax-deferred accounts may be subject to income taxes, and prior to age 59 1/2 a 10% federal penalty tax may also apply.

Matching contributions from your employer may be subject to a vesting schedule. Please consult with your financial advisor for more information.

Navigating Medicare Decisions in Tricky Situations

Raymond James

Retirement & Longevity

What encore careers, young dependents and early retirement mean for your elections.

Medicare is an important component of holistic financial planning, but it can get complex for investors who retire early, care for young dependents or work beyond 65. But knowledge is power. Being aware that your unique situation should influence your Medicare choices is half the battle.

Tips for common scenarios

Not everyone retires right at 65. In fact, it’s becoming more common that people are making their own rules and timelines when it comes to retirement.

If you’re planning to retire before age 65, think about how you plan to bridge your healthcare coverage until you become eligible for Medicare. Medicare is designed for those 65 and older or people with certain disabilities. The only way to ensure healthcare coverage before that date is with private health insurance through your employer or the exchange.

What if you decide you’re working past the age of 65 (the Medicare eligibility point), and you’re not sure if you should enroll in Medicare yet? You can drop your employer’s healthcare plan and enroll in Medicare, but first you should consider the out-of-pocket costs associated with doctor’s visits and procedures. Many people will enroll in Medicare Part A, which is hospital insurance, because there's no premium for most people, as long as they have 10 years of Medicare-covered employment. But to enroll in Part B and simultaneously carry group health insurance is like paying double. 

What if you’re married and cover your spouse on your employer’s plan? Medicare is individual healthcare coverage, so your spouse would either need to be eligible for Medicare or have their own private health insurance.

Let’s say you have young dependents at home. Maybe they’re your own kids you had later in life, or maybe you care for your grandchildren or other dependents. While Social Security offers benefits for young dependents, Medicare doesn’t. Your dependents would need their own healthcare insurance plans.

Keep up with changes

Regardless of the Medicare decisions you make, you should revisit your selections every year. Open enrollment starts annually in October, which is the time to review what works for you and your family.

Sometimes changes are made to the program or laws that get passed affect Medicare. An example is the Inflation Reduction Act that was passed by Congress in 2022. It doesn’t go into full effect until 2025, but it will reduce out-of-pocket costs for everyone from $7,000 to $2,000 for drugs. It also caps out-of-pocket insulin at $35 per month, which is significant for those with diabetes.

If you need a little bit more guidance with your Medicare decision-making, the first point of contact is Medicare.gov. That site offers a ton of information, including how to enroll. Of course, you can enlist your trusted advisor to help you navigate these important decisions as part of a holistic financial plan as well. 

As you consider your Medicare elections:

• Determine if any of your dependents will need to switch to an individual healthcare plan.

• Speak to your advisor about your holistic financial situation to determine what makes the most sense.

Sources: aspe.hhs.gov

The information contained in this report does not purport to be a complete description of the healthcare issues referred to in this material. This material is being provided for information purposes only and is not a complete description, nor is it a recommendation.

January Stagflation

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

Robert Stein, CFA - Dep. Chief Economist

February 20, 2024

A key economic mistake people make is thinking growth leads inflation. One reason they do that is because inflation is a monetary phenomenon. When money is too easy, first growth rises, and then inflation rises with a longer lag due to excess dollars in the system. This process reverses when money is tight, first growth slows, then with a longer lag inflation does too.

That makes 2023 an anomaly. The economy has remained resilient, but year-over-year consumer price inflation has moderated from a peak of 9.1% in mid-2022 to 3.4% in December 2023.

One theory is that the high inflation was all due to economic bottlenecks and supply constraints during COVID, so the end of lockdowns and the process of getting back to normal has expanded supply, leading to both faster growth and lower inflation. There’s no doubt that the imposition of lockdowns and then the re-opening from those lockdowns had “supply-side” effects – first negative, then positive – and are consistent with this explanation.

But it’s a flawed explanation. If supply constraints and their loosening were the key drivers of inflation, we would expect pandemic driven inflation to be followed by outright deflation as the economy reopened and returned to normal. That clearly hasn’t happened, and inflation remains stubbornly high.

Instead, we believe monetary policy played the key role. The M2 measure of the money supply soared 41% in 2020-21, the fastest since World War II. This measure of the money supply then declined 3.2% in 2022-23, the largest two-year drop since the Great Depression. These swings in M2, the relative sizes of the swings (larger up than down), and the long lags between shifts in M2 and inflation do a much better job explaining the inflation pattern of the past few years.

The problem with this theory of “monetary dominance” is that classical liberals like Milton Friedman and the Austrians would expect economic growth to take a hit before inflation were brought back down to normal. And yet Real GDP grew 3.1% in 2023, which is above the 2.0% long-term trend.

So what gives? Our belief is that the US injected so much money, so rapidly, that the economy couldn’t absorb it instantaneously. So, now, what we have seen is that even though M2 has declined, we still haven’t absorbed all the money that was added. Some call it excess savings, we call it excess M2.

But the US has finally absorbed the excess money, and fiscal stimulus is waning as well. And guess what? Recent reports for January show an economy that may be weakening faster than most investors realize. Retail sales fell 0.8% for the month and have declined in three of the past four months. Manufacturing production fell 0.5% in January and manufacturing excluding the auto sector (the auto sector is volatile) has declined four months in a row.

Meanwhile, home building got hammered in January, with both housing starts (-14.8%) and completions (-8.1%) dropping sharply. It’s possible that colder than normal January temperatures were a factor, as well as unusually high precipitation, but the drop in starts was in every major region of the country, the drop in completions happened in most regions (except for the West), and while weather was bad, quantitative measures of national heating requirements were not unusually high in January.

We’ve had bad weather before – and apocalyptic weather reports are clearly clickbait for some in the news media – but housing starts in January were the second lowest for any month since mid-2020, during the onset of COVID when lockdowns still prevailed in much of the country. In other words, we see these data potentially signaling broader economic weakness, consistent with the drop in retail sales and decline in manufacturing production in January.

And yet inflation was also a problem in January, with both consumer and producer prices rising 0.3%, faster than the consensus expected and inconsistent with the Federal Reserve’s 2.0% target inflation.

A weakening US economy with inflation remaining (temporarily) stubbornly high would be consistent with the monetary dominance story of inflation’s rise and fall and would also be a problem for the stock market. Using our Capitalized Profits Model, with a 10-year Treasury yield at about 4.25%, economy-wide corporate profits would need to rise 30%+ to justify an S&P 500 at 5,000. But there’s no way profits (ex-Fed), which are already high relative to GDP would surge that much higher in a soft economy. The current consensus puts profit growth at roughly 10% this year.

Time will tell if the weakness in January becomes more widespread. On the surface, the job market still looks fine, with payrolls up more than 300,000 in both December and January. But the labor market can be a lagging indicator.

Unprecedented policies during COVID have created noise in the data. But underneath it all, we still believe Milton Friedman had it right. A decline in money will lead to recession, and then a decline in inflation.

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Can Homeschooling and a Full-time Job Co-exist?

Raymond James

Family & Lifestyle

Juggling schoolbooks and paychecks isn’t for the faint of heart, but can be a rewarding endeavor with the right expectations and support.

The decision to homeschool can offer freedom, personal learning, and create a deeper connection with your child. But what if you’re employed full time? Can your dream of nurturing a young mind live alongside the very real demands of a busy career? Spoiler alert: It depends.

Picture early mornings juggling lesson plans with coffee, lunchtime Zoom calls interspersed with science experiments, and evenings where exhaustion battles with bedtime stories.

When you have a child, you’re no stranger to how clutch organization and flexibility is in your every day. Considering homeschooling with a full-time job means you have to be honest with yourself about the demands on any given day or week and plan accordingly on both sides of the work and school spectrum.

Planning your pivot

As with any worthy endeavor, success takes planning. Here are some tips to create a harmonious learning environment:

• Schedule synergy: Chart a detailed plan. Factor in work hours, breaks, family time, and homeschooling blocks. Utilize online resources, curriculum plans, and educational apps to maximize efficiency.

• Embrace flexibility: Unexpected meetings, sick kids, or a flat tire? Adapt by modifying schedules, utilizing online lessons, or enrolling in short-term camps.

• Delegate and utilize: Can grandma handle math mornings? Is a neighbor qualified to teach Spanish? Don't be afraid to share the educational load to ease the pressure.

• Community counts: Homeschooling doesn't have to mean isolation. Social interaction and peer support are invaluable. Seek online communities, join local homeschooling groups, or participate in co-op classes.

• Prioritize mental health: Operating on full throttle in your career and your child’s schooling is taxing. Schedule time to exercise, do something you love, or enjoy a hot bath. A well-rested, happy parent is the driving force behind homeschooling success.

Beyond the books

While academics are important, tap into the unique advantages of homeschooling. Use work experience to integrate real-world applications into lessons. Take field trips, visit museum, and volunteer. By making learning an enriching, hands-on experience, the journey and memories go well beyond textbooks and online lessons.

For families who embrace the challenge of overcoming the hurdles of this balancing act, the joys of fostering a deep connection with their children, tailoring education to individual needs, and witnessing the magic of independent learning firsthand can be worth it. And you’ll have many priceless memories to show for your dedication.

Next Steps

• Maximize flexibility in your every day as you consider this journey for your family.

• When you’re not working, practice being present with your child when you’re in their presence.

• Foster a sense of independence by helping your child help themselves.

Sources: https://smartasset.com/investing/types-of-investment, https://www.investopedia.com/terms/i/investing.asp, https://www.finra.org/investors/investing/investing-basics

Holiday Closure

Our office and the markets are closed Monday, February 19, in observance of Presidents Day. Of course, you can access your account(s) using Client Access anytime, year-round. We are back to regular hours Tuesday, February 20 thank you!

CBO’s Rosy Scenario

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

Robert Stein, CFA - Dep. Chief Economist

February 12, 2024

Last week the Congressional Budget Office set out new projections for budget deficits and debt in the decade ahead, and they weren’t quite as bad as they looked last year. The CBO now projects a deficit of 6.4% of GDP in 2033 versus a prior forecast of 7.3%. Total accumulated debt by 2033 is now forecasted to be 114% of GDP versus 119%. None of this is “good” news – deficits and debt would still be too high – but it is “less bad.”

The problem is that the CBO’s assumptions are way too rosy. In particular, it assumes the end of many of the tax cuts enacted in 2017 without any negative effects on the economy. Fat chance! More likely, growth would slow and revenue would come in low, meaning bigger budget deficits.

But it will also be tough to hit the CBO’s revenue projections if we keep the 2017 tax cuts fully in place. The CBO is forecasting “real” (inflation-adjusted) economic growth of about 2.0% per year, on average for the decade ahead, the same growth we’ve experienced since the end of 2000 (before the 2001 recession) and since the end of 2019 (the business cycle peak prior to COVID). If we tax that economy at lower rates than CBO projects it’ll yield less revenue than CBO projects, as well.

The bottom line is that no matter what candidates say this year on the campaign trails in their races for the White House, Senate, and House, both parties are going to have to find ways to limit deficits in the years ahead. If we get a GOP sweep – which we believe would result in a continuation of the 2017 tax cuts (and on which we put 35% odds, up from 30% last November) – we expect measures to fight the deficit to include curbs on “green energy” subsidies, more tariffs, and Medicaid reform.

If the Democrats sweep (20% odds) then we think a wide range of tax hikes will be on the table, including raising the top income tax rate (now 37%) back to 39.6%, raising the top longterm capital gains and dividends tax rates (now 20%) to at least 24%, reducing estate tax exemptions, raising the standard corporate tax rate (now 21%) to 35%, and possibly introducing a carbon tax, which the Clinton Administration very briefly considered in 1993. Back then, both Senators from Nebraska were Democrats, which helped keep President Clinton away from a carbon tax; now the Democrats get very little support from energy-intensive states.

But in a world where the current House majority is razor thin and some election maps are still being redrawn, it shouldn’t shock anyone if we end up with “mixed government” in 2025- 26, with the GOP holding at least one of the White House, Senate, and House, and the Democrats holding at least one, as well. We’d put the odds on that at about 40-45%, at present.

With mixed government, expect some brutal political fights. Does anyone think a Speaker Hakeem Jeffries would simply rollover for a Republican president and accept a full extension of the 2017 tax cuts, or anything close? Why wouldn’t a Republican president test the Supreme Court by “impounding” (refusing to spend) money appropriated by Congress, which hasn’t happened since the early 1970s? The bottom line is that for all the fighting, mixed government scenarios would likely generate no entitlement reforms and little deficit reduction, leaving plenty of time for the bond vigilantes to sharpen their knives.

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Labor Market Not Adding Up

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

Robert Stein, CFA - Dep. Chief Economist

February 5, 2024

On the surface, there’s much to like about the job market. But when you get into the details, it’s not quite as strong and some things don’t add up.

Here’s what to like.

The establishment survey answered by a sample of businesses showed that nonfarm payrolls increased 353,000 in January, easily beating the consensus expected 185,000, the largest gain in a year, and coming in higher than the forecast from every economics group (that filed a forecast with Bloomberg). Meanwhile, payroll gains were revised up by 126,000 for November and December, bringing the net gain, including revisions, to 479,000. In the past year, payrolls are up 2.9 million or 244,000 per month.

We like to follow payrolls excluding government (because it's not the private sector), education & health (because it rises for structural and demographic reasons, and usually doesn’t decline even in recession years), and leisure & hospitality (which is still recovering from COVID Lockdowns). That “core” measure of payrolls rose 194,000 in January, which is the best month since mid-2022.

That same payroll survey showed that average hourly earnings – cash earnings, excluding irregular bonuses/commissions and fringe benefits – rose 0.6% in January and are up 4.5% versus a year ago. The Federal Reserve might not like that – the odds implied by the futures market that the Fed will cut rates by the end of the May 1 meeting went down substantially – but it is good news for workers and means wage growth per hour is out-stripping inflation.

Meanwhile, the survey that samples US households showed that the unemployment rate remained at 3.7%.

But here are the details and figures that make us wary about just accepting all the good news at face value.

First, the same payroll survey showing strong job growth is showing a concerning drop in the number of hours per worker. Workers in the private sector worked an average of 34.6 hours per week in January 2023; this January they were down to 34.1. Average weekly hours haven’t been this low since March 2020, with the onset of COVID.

As a result, even though total jobs are up 1.9% in the past year, total hours worked are up only 0.3%. To put this in perspective, a 0.3% increase in private-sector jobs in the past year would have meant private payroll gains of 33,000 per month, not the 194,000 per month we experienced. (A 0.3% gain in jobs is what would have happened if businesses had hired workers to fill the extra hours they needed but kept the number of hours per worker the same.)

Second, the household survey measure of employment hasn’t been rising nearly as fast as payrolls, which is something that has happened in the past prior to recessions. As we noted earlier, nonfarm payrolls (which includes government workers) are up 244,000 per month in the past year. But the household survey (smoothed for recent population adjustments) is up only 101,000 per month in the past year. That’s a very large gap by historic standards.

Another issue is the oddity of having payroll growth of 244,000 per month in the past year while the unemployment rate has been so low. Since February 2001, right before the 2001 recession, payrolls have grown at an average pace of 91,000 per month. Since February 2020, right before COVID, payrolls have grown at an average pace of 115,000 per month. Those longer-term averages make sense given a growing population in the context of an aging workforce.

But how then can we have payroll growth so much faster in the past year, particularly when the unemployment rate is already so low? Usually job growth gets slower when the jobless rate is near bottom.

One theory can explain this, however: that the US economy has been temporarily boosted by having the government run a larger budget deficit, including the effects of the CHIPS Act, infrastructure bill, and the Inflation Reduction Act. But that artificial boost should soon come to an end. And when it does job growth should slow sharply, as well.

A strong job market is a good thing, but it doesn’t mean a recession can’t start soon. Payrolls are up 1.9% in the past year. But they were up the same in the year ending in January 1990 and a recession started mid-year. They were up 1.3% in the year ending January 2001 and a recession started in Spring 2001. The flu starts when you’re feeling good and it’s normal for a recession, like the flu, to come when the economy looks fine.

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Record Highs for S&P 500 Spotlight January Market Activity

Raymond James

Markets & Investing

January 31, 2024

A period of market volatility and consolidation is likely as markets have already priced in much of the economy's good news.

The report card is in. Despite high interest rates, elevated inflation and a challenging market environment, U.S. gross domestic product grew a strong 3.1% in 2023. And in the month since, consumer spending has continued to be robust, unemployment has remained low and the S&P 500 recorded new highs.

Some took this as bad news. Supported by this resilient economy, the Federal Reserve (Fed) elected to hold interest rates steady at the first Federal Open Market Committee meeting of the year on January 31.

"January was déjà vu, continuing the narrative of late last year with economic resilience, moderating inflation, expectations that the Fed will soon cut interest rates and a mega-cap Tech-led equity rally,” said Raymond James Chief Investment Officer Larry Adam.

“However, with the S&P 500 rallying about 20% from the late-October lows, a period of volatility and consolidation is likely as the market has priced in elevated economic and equity market expectations. Much of the good news has already been priced in.”   

We’ll dig into more details below, but first, let’s look at where we stand one month into 2024.

*Performance reflects index values as of market close on January 31, 2024. Bloomberg Aggregate Bond and MSCI EAFE figures reflect January 30, 2024, closing values. 

Jobs, manufacturing sending mixed messages on U.S. economy

At 2.7 million, 2023’s total nonfarm employment gains were a far cry from the breakneck pace of 2022 (4.8 million), but a more-than-expected increase of 216,000 jobs in December capped a strong year for employment growth overall. However, manufacturing stayed in contraction territory and the Leading Economic Index, a proxy for the future performance of the U.S. economy, declined for the 22nd consecutive month.

Tech and comms push equities higher

January brought new record highs to the S&P 500 as a narrow group of technology and communication services companies led the way, while the rest of the index was largely flat. As fourth quarter earnings season progresses, investors will be scrutinizing company commentary and watching price reactions for signs of broader market participation. We believe equities can climb higher over the next 12 months as the Fed likely cuts rates, bond yields trend lower, and any looming recession remains mild.

Yields across fixed income asset classes climb

Bond yields bounced back in January after steadily declining from last October’s peak when the market determined the Fed was done tightening. Day-to-day volatility remains high and the Treasury curve inverted, yet the corporate curve remains relatively flat and elevated while the municipal curve steadily upward sloping 10 years and out, creating varying income opportunities throughout maturity ranges.  

Data from China keeps oil prices subdued

Although up year-to-date, oil prices are ending January in the bottom half of the 52-week range, with China being a key factor. China’s gross domestic product growth rate of 5.2% was among its weakest over the past three decades, and the outlook for 2024 is mixed. China’s 2023 population drop of 2 million people reflects the fact that its birthrate is below replacement level. The part of the Chinese economy that’s booming? Electric vehicles. Nearly 40% of China’s light-duty auto sales in 2023 were electric – by far the highest percentage among the G20 major economies.

Market paradox in Germany, uncertainty in the UK

The German DAX index surged to an all-time high in January, which is remarkable against a backdrop of persistently downbeat activity and high unemployment. That said, what has driven financial market performance are lower energy prices and the expectation that the European Central Bank might soon pivot to a looser monetary policy stance. In the U.K., subdued performance of financial assets may be a result of uncertainty about a possible change of administration within the next 12 months.

Encouraging progress on D.C. tax deal

In January, Congress made headway on key fiscal priorities, including a potential $78 billion tax package (combining an expansion of the Child Tax Credit with corporate tax breaks) and the long-debated $100+ billion supplementary border security and defense deal. Meanwhile, the near certainty of a Trump-Biden rematch may dampen the volatility that historically hangs over the first quarter of an election year.

The bottom line

When reality doesn’t align with expectations – along with the friction that uncertainty over the timing of interest rate cuts and a potential recession could create – market volatility typically follows. The resilience of the U.S. economy will likely be a continuing theme in the months to come, as will be the Fed’s timing.

Investing involves risk, and investors may incur a profit or a loss. All expressions of opinion reflect the judgment of the authors and are subject to change. There is no assurance the trends mentioned will continue or that the forecasts discussed will be realized. Past performance may not be indicative of future results. Economic and market conditions are subject to change. The Dow Jones Industrial Average is an unmanaged index of 30 widely held stocks. The NASDAQ Composite Index is an unmanaged index of all common stocks listed on the NASDAQ National Stock Market. The S&P 500 is an unmanaged index of 500 widely held stocks. The MSCI EAFE (Europe, Australasia and Far East) index is an unmanaged index that is generally considered representative of the international stock market. The Russell 2000 is an unmanaged index of small-cap securities. The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. An investment cannot be made in these indexes. The performance mentioned does not include fees and charges, which would reduce an investor’s returns. International investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility. Investing in oil involves special risks, including the potential adverse effects of state and federal regulation and may not be suitable for all investors. U.S. government bonds and Treasury notes are guaranteed by the U.S. government and, if held to maturity, offer a fixed rate of return and guaranteed principal value. U.S. government bonds are issued and guaranteed as to the timely payment of principal and interest by the federal government. Treasury notes are certificates reflecting  intermediate-term (2 -10 years) obligations of the U.S. government. Companies engaged in business related to the technology sector are subject to fierce competition and their products and services may be subject to rapid obsolescence.

Material created by Raymond James for use by its advisors.

Did You Know 529s Are Powerful Estate Planning Tools?

Raymond James

Family & Lifestyle

These versatile savings accounts might be the estate planning vehicle you need to learn about.

Most of us associate 529 accounts as college savings vehicles. They’re flexible, allowing you to transfer assets to anyone, including yourself, for the express purpose of furthering the education of your beneficiary. But did you know that a 529 can be a powerful estate planning tool, too?

Modern estate planning

Not everyone is in a position to set aside money for the next generation without jeopardizing their own goals, but if you’re fortunate enough to do so, it’s worth looking into your options.
Specialized savings accounts, informally referred to as 529s, could be at the top of your list. They have quite a few advantages for the beneficiaries – but there are benefits for the donors too, given the high maximum contribution limits and tax advantages.

The special tax rules that govern these accounts allow you to pare down your taxable estate, potentially minimizing future federal gift and estate taxes. Right now, the lifetime exclusion is $13.61 million per person, so most of us don’t have to worry about our estates exceeding that limit.

The framework

Under the rules that uniquely govern 529s, you can make a lump-sum contribution to a 529 plan up to five times the annual limit of $18,000. That means you can gift $90,000 per recipient ($180,000 for married couples) as long as you denote your five-year gift on your federal tax return and do not make any more gifts to the same recipient during that five-year period. However, you can elect to give another lump sum after those five years are up. In the meantime, your investments have the luxury of time to compound and potentially grow.

So, if you’re following along, that $180,000 gift per beneficiary won’t incur gift tax as long as you and your spouse follow the rules. You’ll also whittle your taxable estate by that same amount, potentially reducing future estate tax liabilities. That’s because contributions to 529s are considered a completed gift from the donor to the beneficiary.

Other benefits

Many people worry that gifting large chunks of money to a 529 means they’ll irrevocably give up control of those assets. However, 529s allow you quite a bit of control, especially if you title the account in your name. At any point, you can get your money back. Of course, that means it becomes part of your taxable estate again subject to your nominal federal tax rate, and you’ll have to pay an additional 10% penalty on the earnings portion of the withdrawal if you don’t use the money for your designated beneficiary’s qualified education expenses. 

If your chosen beneficiary receives a scholarship or financial aid, they may not need some or all of the money you’ve stashed away in a 529. So you’ve got options here, too.

• You can earmark the money for other types of education, like graduate school.

• You can change the beneficiary to another member of the family (ideally in the same generation), as many times as you like, since most 529s have no time limits. This option is particularly helpful if your original beneficiary chooses not to go to college at all.

• You can take the money and pay the taxes on any gains. Normally, you’d expect to pay a penalty on the earnings, too. But that’s not the case for scholarships. The penalty is waived on amounts equal to the scholarship as long as they’re withdrawn the same year the scholarship is received, effectively turning your tax-free 529 into a tax-deferred investment. Of course, you can always use the funds to pay for other qualified education expenses, like room and board, books and supplies, too.

• Starting in 2024, funds in a 529 plan can be rolled into a Roth IRA for the beneficiary if the 529 plan account meets certain requirements. Consult with a tax professional about this option and whether the 529 plan account is qualified for this rollover option.

Plus, many plans offer you several investment choices, including diversified portfolios allocated among stocks, bonds, mutual funds, CDs and money market instruments, as well as age-based portfolios that are more growth-oriented for younger beneficiaries and less aggressive for those nearing college age.

Bottom line

Saving for college takes discipline, as does estate planning. Talk to your professional advisor about the nuances of different investment strategies and vehicles before making a years-long commitment.

Sources: Mercer; Broadridge/Forefield

Earnings in 529 plans are not subject to federal tax and in most cases state tax, as long as you use withdrawals for eligible college expenses, such as tuition and room and board. However, if you withdraw money from a 529 plan and do not use it on an eligible higher education expense, you generally will be subject to income tax and an additional 10% federal tax penalty on earnings. As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also a risk that these plans may lose money or not perform well enough to cover college costs as anticipated. Most states offer their own 529 programs, which may provide advantages and benefits exclusively for their residents. An investor should consider, before investing, whether the investor’s or designated beneficiary’s home state offers any state tax or other benefits that are only available for investments in such state’s qualified tuition program. Such benefits include financial aid, scholarship funds, and protection from creditors. The tax implications can vary significantly from state to state.

Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. You should contact your tax advisor concerning your particular situation. Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

A Stock Market Conundrum

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

Robert Stein, CFA - Dep. Chief Economist

January 29, 2024

The economy is still growing. Real GDP rose at a solid 3.3% annual rate in the fourth quarter, and consumer spending was strong in December meaning the first quarter is off to a good start. New home sales came in above expectations and initial jobless claims remain low, although orders for durable goods came in low due to weak demand for aircraft.

All eyes are now on Friday’s jobs report, which we expect to show a gain of about 170,000 while the unemployment rate holds steady. But the strength in employment seems fragile. If we exclude job gains in government, health & education (which are largely funded by government), and leisure & hospitality (still recovering from lockdowns), job growth looks exceptionally weak. In the last seven months of 2023, payrolls excluding those categories rose only 3,000 per month, the kind of weakness we might expect before a recession. In other words, much of recent growth is fueled by government deficits.

Meanwhile the stock market continues to rally, with the S&P 500 closing at a new record high last Thursday. That’s great, but we aren’t exactly sure what the market sees.

If the economy remains healthy and keeps growing, it’s very hard to imagine the Federal Reserve cutting short-term interest rates by the 125-150 basis points the markets appear to expect. In turn, less rate cutting than the market expects should be a headwind for equities in 2024.

What would get the Fed to cut rates by 125-150 bps? Either a sharp drop in inflation or a decline in economic growth. While lower inflation is good, can a sharp drop happen without a weak economy? Either way, we don’t think the stock market would like that outcome because they would likely signal lower corporate profits.

This is all consistent with our Capitalized Profits Model, which still says stocks are overvalued. That model uses economy-wide profits from the GDP accounts (excluding profits or losses by the Fed) and discounts them by the 10-year Treasury yield. Using the level of profits in the third quarter (we won’t get Q4 numbers for profits until the end of March) and a 10-year yield of 4% (which was its yield before rate cut expectations started to evaporate), suggests the S&P 500 would be fairly valued at about 3,900, well below recent highs.

What would it take to suggest that recent stock prices are appropriate? A 10-year yield of 3.2% would do it. So would a 30% increase in profits. But a 3.2% yield would probably be accompanied by lower profits and a 30% surge in profits would likely be accompanied by a much higher 10-year yield, so fair value is even further away than it seems.

The only way out of this conundrum is if Artificial Intelligence and other new and rapidly advancing technologies provide a miraculous boost to productivity. This could keep growth strong, or even accelerate it, while bringing inflation down. In other words, profits up and interest rates down.

While this could happen, it would take a miracle. And while expecting miracles worked for San Francisco fans, we still think investors should remain cautious. The monetary and fiscal stimulus that made COVID lockdowns seem like a bump in the economic road are wearing off.

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.

Slower Growth in Q4, But No Recession

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

Robert Stein, CFA - Dep. Chief Economist

January 22, 2024

The economy slowed substantially in the last quarter of 2023 from the rapid pace of the third quarter, but, as we explain below, still expanded at a moderate rate. Some will take this week’s Real GDP report to confirm their prior view the recession is simply not in the cards for the US economy, but we still think a recession is more likely than not.

Why do we still think a recession is coming? Because monetary policy is tight whether you like to use the yield curve, the “real” (inflation-adjusted) federal funds rate, or the M2 measure of money to assess the stance of policy from the Federal Reserve.

Why hasn’t a recession happened yet? Because monetary policy works with long and variable lags and a surge in the budget deficit in 2023 temporarily postponed the economic day of reckoning. We are right now living through a reckless Keynesian experiment with massive deficit spending relative to low unemployment, with the government having devised programs to temporarily boost GDP in the short run. But this government spending isn’t lifting long-term growth; it’s stealing from future growth.

In the meantime, higher short-term interest rates mean businesses have the ability to lock in healthy nominal returns on cash with minimal risk. In turn, this should lead to a reduction in risk-taking and business investment.

In the meantime, we estimate that Real GDP expanded at a moderate 2.1% annual rate in the fourth quarter, mostly accounted for by an increase in consumer spending.

Consumption: “Real” (inflation-adjusted) retail sales outside the auto sector rose at a modest 1.3% annual rate in Q4 while auto sales declined at a 3.6% rate. However, it looks like real services, which makes up most of consumer spending, should be up at a moderate 2.4% pace. Putting it all together, we estimate that real consumer spending on goods and services, combined, increased at a 2.2% rate, adding 1.5 points to the real GDP growth rate (2.2 times the consumption share of GDP, which is 68%, equals 1.5).

Business Investment: We estimate a 1.8% growth rate for business investment, with gains in intellectual property leading the way, while commercial construction declined. A 1.8% growth rate would add 0.2 points to real GDP growth. (1.8 times the 13% business investment share of GDP equals 0.2).

Home Building: Residential construction is showing some resilience in spite of some lingering pain from higher mortgage rates. Home building looks like it grew at a 2.6% rate, which would add 0.1 points to real GDP growth. (2.6 times the 4% residential construction share of GDP equals 0.1).

Government: Only direct government purchases of goods and services (not transfer payments) count when calculating GDP. We estimate these purchases – which represent a 17% share of GDP – were up at a 1.7% rate in Q4, which would add 0.3 points to the GDP growth rate (1.7 times the 17% government purchase share of GDP equals 0.3).

Trade: Looks like the trade deficit shrank in Q4, as both exports and imports declined but imports declined faster. In government accounting, a drop in the trade deficit means faster growth, even if exports and imports both declined. We’re projecting net exports will add 0.3 points to real GDP growth.

Inventories: Inventory accumulation looks like it slowed down in Q4, meaning inventories generally went up, but at a slower pace than in Q3. That translates into what we estimate will be a 0.3 point drag on the growth rate of real GDP. When a recession hits, we expect inventory declines to play a significant role in the drop in GDP.

Add it all up, and we get a 2.1% annual real GDP growth rate for the fourth quarter. If we are right about a recession, this number is likely to go to zero or below sometime in first half of 2024.

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Budgets And Governing

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

Robert Stein, CFA - Dep. Chief Economist

January 16, 2024

The leaders of the House and Senate have come up with a new budget deal, and many people aren’t happy. It still needs passing by January 19th, or else the government, evidently, may shutdown. We doubt that this will happen, but the fight over government spending seems to drag on year after year after year.

It’s not hard to understand why. Non-defense spending by the federal government (including entitlements like Social Security) has climbed dramatically.

• 10% of GDP in the 1960s

• 14.8% of GDP in 2001

• 15.2% of GDP in 2007

• 17.8% of GDP in 2019

• And now, projected at roughly 22% of GDP over the next 5 years, after peaking at 27.7% in 2020

In other words, non-defense spending now consumes more than twice as much GDP every year as it did 60 years ago. It’s share of GDP is up 45% from just before the Great Recession, and it’s up 24% from the year before COVID. Government continues to take more and more of what the private sector produces, and it is heading for annual deficits of about $2 trillion.

The Great Recession and COVID were one off-events. Yet somehow, government spending never returned to pre-crisis levels following either. And because politicians have not been punished at the ballots for such unconstrained spending – or the resulting deficits – they have had little incentive to alter course.

This is why budget battles have turned consistently ugly in recent years. Repeated threats to not raise the debt ceiling or shut down the government because a budget can’t be agreed on have become commonplace. An ever- changing mix of politicians who want to see spending controlled face heavy pressure from every direction that they must go along to get along. But they still fight. And fight they should.

Total debt has ballooned at the same time the Fed lifted artificially low interest rates to fight the inflation that poor policies created, causing net interest expenses to skyrocket. In 2020, the net interest expense was $332.6 billion. In the past twelve months, it has totaled $730.4 billion. The Congressional Budget Office expects net interest expenses to rise to above $1 trillion per year after 2028. Lunacy.

While many think all the US has to do is raise tax rates, history suggests eliminating deficits this way is virtually impossible. The last period the budget was balanced was between 1998 and 2001. During those years, tax receipts averaged an all-time record of 19.4% of GDP, while total spending averaged just 18%.

This was the tail end of a miraculous period in modern US history. Starting with Ronald Reagan, and continuing through Bill Clinton, government spending fell as a share of GDP. The less government spends, the more there is left for private sector growth. Economic growth boomed, and that growth boosted tax receipts.

When spending gets too high, economic growth slows, as do tax receipts. Last year, the CBO’s budget forecast overestimated tax receipts by 11%, and underestimated spending by 9%. The bigger government gets, the more likely this happens year after year.

Back in the 1980s and 1990s, when the US was cutting spending, real GDP grew an average of 3.2% per year. In the past two years, in spite of historically large Keynesian deficits, real GDP has averaged just 1.7%.

We understand that the make-up of Congress creates difficulties for those who want to cut spending. But calling them names and accusing them of not being able to govern perpetuates the problem. Out of control spending, and huge deficits as far as the eye can see, are the real failure in governance.

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

2024 Economic Outlook: Prepare for Landing

Raymond James

Economy & Policy

January 08, 2024

Chief Economist Eugenio Alemán and Economist Giampiero Fuentes examine the factors which will contribute to the U.S. economy's path forward in 2024.

To read the full article, see the Investment Strategy Quarterly publication linked below.

Key Takeaways:

• Inflationary pressures continued to push lower during the third and fourth quarter of last year with no signs that structural changes would prevent the Federal Reserve (Fed) from achieving its 2% inflation target.

• Markets have begun to believe that the Fed will cut rates several times in 2024, starting in the first quarter. We disagree – we believe that the Fed is more concerned about a potential reacceleration of inflation and it will be very careful in moving rates lower.

• The more than 500 basis points (bps) in fed funds rate hikes has negatively impacted both consumers and the government.

Just as pilots assess conditions before landing, Fed Chair Jerome Powell analyzes the U.S. economy as we enter the final leg of the post-COVID-19 journey. Meanwhile, as investors fasten their seatbelts and hope for a soft landing, we economists fine tune our forecasts for the year. The economy is expected to fluctuate as we expect a wide range of headwinds and tailwinds to challenge the U.S. consumer, but despite some turbulence, we continue to believe that there will be a safe landing.

Inflation: We have started our descent

After more than a year when some analysts argued that structural changes were probably going to keep inflation higher than during the pre-COVID period while preventing the Fed from achieving its inflationary target, inflationary pressures continued to push lower during the third and fourth quarter of last year with no signs that structural changes would be able to prevent the Fed from achieving the 2% inflation target.

The Consumer Price Index (CPI) continued its disinflationary path toward the end of 2023, bringing significant optimism to investors. Hopes of a soft landing and expectations of inflation hitting the 2% target faster than many had expected have pushed markets to believe that the Fed will cut rates several times in 2024, starting in the first quarter. We disagree with the markets because we believe that the Fed is more concerned about a potential reacceleration of inflation, especially if the U.S. economy can avoid a recession and it will be very careful in moving rates lower.

If we assume the economy continues to be strong and experiences a soft landing, what would be the rationale for lower rates if the economy can handle a 5.5% federal funds rate and still grow unabated? In this case, we believe the Fed would be more mindful to preserve the opportunity to ease monetary policy if a future recession requires it. For example, along with quantitative easing, the reason the Fed was able to ease monetary policy in the wake of the COVID-19 pandemic was because it raised the fed funds rate from 0-0.25% in 2015 to 2.25-2.50% in 2019. On the other hand, if rates were already lower in 2020, the Fed would have had less ‘cushion’ to work with.

Even if the economy goes into a mild recession as we are still expecting, the Fed is going to be reluctant to move interest rates much lower fearing that lower interest rates could push inflation higher again.

National debt: Sustained crosswinds

The impact of interest rate increases, amounting to more than 500 basis points since the hiking cycle began, has adversely affected both consumers and the government. The government's annual interest expenditure on the public debt is projected to surpass $1 trillion in 2024, marking the highest figure on record. However, the challenge lies not in the ability of the U.S. to meet its debt obligations; rather, the biggest issue with the U.S. debt is that the political system needs to agree on an already stretched budget to include these interest payments, as well as a long-term solution to the debt problem.

Today, about two-thirds of government expenditures are earmarked for non-discretionary, or mandatory, programs. That is, unless there are changes to current laws, we need to keep paying those expenditures. This is something much like ‘fixed costs’ in terms of business parlance: there are no degrees of freedom to change those expenditures in the short-to-medium run unless there is agreement between the parties in Congress. The remaining one-third of government expenditures are discretionary, which the U.S. government could potentially adjust to allow for payment of higher interest payments on the debt, but these outlays also require political agreement to decide on a solution.

Labor market: Turbulence ahead

The U.S. labor market added over 2.5 million jobs in 2023, but nonfarm payrolls started to slow during the last few months of the year. Job openings have been on a downward trend since peaking in 2022 and we expect this trend to continue in the first quarter of 2024. As the economy continues to slow, we expect the labor market to contract slightly starting in the second quarter of this year. This should push the unemployment rate higher, to ~4.8% in the third quarter of 2024, but we expect the labor market to start to recover before the year ends.

The bottom line: Cleared for landing

Stable and lower inflation, lower job growth and a weaker consumer are going to slow economic growth from the strong expansion experienced in 2023 to ~1.0% in 2024. While we continue to expect a very mild recession that lasts for two quarters, we want to emphasize that the overall growth for the year will remain positive. With current available resources, the U.S. is estimated to be able to grow sustainably at ~1.9% without triggering higher prices. Therefore, our GDP forecast for the U.S. economy, if it materializes, should not only be welcomed by investors but also by the Fed as inflation will be less likely to reaccelerate.

The economic outlook for 2024 should not be the year of ‘recession’ but rather a year of ‘sustained disinflation with weak economic growth.’ In fact, according to our forecast, the upcoming recession would not only be very mild, with fewer job losses and declines in fixed investments, but also shorter in duration than the average recession. While we expect consumer spending to weaken, we expect government and nonresidential fixed investment to grow more and provide a cushion to the economic slowdown. The bottom line is that the US economy has been cleared for landing, but in our opinion, it is unlikely to be as soft as many are predicting.

Read the full Investment Strategy Quarterly

All expressions of opinion reflect the judgment of the Chief Investment Office, and are subject to change. This information should not be construed as a recommendation. The foregoing content is subject to change at any time without notice. Content provided herein is for informational purposes only. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Asset allocation and diversification do not guarantee a profit nor protect against loss. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. Investing in small cap stocks generally involves greater risks, and therefore, may not be appropriate for every investor. International investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility. Investing in emerging markets can be riskier than investing in well-established foreign markets. Investing in the energy sector involves special risks, including the potential adverse effects of state and federal regulation and may not be suitable for all investors. There is an inverse relationship between interest rate movements and fixed income prices. Generally, when interest rates rise, fixed income prices fall and when interest rates fall, fixed income prices rise. If bonds are sold prior to maturity, the proceeds may be more or less than original cost. A credit rating of a security is not a recommendation to buy, sell or hold securities and may be subject to review, revisions, suspension, reduction or withdrawal at any time by the assigning rating agency. Investing in REITs can be subject to declines in the value of real estate. Economic conditions, property taxes, tax laws and interest rates all present potential risks to real estate investments. The companies engaged in business related to a specific sector are subject to fierce competition and their products and services may be subject to rapid obsolescence.

Low Quality Growth

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

Robert Stein, CFA - Dep. Chief Economist

January 8, 2024

Last Friday’s jobs report showed nonfarm payrolls up 216,000 in December, beating the consensus expected 175,000. Many are arguing that this was a huge number proving that the economy is not going into recession. But digging deeper into the data brings some doubt. In fact, it looks like the US is seeing low quality growth.

For example, yes, nonfarm payrolls came in better than expected in December, but not after adjusting for downward revisions of 71,000 to prior months. These downward revisions have now happened in ten out of the eleven past months. Over the past three months, private payrolls have increased a moderate 115,000 per month, tying for the slowest three-month pace of job gains since the COVID reopening started back in 2020.

What’s more, average hours worked by employees also fell by 0.2% in December. Despite more workers, we worked less in December than we did the month before, which is a headwind to growth. Losing 0.2% total hours of work is the equivalent to losing 228,000 jobs.

More importantly, the kind of jobs being added are of lower quality than we want. In 2023, nearly half of all jobs added were in the government and health care (which is heavily funded by government). Compare this to 2015 - 2019 (before COVID) when these two sectors accounted for a fifth of new jobs added.

Where else is the quality of growth low? Construction. Many people are talking about onshoring as manufacturing comes back to the US. Manufacturing facility construction is up 59.1% from a year ago and up 123.5% from two years ago. But this isn’t all private money. The government is funding many new projects, with the CHIPS Act and Inflation Reduction Act, artificially boosting spending in areas like manufacturing construction. But this deficit spending can’t last forever.

Real (inflation-adjusted) government purchases, which feed directly into the GDP numbers, are up 4.8% in the past year versus an average of 1.0% in the past twenty years. Meanwhile, recent government programs have been structured to multiply private-sector investment in politicallyfavored sectors, like “clean energy.” That, in turn, helped prop up economic performance last year – pushing out a recession that had looked likely to arrive at some point in 2023. But it’s low-quality growth that comes at a price. In order to spend on government favored projects, we must tax profitable entities in other areas. This redistribution does not add to growth, it just shifts it from one sector to another.

In fiscal year 2023, the U.S. government spent over $6.1 trillion dollars and ran a budget deficit of nearly $1.7 trillion dollars. That is fiscal madness. And it understates the true spending because the government was credited with a $333 billion “negative outlay” when the Supreme Court struck down President Biden’s plan to forgive student loans. Strip that out, and government spending in fiscal year 2023 represented roughly 24.0% of GDP. An incredibly high number for peacetime, especially for an economy that wasn’t in recession and had an unemployment rate below 4.0%.

It's only a matter of time before low quality growth stalls out. There are consequences to taking short term gains rather than fixing structural problems. Just ask California, Illinois, or New York.

In the meantime, the Federal Reserve is tasked with navigating treacherous terrain. Inflation is moderating but is still too high. The Fed’s choice to move from a scarce reserve system to a system of abundant reserves makes battling inflation that much tougher. And they are navigating with blinders on, willfully ignoring changes to the M2 money supply, down 3.0% in the past year.

We haven’t lost faith in the U.S. economy. Far from it. But we need to take an honest view on the sustainability of the current growth. For the sake of future progress, the government needs to stop digging the hole deeper and face issues head on. We will never beat China by trying to be like China. Government can never create wealth in the long run.

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

10 Themes That Will Affect Your 2024 Investing

Raymond James

Markets & Investing

January 02, 2024

As a new year begins, Raymond James CIO Larry Adam serves up his outlook on the financial markets.

To read the full article, see the Investment Strategy Quarterly publication linked below.

On Top Chef, one of America’s most popular kitchen competition television shows, contestants walk in with knowledge and experience – but no idea what challenges they are about to face. Their goal is to prepare a dish that pleases the expert chefs judging them, but the judges toss in a mix of ingredients that no contestant would expect. The aspiring chefs must think on their feet, improvise and beat the clock.

Sound familiar? Not only was fast footwork the investment story in 2023, the competition is set to get stiffer in 2024. Here are our 10 themes for 2024. Count on more than a few surprise ingredients throughout the year to spice up the financial markets.

1. U.S. economy: "Rotisserie" cycles

The most talked about recession in history has yet to materialize. Many economists have stopped waiting for the delivery and have revised the menu. We still believe that a recession will start in 2Q, but it will likely be the mildest ever. Indeed, it may be so mild that markets barely notice it. We expect the recession to be mild because there are no excesses in the economy, and like a rotisserie oven, many parts of the economy have been rotating from hot to cold independently over the last few years. Even with a mild recession, a recovery by year end should help U.S. GDP warm to a ~1% growth rate for the entire year.

2. Monetary policy: Chairman Powell, the top chef

The Federal Reserve (Fed) is led by our favorite Top Chef: Jerome Powell. Under pressure to cool inflation, he served up a steady course of interest rate hikes over the last 18 months and whipped inflation from 9% to 3.1% currently. Since that restrictive diet is done, the Fed will turn its attention to fattening the economy as growth concerns mount (i.e., a modest rise in unemployment and a potential recession). Markets are salivating over the possibility of as many as six interest rate cuts in 2024, but we believe that is overly optimistic; we favor three or four. More rate cuts than that would likely mean the economy is struggling more than we anticipate.

3. Fixed income: A makeover "rescue"

Like the guests on Bar Rescue, fixed income investors for the last few years may have felt like they were in bad shape, just like the shabby drinking establishments on the show. In both cases, the underlying business and fundamentals are in place and a makeover is all that’s needed. That makeover occurred in the bond market as the sharp reset to higher interest rates gave long-term investors an attractive entry point.

4. U.S. equities: The critical eye of Gordon Ramsay

In his show Hell’s Kitchen, Gordon Ramsay is often hyper critical of the contestants. Just as he has a discerning eye for cooking, investors will need to be more selective in 2024 with their sector, region, style, and market capitalization choices. That’s because a lot of the good news has already been priced into the market, including expectations for a soft landing, Fed rate cuts and easing inflation. Given our expectation for a mild recession, investors should turn a skeptical eye to a consensus earnings estimate of $245 (+12% EPS growth). We think that is likely too frothy. Our expectation is that earnings growth will be only 2% to $225 for 2024. History (i.e., election years, Fed easing cycle, etc.) suggests our less spicy expectations for the S&P 500 – to 4,850 by year end 2024 – make more sense.

5. Sectors: New ideas, richer flavors

With a slowing economic environment, earnings growth will be a decisive factor in determining sector performance. That’s why our 2024 ‘Michelin Star’ sectors are like America’s Test Kitchen: familiar spaces being improved by experimenting with new gadgets and ingredients.

6. Small-cap equities: Don't pass up the "dives"

On Diners, Drive-Ins and Dives, Guy Fieri fires up his bright red 1968 Chevy Camaro convertible and goes roaring around America to find great food in unexpected, small, relatively unknown places. While some ‘dive’ restaurants look ugly on the outside, the food and atmosphere on the inside make up for it. Underperforming small-cap equities may appear unappealing at first glance, but fundamentals under the surface make them worth visiting.

7. International equities: U.S. is "Grade A"

When looking at the global equity markets, U.S. equities are still our prime choice. Developed market international equities are ‘sale priced’ relative to U.S. equities, but growth headwinds could spoil earnings trends in the coming quarters, particularly in Europe. Japanese equities may be an outlier in 2024, underpinned by corporate governance reforms and an ongoing economic recovery. Emerging markets remain a long-term opportunity for investors. They should ripen with the end of the Fed tightening cycle, a modest weakening in the dollar and a rebound in economic growth in Asia and Latin America.

8. Energy: Discipline in the kitchen

Discipline is important when you’re wielding a sharp knife or cooking over an open flame. It’s even more important in the energy market. In 2023, OPEC+ was disciplined for controlling oil supply. And private companies – especially smaller ones – exercised careful capital discipline in drilling for additional oil. In general, we believe energy production discipline will continue to limit the growth of the oil supply.

9. Volatility: Turning up the heat

Volatility was relatively modest last year from a historical perspective. Why? Because of exceptional pessimism at the beginning of last year. Investors feared a recession, stubborn inflation, imploding corporate earnings and the Russia/Ukraine war. In retrospect, that pessimism was overstated; each of those dynamics had surprisingly more favorable outcomes – at least in the markets’ eyes. In 2024, we appear to have the opposite view: uber-optimism leaves the market vulnerable to disappointment. If you thought the kitchen was kind of warm last year, get ready for more volatility in 2024.

10. Asset allocation: Pace yourself at the buffet

We want investors to experience well-crafted fare, which is why we place so much attention on building an asset allocation that matches your tastes. We are factoring in a modest upside for most asset classes in 2024, but don’t let a so-called ‘everything rally’ distract you from maintaining a commitment to a well- structured asset allocation. Faced with a big buffet, it is tempting to splurge on whatever looks good today, ignoring a balanced, more healthy approach. Asset allocation strategies, for the most part, should be in place long term. They remind me of one of the most famous infomercial taglines of all time – the "Set and Forget It" rotisserie oven. "Set it and forget it" is great advice, particularly in challenging and more volatile markets. Timing is also important: decisive short- term moves can sometimes save a meal, but panic-driven actions can ruin it. That’s why, when it comes to a longer-term investment horizon, we prefer to let things marinate.

We look at the future like the mystery basket in Chopped – the ingredients inside could be anything. Creative chefs know how to work with what they are given. We encourage you to peek into our kitchen, with our updated views on what’s cooking, throughout the year. World-renowned chef Bobby Flay said: “Cooking is a subject you can never know enough about. There is always something new to discover.” Don’t let uncertainty scare you out of the market – turn to your sous-chef (AKA your financial advisor) – for support and guidance when things heat up.

Read the full Investment Strategy Quarterly

All expressions of opinion reflect the judgment of the Chief Investment Office, and are subject to change. This information should not be construed as a recommendation. The foregoing content is subject to change at any time without notice. Content provided herein is for informational purposes only. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Asset allocation and diversification do not guarantee a profit nor protect against loss. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. Investing in small cap stocks generally involves greater risks, and therefore, may not be appropriate for every investor. International investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility. Investing in emerging markets can be riskier than investing in well-established foreign markets. Investing in the energy sector involves special risks, including the potential adverse effects of state and federal regulation and may not be suitable for all investors.

There is an inverse relationship between interest rate movements and fixed income prices. Generally, when interest rates rise, fixed income prices fall and when interest rates fall, fixed income prices rise. If bonds are sold prior to maturity, the proceeds may be more or less than original cost. A credit rating of a security is not a recommendation to buy, sell or hold securities and may be subject to review, revisions, suspension, reduction or withdrawal at any time by the assigning rating agency. Investing in REITs can be subject to declines in the value of real estate. Economic conditions, property taxes, tax laws and interest rates all present potential risks to real estate investments. The companies engaged in business related to a specific sector are subject to fierce competition and their products and services may be subject to rapid obsolescence.

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Investor Optimism Set the Tone for a Strong Finish to 2023

Raymond James

Markets & Investing

January 02, 2024

The S&P 500 reversed its 2022 losses, and then some, closing the year near a record high.

A choir of optimistic investor sentiment closed 2023 on a high note, as expectations of “steep cuts to interest rates” may be at odds with the Federal Reserve’s (Fed) actual sheet music. Considering the tumult of the year as sentiment focused on economic and inflation data, this discordance isn’t all that surprising and could signal volatility to come, but in the meantime, the market environment looks a lot brighter at the tail end of 2023 than it did at the close of a dreary 2022.

“December’s rally was fueled by a further deceleration in inflation and the Federal Reserve’s switch at the last FOMC (Federal Open Market Committee) meeting of the year to a more dovish tone and talk of Fed interest rate cuts in 2024,” said Raymond James Chief Investment Officer Larry Adam. “However, it is important to put the positive year of performance into perspective: 2023 was a reset year as the over 25% return for the S&P 500 only recouped all the losses from 2022.”

While the Dow Jones Industrial Average notched seven record highs in 2023, the S&P 500 closed the year less than 1% from all-time highs. Tech-related sectors were the best performers for the year, as the NASDAQ Composite and its leading artificial intelligence stocks saw its best year since the 1999 tech bubble. And small-cap equities, which had been a significant underperformer for the year, showed signs of a resurgence as it was the best performer in the fourth quarter.

Still, it may be too soon to celebrate the Fed engineering a “soft landing” – a return to the target inflation rate without a recession. For one, inflation remains above the 2.0% target. Two, the lagging effects of its rate hike program continue to cool economic activity. And three, the repercussions of higher economic growth or any other geopolitical event with the potential to disrupt food and energy prices could directly influence inflation and shape future Fed policy.

But even a conservative reading of the Fed’s messaging suggests interest rate cuts to come through 2024. That said, the Fed has demonstrated its commitment to calming inflationary pressures, it appears they are turning their attention to the economy where there are more and more signs of the economy slowing.

Before we continue, let’s take a final look at 2023 by the numbers.

*Performance reflects index values as of market close on December 29, 2023. 

Composite index points to recession

The Leading Economic Index, a composite index from The Conference Board that seeks to forecast turning points in the business cycle, declined for its 20th consecutive month in November, weakening further than expected. The Conference Board said it expects a “short and shallow recession in the first half of 2024.”  

Movement suggests broadening equity market growth

To a significant degree, the incredible performance of a small formation of high-flying, mega-cap tech stocks propped up headline equity indices through 2023, providing a sense of a stronger market than experienced by a more diversified position. The average stock, by comparison, has been in a two-year bear market. Recent activity since the start of the October rally suggests positive movement below the surface, meaning 2024 could bring more opportunity for those stocks left behind. December saw 10 of the 11 sectors finish in the green, with interest-rate sensitive sectors leading the way.

Treasury yields lowered as sentiment improves

Fixed income prices soared, continuing to demonstrate the strength of the market through December. Reflecting improving expectations, the yield on the 5-year Treasury ended November at 4.27% and closed December at 3.85%. The 10-year yield declined from 4.33% to 3.88%. The year’s high interest rates allowed investors an opportunity to lock in elevated income levels while the year-ending price strength provided those participants with positive total returns.

Waning OPEC+ vigilance brings oil prices down

Production discipline among the OPEC+ group, amid a return to pre-COVID demand, has been slipping, bringing oil prices to near 2023 lows in December. Particularly, Saudi Arabia and Russia have expressed displeasure at smaller OPEC members that are flagrantly producing beyond their quota levels, cheating the cartel, in effect.

European central banks yet to message lowering rates

Like the U.S.’s Fed, the European Central Bank and Bank of England held monetary conditions steady through December as economic activity continues to slow. Meanwhile, large-cap equities – particularly German stocks – dashed upward to close the year with strength, as the Eurostoxx 600, a composite index of 600 European stocks, hit 23-month highs. Unlike the Fed, the British and European monetary authorities have not signaled the lowering of interest rates. Investor sentiment has swung toward a growth outlook but fears that higher-for-longer rates could unnecessarily deepen and lengthen a recession could cause investor sentiment to rapidly reverse.  

U.S. and China resume military-to-military talks

An agreement to resume military-to-military communication secured in November at the meeting of President Joe Biden and President Xi Jinping came to fruition in December, ending a 17-month communications impasse between the two world powers’ armed forces. This is generally seen as supporting stability, as military-to-military communications can act as a critical avenue for addressing miscommunications and flare-ups around key geopolitical flashpoints, such as in the Taiwan Strait and South China Sea.

The bottom line

At this time last year, no one could have projected the highs and lows that would follow – the incredible first two quarters, the midsummer reversal, then the even more remarkable end-of-year rally. We start 2024 in much stronger position, owing to the progress made on inflation, and that’s heartening – strength often begets strength. However, sluggish economic growth and the potential for investor sentiment to suddenly shift are potential risks, as is the potential of a recession. That’s worth remembering, even when the forecast is clear.

Investing involves risk, and investors may incur a profit or a loss. All expressions of opinion reflect the judgment of the authors and are subject to change. There is no assurance the trends mentioned will continue or that the forecasts discussed will be realized. Past performance may not be indicative of future results. Economic and market conditions are subject to change. The Dow Jones Industrial Average is an unmanaged index of 30 widely held stocks. The NASDAQ Composite Index is an unmanaged index of all common stocks listed on the NASDAQ National Stock Market. The S&P 500 is an unmanaged index of 500 widely held stocks. The MSCI EAFE (Europe, Australasia and Far East) index is an unmanaged index that is generally considered representative of the international stock market. The Russell 2000 is an unmanaged index of small-cap securities. The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. An investment cannot be made in these indexes. The performance mentioned does not include fees and charges, which would reduce an investor’s returns. International investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility. Investing in oil involves special risks, including the potential adverse effects of state and federal regulation and may not be suitable for all investors. U.S. government bonds and Treasury notes are guaranteed by the U.S. government and, if held to maturity, offer a fixed rate of return and guaranteed principal value. U.S. government bonds are issued and guaranteed as to the timely payment of principal and interest by the federal government. Treasury notes are certificates reflecting  intermediate-term (2 -10 years) obligations of the U.S. government. Companies engaged in business related to the technology sector are subject to fierce competition and their products and services may be subject to rapid obsolescence.

Material created by Raymond James for use by its advisors.

The Housing Outlook: 2024

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

Robert Stein, CFA - Dep. Chief Economist

January 2, 2024

Just because we still think the economy is headed for a recession, doesn’t mean we think the housing market is going to get killed.

The housing market was a mixed bag in 2023: housing starts and existing home sales were weak, while new home sales and home prices rose, in spite of the highest mortgage rates in twenty years. This year we expect modest gains almost all around: modest gains in housing starts, modest gains in sales, and modest gains in prices.

A recession, by itself, would have a negative effect on housing. But there are so many other factors affecting housing that we think the sector would weather the economic storm.

In terms of construction, builders started fewer homes in 2023 than in 2022, which was already down from the COVID peak in 2021. But builders have been consistently building too few homes since the bursting of the housing bubble about fifteen years ago. As a result, we expect a turnaround in 2024. However, the gains should be concentrated in single-family homes; the number of multi-family homes (think apartments and condos) under construction is at an all-time high already.

In terms of sales, it would be hard for the existing home market to get any worse in 2024. Sales have been handcuffed in 2022-23, for two reasons. First, temporary indigestion as mortgage rates rose. Second, homeowners who borrowed money at rock-bottom mortgage rates in 2020-21 have been very reluctant to sell. Who in their right mind would give up a mortgage with a fixed rate of something like 2.75% locked in for fifteen or even thirty years?

But with each passing year a gradually smaller share of homeowners will be locked in with those rock-bottom mortgage rates. Some of them will move anyhow, for one reason or another. In addition, mortgage rates should be lower this year than in 2023, helping boost sales among some prospective buyers and sellers.

Meanwhile, new home sales were up in 2023 and should continue to grow in 2024. Lower mortgage rates should help a little, as will the construction of more single-family homes.

The biggest surprise in the housing market last year was that prices increased consistently after falling in the second half of 2022. Through the first ten months of 2023, the national Case-Shiller index and the FHFA index were both up roughly 6.0%. We think the continued resilience of home prices largely reflects a lack of supply. However, a faster pace of construction in 2024 should put a ceiling on price gains in the year ahead.

The business cycle hasn’t been normal since COVID hit in 2020. COVID led to a massive surge in government stimulus, both monetary and fiscal, to fight widespread and overly draconian shutdowns. That was followed by tighter money in 2022-23, although government spending has continued to gush. Meanwhile, in certain ways, housing is still recovering from the housing bust that followed the bubble that peaked before the Financial Crisis in 2008-09.

Put it all together and we have a recipe for general improvement in housing even as the rest of the US economy slows down.

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Office Holiday Closure

Thanks to all our clients for an amazing year! We look forward to continuing to serve you and help you achieve your goals in 2024. Raymond James offices and the market are closed on Monday, January 1, in observance of New Year's Day.

Tax-efficient strategies for investment properties

Raymond James

Family & Lifestyle

3 smart ways to defer capital gains taxes.

One of the benefits of purchasing property as an investment is the tax benefits that can come with it – both while you own it and after you sell. Applying tax-efficient strategies will help you make the most out of your investment property.

Most such strategies require planning and preparations to be put in place, so you’ll want to do your due diligence and consult with your advisor and other professionals before you assume these strategies apply to your situation.

How to defer capital gains taxes

There are three strategies to consider if you’re seeking ways to defer capital gains taxes upon the purchase or sale of your investment property.

Qualified opportunity zones (QOZ): QOZs are economically distressed communities where new investments, under certain conditions, may be eligible for preferential tax treatment. They're designed to spawn economic development by providing incentives to individual investors or businesses putting capital into the locality. There are more than 8,700 QOZs to invest in across the United States. To get the tax deferral, you must invest through a Qualified Opportunity Fund. Once the property is sold, the seller has 180 days to invest the gains in the fund, and the investment must not be in exchange for debt interest, only equity interest.

1031 like-kind exchange: A 1031 (as they’re commonly called) is a strategy to defer taxes by reinvesting the capital in a “like-kind” property. Proceeds from the sale of a property are held in escrow by a third-party intermediary and used to buy a new property. There are several qualifications that must be met for this exchange. First, the new property must be within the United States and be of similar nature and character to the old property. It must also have a value that is equal to or greater than the old property for maximum benefit and to avoid capital gains taxes completely. The new property must be identified in writing to the intermediary within 45 days of the original property’s sale and you must close on the new property within 180 days of the sale of the original property. These exchanges must be performed without error to avoid owing taxes, so consult your financial advisor and tax professionals.

Installment sales: Another way to help maximize tax efficiency on the sale of an investment property is a payment agreement with the buyer where the buyer makes payments in installments with interest over time. This breaks up the income earned and defers taxes until later years. Installment sales start with partial payment the year following the actual sale. Typically you can get a higher selling price than you would with an all-cash sale and you’ll be collecting interest. Of course, there are some risks for extending payments over time, like risk of default on the arrangement, capital being tied up for a period of time and market and interest rate fluctuations, which could lead to lost income. But the tax benefits may outweigh these risks.

Other investment property tax strategies

There are other opportunities to make your investment property purchase or sale tax efficient. A simple strategy with less formality is to sell your property during lower income years. This will allow you to be taxed in a lower tax bracket than usual, saving on capital gains taxes.

If charitable giving is in your heart and part of your financial strategy, you could contribute to a donor advised fund (DAF). You can make a contribution and enjoy the tax break immediately but decide which nonprofits to donate to later on.

There's also an opportunity to qualify for a low-income housing tax credit (LIHTC) by developing housing targeted at lower income tenants. LIHTC gives investors a dollar-for-dollar reduction in their federal tax liability for providing financing to develop affordable housing for low-income individuals.

One of the benefits of owning investment property is flexibility when it comes to taxes. With a bit of preparation and knowledge, you can decrease your tax burden and maximize your investment. It’s wise to speak with your advisor and other professionals to determine which tax strategies make the most sense for your situation.

Sources: opportunityzones.hud.gov; irs.gov; investopedia.com; seracapital.com; forbes.com; novoco.com

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation.

Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

Donors are urged to consult their attorneys, accountants or tax advisors with respect to questions relating to the deductibility of various types of contributions to a Donor-Advised Fund for federal and state tax purposes.

Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of Raymond James, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.

How Does SECURE Act 2.0 Change Saving for Retirement?

Raymond James

Retirement & Longevity

Washington Policy Analyst Ed Mills outlines key components of the new legislation.

The year-end fiscal 2023 government funding bill contained legislation that makes the most significant changes to the U.S. retirement savings system in decades. The SECURE 2.0 Act builds on retirement savings changes passed in 2019 and contains new provisions that further raise the required minimum distribution (RMD) age, shift to automatic plan enrollment and provide for new matching/emergency withdrawal opportunities.

Most of the key provisions are effective in the 2024-2025 timeframe, but smaller adjustments (such as increasing to 73 the age for starting RMDs) are effective in 2023.

The SECURE 2.0 Act is the second bipartisan bill designed to boost access to retirement savings.

The SECURE 2.0 Act is a follow-up bill to the original SECURE Act passed in 2019, which began the process of increasing the RMD age from 70 1/2 and increasing participation in retirement savings plans through various tax incentives. The Act also eased administrative rules for employer-sponsored retirement plans.

The new legislation goes well beyond the original iteration and seeks to expand participation in retirement savings plans through mandatory enrollments, as well as increased flexibility in the individual use of advantaged savings accounts. The Act also extends the savings timeframe before RMDs are required to age 75 by 2033 – an almost five-year increase from the original RMD distribution age.

Overall, the changes enacted by the legislation (to be phased in over a multiyear period) are likely to boost the asset base for asset managers through increased participation and interest in retirement savings plans.

Key changes will be phased in over a multiyear period. 

The Act also features an allowance for matching contributions to be made for student loan payments (expanding the retirement savings of younger adults), higher catch-up limits for those ages 60-63, and additional opportunities for penalty-free withdrawals and lower penalties for missed RMDs that are corrected.

Eligible employees will soon be automatically enrolled into new employer-sponsored retirement plans. Under-the-radar provisions in SECURE 2.0 include an expansion of multiple employer plans (MEPs) and pooled employer plans (PEPs) to include 403(b)s, 529 to Roth IRA rollovers (to a maximum of $35,000), and employer-offered de minimis financial incentives (such as gift cards or other financial awards) to increase employee participation in retirement plans.

Here are more detailed descriptions of the key provisions in SECURE 2.0:

• Automatic enrollment: Eligible employees are required to be automatically enrolled in new 401(k) and 403(b) retirement savings plans with a contribution between 3% and 10%, rising by 1% annually (up to 15%) unless employees opt out. Automatic enrollment is effective starting 2025.

• Higher RMD age: The RMD age increases to 73 in 2023 and 74 in 2030, and bumps to 75 in 2033.

• MEP and PEP access for 403(b) plans: Access to multiple employer plans (MEPs) and pooled employer plans (PEPs) is expanded to include 403(b) plans.

• Matching contributions for employee student loan payments: Plan sponsors may make matching contributions to 401(k), 403(b) and simple IRA plans for qualified student loan payments made by employees effective 2024.

• Expanded emergency expense distribution allowances: Emergency distributions of up to $1,000 are permitted for unforeseeable or immediate financial needs relating to personal or family emergency expenses once per year, to be paid back within three years (effective 2024).

• Tax-free and penalty-free rollover from 529 to Roth IRA: Beneficiaries of 529 college savings accounts are permitted to rollover up to $35,000 from a 529 account in their name to a Roth IRA account. Rollovers are subject to IRA annual contribution limits and are available for 529 accounts that have been open for more than 15 years. Rollovers are permitted starting 2024.

• Reduced penalty for failure to take RMDs: The 50% tax penalty for failure to take RMDs is reduced to 25%. For IRAs, the tax is further reduced to 10% if corrected. Reduction is effective as of the bill’s signing.

• Higher catch-up contribution allowances. For those ages 60-63, the catch-up contribution limit is raised to the greater of $10,000 or 50% higher than the regular catch-up amount. The higher allowance is effective starting 2025.

• Emergency withdrawals for domestic abuse survivors: Emergency withdrawals for the expenses of individuals escaping domestic abuse situations are provided at the lesser of $10,000 or 50% of the value of the account, to be repaid over three years with a refund of income taxes paid on the repaid amount. Withdrawals permitted starting 2024.

• Emergency withdrawals for disaster relief: Withdrawals of up to $22,000 from employer retirement accounts or IRAs are permitted for individuals affected by a federally declared disaster. These emergency-related withdrawals are permitted for disasters occurring on or after January 26, 2021.

• Expanded administrative cost tax credit for new businesses: A 50% tax credit for administrative costs incurred by new businesses is raised to 100% for companies with 50 or fewer employees effective 2023.

• Employer-offered incentives: De minimis financial incentives (such as gift cards or other financial awards) are permitted for sponsor efforts to boost employee participation in retirement savings plans, effective as of the signing of the bill into law.