Last week I provided updates on a couple of timely developments in Social Security and bitcoin. This week I’m following up on the same topics.
Social Security COLAs –
We learned recently how the Social Security Administration is bumping payment amounts in 2021 by 5.9%, an increase not seen in decades. The SSA is doing so in response to a spike in inflation that’s becoming more apparent every day.
But this raises an obvious question that I should have included in my post last week.
If you’re planning to wait on starting Social Security until 67, or even 70, should you start drawing your benefits early to take advantage of the big cost-of-living adjustment, or COLA?
This is a good question with a short answer. No, you shouldn’t file early to take advantage of the 5.9% bump because you’re effectively getting an 8% bump per year by waiting.
Of course, if you need the money to live on you might want to start early, ideally after doing some planning work to review your options. Instead, waiting grows your benefit base and this base receives future COLAs, so you want it to be as large as possible. And waiting is the simplest way to grow your base, short of working longer and paying more and higher taxes into the system. This waiting zone currently maxes out at age 70.
If you draw your benefits before your Full Retirement Age, often 66 and some months or an even age 67, your base shrinks by a fraction of a percentage point for each month you’re early. That’s a dramatic reduction if you started your benefits at the earliest possible age of 62. The bottom line for retirees is that since the filing decision can be made any time after you turn 62, try to wait as long as possible. If you can hold out long enough, each month you wait beyond your FRA incrementally adds to your base at the rate of 8% per year.
How do you get by in the meantime? Ideally you’d tap into cash savings, or even sell investments in a non-retirement account. Doing either usually saves you on taxes and could even create some planning opportunities like doing Roth Conversions or realizing additional capital gains for “free” if you’re in a low enough tax bracket.
Deciding when to start taking Social Security benefits can be difficult and definitely goes beyond the straightforward financial stuff. Many folks are concerned that the program will run out of money and won’t be around for them when the time comes. This is a rational fear given the hyperbolic headlines we see from major news outlets. The reality is more complicated, however, and hopefully not as dire as it often seems. Try not to let fear drive a decision like this.
Here’s an article from Investment News with more information on this topic.
Home ownership has long been seen as a critical component to success in America. This has so impacted our psychology that many renters feel inadequate for not taking part in what has been called the ownership society. So it’s fair to ask how far will (or should) you go to be a homeowner. It seems declining affordability is causing some buyers to get creative.
GW Bush wasn’t the only president to aim for growing home ownership, of course. FDR’s New Deal and the post-WWII economic and baby boom helped grow our home ownership rate from 44% in 1940 to about 62% by 1960. Growth continued before peaking at 68% in 2007 and obviously took a hit during the Great Recession. We’ve been in the mid-60% range ever since.
While average on the world stage, our current home ownership rate of about 64% seems poised for more growth. There’s so much demand chasing not enough supply. Even amid what many term an affordability crisis, the drive to own a home is so strong that some are looking for alternatives to traditional home ownership.
For example, there’s a growing number of people buying homes in partnership with each other, something known as co-buying. We’ve all heard of this in terms of buying a vacation property with a friend or even with strangers as part of an investment scheme, but more buyers are using co-buying to buy a primary residence. They live together, share expenses, and potential home equity growth as well. They also share risk, which can work out badly if not planned for and if, unfortunately, they’re unlucky.
Honestly, I didn’t know co-buying was that big of a thing, but I’ve been reading about it and wanted to share some information. Ultimately, it’s an interesting development in the ongoing saga of rising real estate prices and what’s sustainable longer-term.
First, let’s review some charts and commentary from my research partners at Bespoke Investment Group. They conduct a monthly survey of 1,500 consumers based on Census data and often come up with interesting analysis. This time it’s about the rise of Millennials and Gen Z as homeowners. This data confirms the anecdotes about younger folks being eager to buy and also excited to fix up their space.
Last week turned out well for the stock market considering how the week began. Investors digested some bad news for most of Monday, realized some of it wasn’t so bad on Tuesday, and then bought back what they sold for much of the rest of the week. This was a good example of how odd markets can sometimes behave, even amid an otherwise healthy economy.
What might also have helped sooth investor worries was updated data from the government on the financial health of the U.S. consumer. We make up 69% of GDP, a historic high point as of the second quarter, so the overall financial stability of households is incredibly important for the economy. The data is encouraging so I want to share some of it with you.
While the data comes from the Fed the charts and commentary below come from my research partners at Bespoke Investment Group. What’s interesting this time around versus the Great Recession, for example, is how well the average consumer is fairing right now. They have cash in the bank, low consumer debt, and haven’t gone crazy using their homes as ATMs. All opposite from where we were during the mid-2000’s.
One takeaway for investors is that a healthy consumer equals a healthy economy, at least for the 69% of businesses catering to them. And given that our government is potentially adding trillions in more spending to the system, it’s hard to imagine the economy and the markets turning really nasty anytime soon given this backdrop.
That doesn’t mean markets won’t be volatile along the way. They’re likely to be and are again today. This is especially true during this time when the unthinkable seems to happen with regularity. There are simply too many balls in the air, so to speak, for investors to juggle that they’ll be prone to react in unexpected ways. You don't have to sell and bury everything in a jar, just be prepared.
Continue reading below for the charts and brief commentary from Bespoke.
There’s a couple top-of-mind items as I sit down to write this morning so I’m going to break this post into two parts. The first is an update on Social Security and the second has to do with bitcoin. Let’s jump right in, shall we?
It’s always nice to get a pay raise. Often you have to ask (or beg) for one but sometimes it just happens. Fortunately for Social Security beneficiaries the latter is the case starting in 2022.
We’ve known about the expected bump coming for Social Security beneficiaries given how much inflation there’s been lately, we just didn’t know how big the bump would be. Last week the benevolent folks at the Social Security Administration announced a 5.9% increase in benefit checks beginning this January. That increase is huge and hasn’t been seen since 1982 when payments rose by 7.4% (and the two prior years had double digit increases – lots of inflation back then, of course)! The closest since then was 5.8% for payments in 2009. While one could argue that an almost 6% raise still isn’t enough these days, it’s much better than the 1’s and 2’s, even 0’s, we’ve seen during the last decade.
How did the SSA come up with 5.9%? We’ve discussed this previously, but as a reminder the Bureau of Labor Statistics calculates a variety of inflation metrics and the SSA looks at one called CPI-W, as mandated by Congress. They do this every third quarter each year and compare to the same period the year prior. If there’s inflation they round the number to the nearest tenth and that sets the benefit increase for the next year beginning in January (but the first payment is actually made at the end of December).
The bottom line is that this should be welcome news to anyone living on a fixed income. The typical monthly bump should be around $92 based on the average benefit payment of about $1,559 per month. That’s taxable for some folks, of course, but even after adjusting for taxes the increase might cover a utility bill, help pay for Medicare, or otherwise be more meaningful than last year’s $20 average.
Bumps like this are a double-edged sword, of course, and we’ll have to see how 2022 plays out, how inflation behaves, and what the next raise from the SSA might look like.
Here’s a link to some general information about this from the SSA’s website.
US and global stock markets performed well for much of the summer before faltering just prior to the end of the third quarter (Q3). Investor confidence took a step back as prices fell and volatility rose. The downward slide was due to a host of issues that festered throughout Q3 but remained unresolved as the calendar shifted quarters.
Here’s a roundup of how major markets performed during the third quarter and year-to-date, respectively:
US Large Cap Stocks: up 0.6%, up 15.9%
US Small Cap Stocks: down 4.3%, up 12.3%
US Core Bonds: basically flat, down 1.7%
Developed Foreign Markets: down 1.1%, up 8.4%
Emerging Markets: down 8.7%, down 2.1%
September has historically been one of the worst months for stocks. According to Bespoke Investment Group, the past 20 years has only seen positive returns 38% of the time for the S&P 500 during September. Add in a long period of low volatility mixed with a waning-but-still-concerning Delta variant, a potential government shutdown and debt default, trillions of potential new spending from Congress, and then a looming “Lehman Moment” coming out of China late in the month, and it’s no surprise we saw a rocky September.
Across sectors, the Financials and Utilities sectors fared best for Q3 as a whole, while Industrials and Materials performed the worst. But during September Energy was up almost 9% while the other major sectors finished in the red, with most down 5% to 7%. Developed foreign markets followed suit, down about a percent for the quarter and about 3% during September. The main emerging markets index was down almost 9% for Q3 and about 4% for September on concerns emanating primarily from China, Hong Kong, and Brazil.
While the surge in volatility was due to many factors coming together seemingly all at once, one of them, inflation, has been of growing concern at least since the pandemic lows in 2020. Since then the Federal Reserve has pumped trillions of dollars into the financial system to help support the economy and markets. Congress added its own cash as well. This spending was meant to be inflationary but controllable, or at least short-lived. We seemed to reach a point of consternation when inflation numbers through August showed prices rising by 5.3%, a number not seen for at least a decade. In response, the Fed continued to profess being relatively unconcerned about rising prices and reiterated it can move to control inflation if needed.
Along those lines, bonds were volatile during Q3, although the changes were small when compared to the stock market. The yield on the 10yr Treasury, a major benchmark, began the quarter at about 1.4%, then sank to almost 1% before reaching about 1.5% at quarter’s end. These moves kept major bond indexes about flat for the quarter. Longer-term bonds were negative.
Another factor causing market volatility was growing tension around the debt ceiling, an arbitrary limit Congress sets for our nation’s borrowing that has been around for over 100 years. Since then it’s never been reduced, only extended many times, and sometimes temporarily suspended as it was last year. This year Congress has to raise it or risk running out of room to borrow to pay government debts. The latter would mean “default” and is very similar to a household running out of available credit as the bills keep coming due. But since the federal government can always create more money where households can’t, debt ceiling debates are essentially an opportunity for political theater that moves markets and scares a lot of people unnecessarily. The rhetoric picked up steam late in September, but the issue was left unresolved as the quarter ended.
Investors also focused on spending plans in Congress. There was short-lived concern that the government would be forced to shut down at the end of September, but that risk was pushed off until December. Congress also left in the air multi-trillion-dollar spending packages that would alter the tax code, retirement savings, and personal banking, just to name a few areas that would be of direct concern to investors. While more spending would certainly benefit the economy in the short- and medium-term, as the quarter waned investors grew uneasy about what the final bills might contain and how these provisions would play out in the real economy.
But people in the real economy seem to be doing pretty well, at least on average. According to government statistics consumers have more cash in the bank, more home equity, and less consumer debt than before the Great Recession. Rising stock prices and a hot housing market and have helped folks who hold these assets feel the so-called wealth effect which increases confidence. And government subsidies have helped those who don’t (as well as many who do) shore up their personal balance sheets. In short, there’s still a lot of spending money out there and this should help keep the economy growing.
This continued growth is expected to be a tailwind for the stock market as we enter the fourth quarter. And just as September is often a bad month for stocks, the winter months are usually good. I wouldn’t expect a cakewalk, however. Volatility is likely to be with us for awhile as we work through the variety of issues alluded to above.
Yesterday was nasty for the stock market and this followed a couple weeks of downward slide. That’s a rather abrupt shift from a long run of low volatility and solid returns since the pandemic lows. So what’s going on with the markets right now? Put simply, investors are in a bad mood after digesting too much bad news.
Even with all the technology, markets are still fundamentally human and are absolutely susceptible to mood swings. Some even suggest that the stock market has manic depressive tendencies. I’m inclined to agree. Start piling on bad news, even if it’s not all directly tied to the markets and economy, and the mood can go from ebullient to gloomy almost overnight. This might seem odd given what the market has shrugged off in the last 18 months, but nobody said it’s predictable.
Analyst outlook is solid, but right here right now the mood has turned sour. Individual investors had been growing increasingly bullish during the summer but turned sharply bearish as negative news began to mount.
The gut punch of Afghanistan policy. The delta variant, White House mandates, and fresh economic concerns. Growing consternation about Fed policy and the direction of interest rates. Congress debating more major spending initiatives and another major tax overhaul amid self-imposed tight deadlines. Another debt limit debate and U.S. default scare looming with all the corresponding rhetoric. And then news this past weekend that the second largest property developer in China could go bust, potentially leading to contagion. That sort of news out of China usually wouldn’t be such a big deal on a day that saw investors in a better mood. That wasn't yesterday, unfortunately.
While these topics are being covered at length by many, the most pressing issues for investors are tax changes, more spending, and the debt ceiling debate. Along these lines I wanted to share a recent podcast from Michael Townsend, Schwab’s rep in Washington. Michael is a level-headed non-partisan who reports on all things D.C.-related. In this episode he breaks these issues down and discusses his growing concern with how things are evolving in Congress.
Even though I admit to feeling the mood myself lately, I’m not overly concerned from an investment standpoint. We have to deal with risk daily and I’ve been reminding myself in recent months how lucky we’ve been to see the kinds of investment returns we’ve had with such low volatility. That can’t last forever and a spike in “vol” like this is good for markets. It shakes things up a bit, creates opportunities for rebalancing, and allows new money to be put to work at lower prices. I wish volatility wasn’t so on-again-off-again, but that’s been the case for years now. We play our hand with the cards we’re dealt, right?
As I write this Tuesday morning it’s good to see the futures markets bouncing a bit from yesterday’s close. It was also good to see “the smart money” start buying in the last 15 minutes or so of yesterday’s market, causing the Dow to close down about 614 points, which was an improvement from being down over 900 at one point. That brightened the mood a smidge, but not like a strong Turnaround Tuesday would. We’ll see how things play out in the coming days.
