Market-Moving News[i]
Growth
2Q24 GDP growth came in at 2.8% q/q saar compared to expectations of 1.9% and above last quarter's 1.4%. Notably, the core PCE index rise to 2.9% was slightly firmer than expected but was below the 3.7% increase in 1Q, while consumer spending was a solid 2.3%. Overall, the report points to less softness than the 1Q print suggested. While the U.S. economy has cooled from its 4.1% pace in 2H23, growth averaged a solid pace of 2.1% in 1H24.
Jobs
The July jobs report showed a significant slowdown in job gains, growing just 114K. In addition, 29K jobs were removed from the prior two months, bringing the three-month moving average down to 170K. The unemployment rate rose 20bps to 4.3%, which triggered the Sahm Rule (an empirical observation that predicts recession when the three-month moving average of the unemployment rate exceeds its lowest level over the prior 12 months). Lastly, wage growth continued to cool with July average hourly earnings rising by 0.2% m/m and 3.6% y/y, the slowest annual increase since 2021. Overall, this report showed a labor market that is cooling a little too quickly for comfort.
Profits
The 2Q24 earnings season is wrapping up! With 87% of market cap having reported, analyst estimates for pro-forma earnings per share (EPS) are currently tracking at $60.20. If realized, this would represent growth of 10.4% y/y and 6.6% q/q. Across sectors, information technology and communication services are expected to deliver another quarter of double digit earnings growth, while health care is expected to bounce back after a challenging first quarter. Elsewhere, some of the more cyclical sectors, like industrials and materials, are expected to see earnings fall relative to last year. As wage pressures fade and companies focus more on cost management, margins are expected to be the largest contributor to earnings growth.
Inflation
The June CPI report showed a welcome cooling of inflationary pressures. Headline CPI fell 0.1% m/m while core CPI rose just 0.1%, bringing the annual gains to 3.0% and 3.3%, respectively. Energy prices fell 2.0% m/m, led lower by gasoline, while lower new and used vehicle prices allowed core goods prices to fall 0.1% m/m. Across core services, shelter inflation rose just 0.2% m/m, breaking a near three-year streak of inflation at or above 0.3%, and auto insurance bounced 0.9% m/m after falling in May. Airfares also looked weak, falling 0.5% m/m. Overall, this report showed that disinflationary momentum is regathering steam, and price pressures should continue to ease through the summer.
Rates
At its July meeting, the FOMC voted to hold rates steady at 5.25%-5.50%, as expected. The FOMC statement contained subtle but important dovish tweaks: more confidence on the path of inflation, some concern about a softer labor market and an equal focus again on inflation and full employment. During the press conference, Chair Powell hinted several times that an upcoming rate cut in September might be “on the table.” Given a weaker jobs print following the meeting, markets are now expecting the Fed to cut rates more and at a faster pace this year.
Risks
A labor market cooling at an uncomfortably fast pace, presenting challenges to risk assets. A slow-moving economy is more vulnerable to any kind of shock. Moderating economic growth could weigh on earnings, leaving markets vulnerable at stretched valuations.
Investment Themes
Fixed income offers attractive levels of income and protection against an economic downturn. Broadening profit growth should represent opportunities outside of the Magnificent 7 and support a more inclusive rally. Powerful structural and cyclical tailwinds should support select international markets.
The Week Ahead: Aug 12-16
- Monday
- No major reports scheduled
- Tuesday
- Producer Price Index
- Wednesday
- Consumer Price Index
- Thursday
- Retail Sales
- Friday
- No major reports scheduled
- No major reports scheduled
Philosophy Quote of the Week[ii]
Take Charge and End Your Troubles”
“You’ve endured countless troubles – all from not letting your ruling reason do the work it was made for – enough already!”
Marcus Aurelius, Meditations, 9.26
Tax Tips[iii]
Save Taxes with 529 Education Plans
529 Education plans have been around since 1996 and are officially known as a “Qualified Tuition Program.” This is an education vehicle the provides for money to be set aside and/or invested and later used for someone (usually a child) to be able to attend school and have the education paid for. The big benefit is that the earnings or income is NOT subject to tax, if the money taken from the 529 plan is used for education purposes.
Each state can offer a Prepaid Tuition Plan or a Savings Plan. You do not need to buy a Savings Plan in the state you live in. If you buy the Prepaid Tuition Plan, it must be used in the state’s schools.
You can own the plan and set it up for your children, grand-children, relatives, friends, or even yourself. Beneficiaries can be changed without any problem. There is an Owner or Custodian and one beneficiary per plan. The beneficiary can be changed at any time – and you can roll the money from one 529 plan into another without restrictions.
How does it work?
You set up a 529 plan and fund it with money.
How much?
There are certain limits (always consult with your tax professional) but most plans have a minimum of around $250 and you can put up to $110,000 in per year. Whatever the account earns while it is open is tax-deferred and completely tax-free when the money is used for eligible education purposes.
What schools can be funded with 529 Plans?
Any school, public, private or faith-based (1st grade thru 12th grade). Any college, university, apprenticeship, vocational, trade school, or primary, secondary and post-secondary institution that can participate in a student aid program administered by the Department of Education.
To get the money tax-free it must be spent on Eligible Education Purposes. Examples include tuition, resource fees, books, supplies, registration fees, computers, technology, hardware, software or related equipment – even internet services and room & board. For 2023 you can use 529 plans to repay student loans and interest, up to $10,000.
Many states offer tax deductions for contributions made to 529 plans – so consult with your tax professional!
Look Out for the Catch!
If the money isn’t used for education, there is tax on the earnings amount withdrawn and a 10% penalty.
Key Points
- 529 Plans are either Prepaid Tuition Plans or Savings Plans
- Anyone can establish a 529 Plan for anyone – even yourself
- 529 Plans are available for primary, secondary, religious, post-secondary, apprenticeship, vocational and trade school educational institutions
- 529 Plan withdrawals can be used to repay student loans
- The longer you wait to withdraw the funds, the longer the tax-deferral period of the plan
- Earnings are tax-deferred and tax-free if used for qualified Eligible Education Purposes
- Eligible Education Purposes include almost everything, but amounts are limited for primary and secondary schools
- Check your state to determine what deductions are available for 529 Plan contributions
- Watch out for tax and the 10% penalty if non-qualified withdrawals are taken
Health Tip of the Week[iv]
Top 10 Myths About Sunscreens
Sunscreen is essential for protecting your skin from early aging and skin cancers, which often are a direct result of the sun's ultraviolet, or UV, radiation.
Even with increased awareness of dangers from the sun, more people in the U.S. are diagnosed with skin cancer each year than all other cancers combined. By age 70, at least 1 in 5 people in the U.S. will develop skin cancer.
It's more difficult to treat wrinkles, sunspots and leathery skin once the damage is done, so prevention is key.
Check out the top 10 myths about sunscreen before you venture outdoors:
Myth #1: It doesn't matter what time of day I go out in the sun.
Fact. In North America, the sun is at its peak between 10 a.m. and 4 p.m. That's when UV rays are strongest and your risk of skin damage is the greatest. However, this doesn't mean early mornings and late afternoons are without risk. You need skin protection from sunrise to sunset.
Myth #2: I can't get sunburned or suffer skin damage when it's cloudy, rainy or during the winter.
Fact. If the sun is up and you're outdoors, you're exposing your skin to UV radiation. Even on cloudy days, up to 90% of the sun's rays still can penetrate your skin. Water, sand and snow can reflect the sun, which exposes your skin to indirect UV rays. No matter the weather or the season, applying sunscreen every day is a must.
Myth #3: I tan but don't burn, so I don't need sunscreen.
Fact. There is no such thing as a safe tan. Tanning is your body's response to UV damage and a sign that your skin has been injured. Even getting just a "glow" damages your skin's DNA, and increases aging and your risk of skin cancers. A tan will not protect your skin from sunburn or other sun damage.
Myth #4: I don't need sunscreen because I have dark-colored skin.
Fact. Dark-colored skin does not burn as quickly, although it still is susceptible to sun damage, including dark spots, wrinkles and sunburn. Regardless of your skin tone, do not skip the sunscreen.
Myth #5: My makeup has sunscreen. That's all I need.
Fact. Foundation with a sun protection factor, or SPF, of at least 30 provides some sun protection, but is less protection than traditional sunscreen. Also, most people typically apply makeup to just the face, and not the throat, back of the neck or other sun-sensitive areas. Be sure to apply a layer of traditional sunscreen under your foundation, as well as any areas that will be exposed to the sun.
Myth #6: I won't get enough Vitamin D if I wear sunscreen.
Fact. Even well-applied sunscreen lets 2% to 3% of the sun's ultraviolet B rays reach your skin, and your body needs only a little to produce vitamin D. Rather than risk skin cancer, it's better to seek your vitamin D needs through a healthy diet or supplement.
Myth #7: Any kind of clothing protects my skin from getting too much sun.
Fact. Darker, heavier fabrics with tighter weaves offer more protection than lightweight and light-colored clothing. You also can get high-tech protection and breathability from many new fabrics. Look for the ultraviolet protection factor, or UPF, designation on apparel. A UPF of 30 to 49 offers good protection, while a UPF of 50 or more rates as excellent. The more skin you cover, the better. Don't forget to accessorize your outfit with a wide-brimmed hat and UV-filtering sunglasses.
Myth #8: A higher SPF gives significantly more protection.
Fact. No sunscreen blocks 100% of the sun. Sunscreen with an SPF of 100 blocks only 1% to 2% more of the sun's rays than one with an SPF of 30, which already blocks 97% of rays. Also, SPF does not affect how long you will be protected. Protection typically lasts two hours or less for all sunscreens. Look for a broad-spectrum — blocks UVA and UVB rays — water-resistant sunscreen with an SPF of at least 30. Reapply it frequently, especially after being in the water or sweating.
Myth #9: All sunscreens are created equal.
Fact. Not necessarily. There are two primary types of sunscreen: physical and chemical. Both options have pros and cons.
Physical sunscreens, also called mineral sunscreens, work like a shield and sit on the surface of your skin to deflect the sun's rays. They contain the active ingredients zinc oxide or titanium dioxide. Mineral sunscreens are considered safer for you and the environment. They also are best for people with sensitive skin, children and those with pigment concerns, such as melasma. While traditional mineral sunscreens left a white residue on your skin, tinted and less-visible mineral sunscreens now are available.
Chemical sunscreens work like a sponge. They absorb the sun's rays into the skin and convert the UV light into heat, which then dissipates. In the U.S., these sunscreens contain one or more of these active ingredients: oxybenzone, avobenzone, octisalate, octocrylene, homosalate and octinoxate. Chemical sunscreens are easier to apply and don't leave a white residue on the skin. However, they can irritate the eyes and cause allergic reactions on some people's skin.
If possible, avoid sunscreens with oxybenzone because this chemical may disrupt hormones and cause allergic skin reactions. Also, pass on spray sunscreens, which are not nearly as effective as those applied by hand.
Also avoid so-called sunscreens, such as cocoa butter, safflower, olive, jojoba, baby or coconut oil that provide no sun protection.
Myth #10: Sunscreen never goes bad.
Fact. The Food and Drug Administration requires that all sunscreens retain their original strength for at least three years. Check the bottle for an expiration date. If your sunscreen has expired or been exposed to extreme heat or cold, toss it. If you're using sunscreen every day when outside, a bottle should not last long.
Melanie Dixon, M.D., practices family medicine, with a special interest in dermatology, in Mankato, Minnesota.
[i]https://am.jpmorgan.com/us/en/asset-management/protected/adv/insights/market-insights/market-updates/economic-update/ accessed 08.12.2024. https://www.kiplinger.com/investing/economy/this-weeks-economic-calendar, accessed 08.12.2024.
[ii] Holiday, Ryan. The Daily Stoic: 366 Meditations on Wisdom, Perseverance, and the Art of Living. Kindle edition, page 242. Accessed 08.12.2024.
[iii] Hockensmith, Robert F. 52 Ways to Outsmart the IRS, Weekly Tax Tips to Save You Money. Kindle edition, page 145-146, accessed 08.12.2024.
[iv]https://www.mayoclinichealthsystem.org/hometown-health/speaking-of-health/myth-or-fact-coconut-is-an-effective-sunscreen, accessed 08.12.2024.