Stocks Advanced Cautiously In July – Domestic Equity Overview

Concerns about the Delta variant and a rapid rise in infections drove equity volatility higher as economic projections and earnings growth estimates were reevaluated. Equity markets were generally resilient to renewed restriction mandates in July.

Analysts are cautious regarding continued earnings growth in certain industries as renewed restrictions imposed by local, state, and federal government agencies, as well as by private companies, may inhibit recent progress made in sectors including travel, leisure, and restaurants. Regardless, major equity indices traded higher in July as recovery expectations and post-pandemic momentum fueled the market, with the S&P 500 up 2.2% for the month. (Sources: Bloomberg, Reuters)

Rates Pulled Back In July – Fixed Income Overview

Treasury bond yields fell as markets reacted to increasing infections globally. The 10-year Treasury bond yield closed at 1.24% on July 31st, down from 1.45% at the end of June.

The Federal Reserve voiced concerns regarding how surge in Delta variant cases may impact economic activity. Monetary policy support that has been in place since early 2020 will not be withdrawn until “substantial further progress” is made, the Fed announced. The Fed is holding off on plans to begin indirectly raising interest rates until conditions improve. (Sources: U.S. Treasury, Federal Reserve)

65-Year Olds Projected To Exceed 18-Year Olds – Domestic Demographics

Demographics and population data are carefully tracked by the Census Bureau in order to determine what the United States may look like in the future.

Minors under 18 years of age in the U.S., of whom there are over 73 million, currently outnumber the 46 million Americans who are 65 and over. Younger citizens typically spur economic growth with consumer demand and provide essential workers for the labor market. The demographical make-up of the country was driven by the baby boom generation for decades. Those born between 1946 – 1964 shaped the economic makeup of the country while providing economic growth and skilled workers. The first wave of baby boomers reached 65 years of age in 2011, initiating a massive shift of individuals from working status to retirement status.

The Census Bureau estimates that by 2035, those age 65 and older will begin to outnumber those 18 years old and under. The number of 65-year olds and above will rise much faster than those 18 and younger, creating a strain on the U.S. job market. By 2050, it is estimated that there will be nearly 90 million Americans aged 65 and older. The shrinking pool of minors will eventually lead to lower population growth and potentially lower economic growth. A growing elderly population is expected to impact already-strained Medicare and Social Security benefits.  (Source: U.S. Census Bureau)

Tax Repercussions Of The Child Tax Credit – Tax Planning

In the past month, around mid-July, millions of Americans received a tax credit deposit to their bank accounts. This government payment was part of the federal pandemic relief program that allocated billions of dollars to eligible families with children.

In March of this year, Congress expanded the child tax credit to $3,600 per child for the year, from $2,000. The increased credit was a response to the financial fallout of the pandemic, in order to assist families nationwide across several income brackets. The IRS made the first of six monthly payments in July to eligible families.

The tax credits are based on the most recent tax return filed, so if 2020 hadn’t been filed yet then payments were based on 2019 tax returns. There is an income phase out at $75,000 for single filers and $150,000 for most married filers. Above these income limits, the tax credit reduces by $50 for every $1000 of additional income.

If actual 2020 income for a family was higher than the tax return used by the IRS to calculate payments, the family may encounter tax implications once the updated tax returns are filed. So if income is higher in 2020 than in 2019, the IRS used the 2019 return to determine the amount of the tax credit, then taxes may be owed to account for overpayment.

The maximum tax credit for 2021 is $3,600 for each child under age 6 and $3,000 for each child ages 6-17 through December 31, 2021. Half of the total credit amount will be paid in advance monthly payments starting July 15, 2021 and the other half will be credited when 2021 income tax returns are filed. In order to avoid a possible tax consequence from the advance payments, the IRS is allowing taxpayers to un-enroll from the advance monthly payments. The IRS link to un-enroll is https://www.irs.gov/credits-deductions/child-tax-credit-update-portal. (Sources: IRS, TaxPolicyCenter)

CD Rate History – Historical Note

Certificates of Deposits (CDs) used to serve as a viable source of income for retirees and conservative savings asset for working individuals. However, with persistent ultra-low nominal interest rates that often translate to negative real rates given inflation, the viability of CDs for purposes of investing has been severely limited.

A CD comes with notable liquidity constraints. Banks restrict access to the funds until the maturity date of the investment and impose penalties for early withdrawals.

Data compiled by both the FDIC and the Federal Reserve over the decades has carefully tracked CD rates offered by banks nationwide. The average 3-month CD as of this past month has a rate of 0.09%, a fraction of a comparable 3-month CD in 1983.

It’s difficult to offset inflation with current CD rates. When a 3-month CD paid 13.78% in 1979, the inflation rate of 13.3% that same year translated into earning half a percentage point difference in real terms net of inflation. The challenge today, even with low inflation relative to 1979, is that the average 3, 6, and 12-month CD rates are below the current rate of inflation. (Source: Federal Reserve Bank of St. Louis)