Bob’s Journal for 12/23/21

Capture a 7.12% Risk-Free Yield

I always warn people that there’s a lot of risk behind headlines such as the one above, but that’s not the case this time.

You can capture a 7.12% yield, and it’s guaranteed by the U.S. government. The yield is available through April 2022.

You can earn the high yield on the new Series I Savings Bonds, also known as I-bonds. An I-bond is a savings bond that earns both a fixed interest rate and a rate that is reset twice annually based on inflation.

The rise in inflation in 2021 caused the variable yield on the I-bonds to rise to the point that the new bonds will pay 7.12% through April.

The bonds pay interest for 30 years or until you cash them in, whichever occurs first.

There is a catch. There are limits to who can buy I-bonds and how much you can invest in I-bonds. 

Buyers must be either U.S. citizens, U.S. residents, or civilian employees of the United States. Generally, only individuals can buy the bonds.

To buy an I-bond you have to open a TreasuryDirect account with the U.S. Treasury. There are no fees for buying or selling the bonds through the account.

If you buy the bonds in electronic form, you can invest a maximum of $10,000 in I-bonds during a calendar year. An alternative is to buy paper bonds, in which case you can invest only $5,000 in the bonds during a calendar year.

The limits apply separately. You can buy $10,000 of electronic bonds and $5,000 of paper bonds in a calendar year. The limits apply per individual. In a married couple, each spouse can buy up to the maximum individual limit.

Visit the TreasuryDirect web site for more details. 

An Overlooked 40th Anniversary

In 2021, we marked the 40th anniversary of a key benefit for taxpayers.

In the Economic Recovery Tax Act of 1981 (ERTA), key sections of the tax code were indexed for inflation for the first time.

President Ronald Reagan had championed inflation indexing of the tax code since 1977, but his first draft of ERTA didn’t include the provision. Budget analysts said indexing would cost too much and force other tax cuts to be reduced or eliminated.

But Senator Robert Dole served as Chairman of the Senate Finance Committee at the time and also championed indexing. He insisted that indexing be a key component of ERTA. Once indexing was added to the bill, President Reagan aggressively supported it.

The result was inflation indexing of income tax brackets, personal exemptions and the standard deduction beginning in 1985. Treasury Secretary Donald Regan said indexing was his favorite part of the law.

Since then, many other provisions of the tax code have been indexed for inflation and most new provisions routinely include inflation indexing.

Without indexing, inflation causes automatic tax increases that Congress doesn’t have to enact. A person’s nominal income can increase because of inflation. The person’s purchasing power remains the same or even declines, but income taxes increase because the higher nominal dollars are taxed and might push the taxpayer into a higher income tax bracket. Also, tax breaks such as the standard deduction would be less valuable each year and retirement plan contribution limits wouldn’t increase each year without indexing.

We can see the automatic tax increases caused by inflation in sections of the tax code that still aren’t indexed. The most prominent is the calculation of the amount of Social Security benefits that are included in gross income.

Taxes on Social Security benefits initially were intended to be imposed on only upper-income beneficiaries. But the income levels at which the tax is triggered haven’t been indexed for inflation.

The result is that more and more beneficiaries, and a higher percentage of beneficiaries, are subject to the tax each year. It is estimated that in a few years about 80% of Social Security beneficiaries will pay income taxes on their benefits.

Before 2021 ends, we should celebrate the 40th anniversary of inflation indexing of the tax code and be thankful for this legacy of Ronald Reagan and Bob Dole.

Looking Inside the Stock Indexes

Sometimes most stocks rise or fall with the indexes, but not always. Sometimes we see the truth in the old adage, “It’s a market of stocks, not a stock market.”

We’re in such a period now.

The headlines pointed out that the S&P 500 declined 2% last week. But a look into the details showed that some stock investors fared well during the week.

Most of the decline in the S&P 500 was due to sharp declines in two sectors: technology and consumer discretionary. These sectors led the stock indexes higher during most of the pandemic period. They did so well that their shares of the S&P 500 steadily increased. The technology sector rose to be the highest percentage of the S&P 500 any sector has ever had.

Both those sectors declined 4% last week. The energy sector declined just over 5%, but it is a small percentage of the index.

But of the 11 sectors in the index, four had solid gains for the week: Health care (2.48%), real estate (1.75%), consumer staples (1.36%) and utilities (1.24%). Three others had modest losses: financials (-1.18%), materials (-0.72%) and communication services (-0.29%).

The experience shows that when the margin of safety in a sector or an investment declines, the investment is vulnerable to a sudden, sharp drop on bad news.

The Data

Housing starts increased by 11.8% in November from October’s level. Starts were 8.3% higher than 12 months earlier. 

Single-family home starts were 11.3% higher in November than October but were 0.7% lower than 12 months earlier. 

It is likely that after December’s data are published, home starts for calendar year 2021 will be the highest in any year since 2006.

Existing home sales reported by the National Association of Realtors (NAR) increased by 1.9% in November from October’s level but were 2.9% lower than 12 months earlier. 

The median sale price of existing homes increased by 13.9% over 12 months to $353,900. NAR reported that November was the 117th consecutive month in which the median price was higher than 12 months earlier, marking the longest stretch since the data has been kept.

Consumer Confidence, as measured by The Conference Board, increased in December. The Consumer Confidence Index was reported at 115.8, and November’s number was revised two points higher to 111.9.

The Present Situation Index was flat while there was a jump in the Expectations Index. All the indexes are well above long-term averages, but below historic highs reached before the pandemic.

The Kansas City Fed Manufacturing Index stayed at 24 in December, the same as November’s level. The index was 31 in October.

Expectations for the future remained positive, but were a little lower than in November.

The Philadelphia Fed Manufacturing Index tumbled in December to 15.4 from 39.0 in November. A reading above zero indicates improving conditions.

The rate of growth declined for new orders, shipments and unfilled orders.

Industrial Production increased 0.5% in November from October’s level. Production was 5.3% higher than 12 months earlier and at the highest level since September 2019.

The manufacturing component of industrial production increased 0.7% in November. 

New unemployment claims increased to 206,000 in the latest week from the 52-year low of 188,000 established the previous week. Continuing claims declined to 1.845 million from 1.943 million the previous week.

The PMI Composite Flash Index for mid-December declined to 56.9 from 57.2 at the end of November. The mid-December level is the lowest in three months.

The Services Index also declined to a three-month low, while the Manufacturing Index dropped to a 12-month low. 

Prices paid by businesses continued to rise, increasing at the highest level on record for this survey.

The Leading Economic Indicators Index from The Conference Board increased by 1.1% in November, following a 0.9% rise in October.  

The third estimate of third-quarter gross domestic product (GDP) showed a slight increase from the first two estimates. The economy was estimated to grow at a 2.3% annual rate, up from 2.1% in the second estimate. A higher estimate of personal consumption expenditures accounted for most of the increase.

The Markets

The S&P 500 rose 0.29% for the week ended with Tuesday’s close. The Dow Jones Industrial Average lost 0.17%. The Russell 2000 increased 1.87%. The All-Country World Index (excluding U.S. stocks) added 0.59%. Emerging market equities slipped 0.50%.

Long-term treasuries lost 0.93% for the week. Investment-grade bonds increased 0.12%. Treasury Inflation-Protected Securities (TIPS) added 0.47%. High-yield bonds gained 0.57%.

In the currency arena, the U.S. dollar declined 0.12%.

Energy-based commodities increased 1.53%. Broader-based commodities rose 1.48%. Gold gained 0.92%.

Bob’s News & Updates

My latest book is “Where’s My Money: Secrets to Getting the Most out of Your Social Security.” It tells you clearly what your benefit options are in different situations and how to determine the best choice for you. You can find it on Amazon.com or Regnery.com. 

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I’m a senior contributor to the Forbes.com blog. You can view my contributor page here.