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Bob’s Journal for 2/23/22

Published on: Feb 23 2023

Higher Valuations Prop Up Stocks

We’re well past the midpoint of the earnings season for the fourth quarter of 2022, so we can draw some conclusions.

There is some good news, but it’s not especially good news.

About 68% of the companies that reported so far had earnings higher than analysts’ pre-report estimates. Also, 65% of companies reported revenues that were above estimates.

But analysts generally became pessimistic as the fourth quarter progressed, so the earnings and revenue estimates weren’t as tough to beat as at the start of the quarter.

Also, the percentages of companies beating the estimates were below the long-term averages. The five-year average of the percentage of companies beating earnings estimates is 77%, and the 10-year average is 73%, according to FactSet. For revenues, the five-year average of companies beating estimates is 69%, and over 10 years is it 63%.

The bad news is that earnings declined by more than 4.5% from the third quarter, and over 12 months earnings are down almost 6%.

Most of the earnings growth for the S&P 500 was by energy and resource companies. Delete those companies from the tabulations, and the earnings decline is significant. Only four of the 11 S&P 500 sectors reported 2022 earnings higher than 2021 earnings.

While many companies reported higher revenue, a lot of the revenue increases were due to inflationary price increases. Costs rose faster than prices, and demand in many sectors also was down. That’s why both earnings and profit margins were down.

Stock prices increased late in 2022 and to start 2023. Most of the stock price increases are due to high valuations. Investors are willing to pay more for each dollar of earnings and revenues.

The higher valuations indicate optimism about the economy and earnings in 2023.

But inflation remains much higher than the Fed’s target. The odds are the Fed will keep interest rates high until inflation is closer to its 2% target. That gives investors safe alternatives to stocks since conservative investments yield around 5%. It also is likely that a recession or something close to one is needed to bring inflation to target.

Another warning sign is that analysts are lowering their earnings estimates for the first quarter of 2023 more than usual, also according to FactSet.

From the end of December to the end of January, aggregate S&P 500 earnings estimates declined by 3.3%, more than twice the five-year average.

Will Congress Repeal Roth IRA Benefits?

Since the Roth IRA was created in 1997, a portion of the financial services community warned the Roth IRA was a trap. Congress would wait until Roth accounts held trillions of dollars, then repeal all or some of the tax benefits.

From the start, I’ve been skeptical of the arguments that Roth IRAs are a trap and encouraged taxpayers to use them. I think there’s even less reason today to fear the Roth IRA trap.

Life insurance and annuities have maintained their tax advantages for many decades despite academic and political arguments against them. That’s because insurance companies have good lobbying organizations, and many consumers now rely on the benefits of the products.

Roth IRAs have the same advantages. Mutual funds and brokers are custodians for Roth accounts that hold a lot of money. These financial services companies have good lobbying organizations. Plus, a lot of consumers have Roths IRAs as part of their financial plans and would object to repeal of their benefits.

More importantly, recent laws and proposals indicate Congress likes Roth accounts. That’s because people who use Roth accounts pay their taxes now.

When traditional IRAs and 401(k)s are used, people receive tax breaks today and don’t pay taxes on their accounts until the future, often many decades in the future.

There are trillions of dollars sitting in traditional retirement accounts, and many in Congress are impatient to receive the tax revenue from distributions of those benefits.

That’s why the SECURE Act of 2019 repealed the Stretch IRA, accelerating taxes on inherited retirement accounts.

It also is why a few years after the Roth IRA was created that Congress repealed the rule that taxpayers with incomes above $100,000 couldn’t convert traditional IRAs to Roth IRAs. Congress wants people to convert traditional IRAs to Roth IRAs, so the government can collect taxes now instead of later.

The SECURE Act 2.0, enacted at the end of 2022, contained several provisions that encourage people to use Roth accounts. There are members of Congress who propose that traditional retirement accounts be phased out in favor of Roth-type accounts.

My only fear about taxes on Roth accounts is that Congress might do to Roth IRAs what it did to tax-exempt bond interest.

Interest on state and local government bonds still is not included in gross income. But tax-exempt interest is added back to income to determine adjusted gross income for computing the Stealth Taxes.

Stealth Taxes are the tax on Social Security benefits, the Medicare premium surtax, the 3.8% net investment income tax, and others.

It is possible that at some point, Roth distributions will be added back to adjusted gross income when computing the Stealth Taxes. The Roth distributions wouldn’t be subject to income taxes, but they could be used to increase the Stealth Taxes. That’s not the law now, and I haven’t seen anyone in Congress propose it.

Older Mortgage Applicants Are More Likely to be Rejected

As U.S. homeowners age, their mortgage applications are more likely to be rejected.

The mortgage rejection rate rises steadily with an applicant’s age, according to a new study from the Center for Retirement Research at Boston College. The study examined confidential data compiled under the Home Mortgage Disclosure Act.

The three oldest age groups have rejection rates one to three percentage points higher than younger age groups do. The study said rejection rates for older applicants exceed the rates for Black and Hispanic applicants.

The study says the higher rejection rates probably aren’t the result of prohibited age discrimination.

The reason lenders give most often for rejection of older applicants is that the applicant had insufficient collateral, accounting for 50% to 70% of the higher rejections.

One probable reason for insufficient collateral is that older homeowners are less likely to maintain the quality of their homes.

Other reasons are the homeowners might be seeking to consolidate multiple mortgages or other debts and that the older applicants’ finances might be stretched by other financial obligations.

The study wasn’t able to determine if older homeowners who apply for mortgages are more likely to be in financial distress than younger applicants.

The higher mortality risk of older applicants also might explain some of the rejections. An older applicant is more likely to pass away within a few years, and that increases the probability the mortgage either will be paid early or go into default. Lenders don’t like either of those outcomes.

When making long-term financial plans, older Americans should be aware they have a higher probability of being rejected for conventional mortgages.

The Data

The economy improved a bit in the first half of February, according to the PMI Flash Indexes.

The PMI Manufacturing Index rose to 47.8 from 46.9 in January. The PMI Services Index increased to 50.5 from 46.8 in January. That brought the PMI Composite Index up to 50.2 from 46.8 in January. Any reading above 50.0 indicates an expansion, while readings below 50.0 indicate contraction.

Existing home sales declined another 0.7% in January, following a 2.2% fall in December. January marks the 12th consecutive month existing home sales were lower than the previous month — the longest such streak since the data was first tabulated in 1999.

The number of existing homes sold in January was the lowest monthly total since October 2010. Total sales were 36.9% lower than 12 months earlier. Total sales in 2022 were the lowest since 2014.

Despite lower sales, the median sale price was 1.9% higher than 12 months earlier at $359,000.

The Philadelphia Fed Manufacturing Index tumbled in February to negative 24.3, the lowest level since May 2020. The index was negative 8.9 in January.

February was the sixth consecutive month the index was in negative territory.

The economy contracted a bit more in the first half of February, according to the PMI Flash indexes. The PMI Manufacturing Index declined to 46.9 from 47.5 in January. The PMI Services Index fell to 46.8 in February from 47.1 in January.

The PMI Composite Index fell to 46.8 in February from 47.5 in January.

Existing home sales declined 1.5% in January. Home sales have declined 11 consecutive months, which is the longest streak since 1999. Sales were at their lowest level since November 2010.

Despite lower sales, the median sale price for all existing homes was $366,900 in January, 2.3% higher than in December.

Housing starts declined 4.5% in January from December’s level, which was 3.4% lower than November’s. January’s level of housing starts was the largest monthly decline since July, and the number of starts in January was the lowest since June 2020.

Building permits increased 0.1% in January, breaking a streak of three consecutive monthly declines.

The Producer Price Index (PPI) increased 0.7% in January after declining 0.2% in December. Over 12 months, the PPI was up 6%, which compares to 6.5% at the end of December.

Excluding food and energy, the core PPI increased 0.5% in January after rising 0.3% in December. Over 12 months, the core PPI was up 5.4%, compared to 5.8% at the end of December.

New unemployment claims declined by 1,000 to 194,000 in the latest week.

Continuing claims, which lag a week behind new claims, increased to 1.696 million from 1.680 million.

The Markets

The S&P 500 lost 3.28% for the week ended with Tuesday’s close. The Dow Jones Industrial Average fell 2.74%. The Russell 2000 declined 2.64%. The All-Country World Index (excluding U.S. stocks) decreased 2.25%. Emerging market equities retreated 3.14%.

Long-term treasuries lost 3.49% for the week. Investment-grade bonds fell 2.20%. Treasury Inflation-Protected Securities (TIPS) declined 0.49%. High-yield bonds retreated 2.11%.

In the currency arena, the U.S. dollar gained 1.08%.

Energy-based commodities fell 2.49%. Broader-based commodities lost 1.96%. Gold declined 1.16%.

Bob’s News & Updates

My new book is officially published: “Retirement Watch: The Essential Guide to Retiring in the 2020s.” Learn more and order by clicking here and here. You write one of the first reviews.

My previous book, “Where’s My Money: Secrets to Getting the Most out of Your Social Security,” is receiving mostly five-star reviews on Amazon for telling you clearly what your benefit options are in different situations and how to determine the best choice for you. You can find it on Ammazon.com or Regnery.com.

The number of regular viewers for my Retirement Watch Spotlight Series continues to increase. You should sign up because I make in-depth presentations of key retirement finance topics. You can watch these online seminars from the comfort of your home or office at times you choose. To learn more about my new Spotlight Seriesclick here.

A recent five-star review of my book, “The New Rules of Retirement” on Amazon.com said, “A complete retirement guide! One of the best books on this topic!” Click for more details about the revised edition of “The New Rules of Retirement.”

If you’re interested in my books, check my Amazon.com author’s page.

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

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