Bob’s Journal for 5/6/21

SECURE Act 2.0 Receives First Congressional Review

The Securing a Strong Retirement Act of 2021 (SECURE Act 2.0) is sponsored by the same congressional leaders who in late 2019 pushed through the Setting Every Community Up for Retirement Enhancement (SECURE) Act.

The SECURE Act 2.0 was reviewed by the House Ways & Means Committee yesterday, May 5. The intent of the legislation is to make it easier for people to save more money for retirement and for employers to offer retirement-saving opportunities to employees.

The SECURE Act 2.0 would allow employers to automatically enroll more employees in retirement-saving plans such as 401(k)s and give small employers a bigger tax credit for starting new retirement plans. More part-time workers would be eligible to participate in retirement plans.

The bill would have the catch-up contribution amount indexed for inflation instead of being fixed as it has been for years. In addition, the amount of an individual retirement arrangement (IRA) that could be invested in qualified longevity annuity contracts (QLACs) would be increased.

The annual limit for a qualified charitable distribution (QCD) would be indexed for inflation after 2021. That is a sample of the bill’s provisions.

Of course, Congress needs other provisions to make up most of the tax revenue that would be lost from these changes. In the original SECURE Act, that was done by eliminating the Stretch IRA.

In SECURE Act 2.0, the tax revenue is generated by small changes instead of one dramatic one.

The original version of the SECURE Act 2.0, introduced last fall, would have delayed required minimum distributions (RMD) to age 75. The current version phases that in, raising the RMD beginning age to 75 over several years. That lowers the tax revenue loss in the first few years.

The original SECURE Act 2.0 also proposed an additional catch-up retirement plan contribution after age 60. The latest version delays the increased contribution limit to age 62 and phases in the full increase over several years. Again, that reduces the tax revenue loss.

A revenue-raising proposal would allow SIMPLE and SEP IRAs to have Roth features instead of being limited to traditional IRA features. The people who opt for Roth treatment instead of traditional IRA treatment would pay taxes now instead of later. That increases tax revenue.

Likewise, an employee can elect to designate employer-matching contributions made to a 401(k) or similar plan to be Roth plan contributions. The employee who makes this election would have to include the employer-matching contribution in gross income.

When a 401(k) or similar employer plan allows employees to make catch-up contributions, after 2021, those catch-up contributions would have to be designated as Roth contributions. That would require the employee to include the catch-up contribution in gross income the year of the contribution.

I will be monitoring the legislation to see if additional tax increases are added to the SECURE Act 2.0 as it progresses through Congress.

Inflation Warning Signs Are Increasing

Warren Buffett of Berkshire Hathaway said at the company’s annual shareholder meeting last Saturday that signs of strong inflation at its various businesses are occurring. There are other signs that inflation is rising and is perhaps higher than government data capture.

Lumber prices recently hit a record high. The price of corn is surging, rising about 16% in April and about 44% so far in 2021.

Many employers report that their biggest problem is finding qualified employees to hire. That’s causing employers to offer higher wages to hire people and to retain current employees.

The Wall Street Journal recently reported that restaurants, including fast-food establishments, are offering signing bonuses to new hires along with higher wages. Some restaurant chains are offering college tuition, paid family leave and other perks, yet they still can’t hire enough workers to meet customer demand.

Some of the price increases are due to supply shortages, because producers cut back during the pandemic recession. It takes a while to increase production of many items. But other price increases are the result of government policy.

A lot of the inflation from the Federal Reserve’s easy money policy has so far been reflected in asset prices, especially stock prices. But lately prices of goods and services to consumers and businesses have been rising, and we can expect them to keep rising through 2021 and probably beyond.

Improve by Subtracting

Quite often when people tell me about or show me their investment portfolios, I see that they are too complicated. There are too many investments.

Most investors could reduce the number of investments they own and make their lives easier without hurting their returns. Many would increase their investment returns.

Investment portfolios aren’t the only things that can be improved by reduction or subtraction.

Most people, when looking to improve or change something, instinctively consider things to add, according to a study by researchers associated with the University of Virginia that recently was published in Nature.

The study concludes that people overlook ways to improve their lives or aspects of their lives by subtracting and simplifying.

The researchers presented test subjects with situations involving Lego structures, essays, recipes, travel itineraries, miniature golf and more. In each case, the subjects were asked to solve a problem or improve the situation.

Most of the time, the subjects considered ways to add something. Rarely was eliminating, simplifying, or subtracting something the solution attempted. Yet, subtraction or simplification often was the fastest and most efficient solution.

In his book, Thinking, Fast and Slow, Nobel Laureate Daniel Kahneman pointed out that most people make decisions using mental shortcuts. Sometimes the shortcuts are efficient and effective. But too often, especially with financial decisions, the shortcuts lead to poor decisions. Instinctively looking to add something instead of subtracting is another form of a mental shortcut.

I’ve often advised my readers to simplify their financial lives. That’s one reason my recommended portfolios don’t have dozens of investments in them.

Simplifying your financial life often produces better results. It also frees up more of your time to engage in the activities you really want to do instead of managing your finances.

The Data

Personal income increased at a record 21.1% annualized rate in March. New stimulus checks accounted for most of the income increase.

Consumer spending also increased sharply, rising by 4.2% in March.

The Personal Consumption Expenditures Price Index, the Fed’s preferred inflation measure, increased 0.5% in March and 2.3% over 12 months. Excluding food and energy, the price index increased 0.4% in March and 1.8% over the past 12 months.

Pending home sales were 1.9% higher in April than in March, according to the National Association of Realtors. This was less than the 5% increase economists expected.

The March sales were 23.3% higher than 12 months earlier. Realtors say sales are hampered by a shortage of homes available for sale and rising mortgage interest rates.

The ISM Services Index declined a little to 62.7 in April from 63.7 in March.

But the PMI Services Index increased to 64.7 in April from 60.4 in March. That helped the PMI Composite Index for the entire economy increase to 63.5 in April from 59.7 in March.

Consumer Sentiment, as measured by the University of Michigan, increased to 88.3 in April from 86.5 in March. Lately, this measure has lagged far behind The Conference Board’s Consumer Confidence Index.

Private sector jobs increased by 742,000 in April, according to the ADP Employment Report. That is well above March’s 565,000 new jobs but below economists’ expectations of 800,000 new jobs.

As has been the case in recent months, the most job gains were in leisure and hospitality. The ADP report indicated the sector still has about three million fewer jobs than before the pandemic. About 636,000 of the new jobs were in the service sector.

New unemployment claims reached a new low for the pandemic era in the latest week. New claims were 553,000, compared to 566,000 the previous week.

Continuing claims increased a little to 3.67 million. The total number of Americans receiving some form of unemployment benefits declined by 850,000 to 16.6 million.

The Chicago Purchasing Manager’s Index shot higher again in April, indicating the Midwest economy continues to grow. The index was 72.1 in April compared to 66.3 in March.

That’s eight consecutive monthly readings above 60 for the index. Any reading above 50 indicates economic expansion.

Growth in manufacturing finally slowed in April, according to the ISM Manufacturing Index. The index was reported at 60.7 for April. That’s down from 64.7 in March and below expectations of 65 or higher. It also is the lowest level for the index in 2021.

Also of note is that the prices paid component of the index was at its highest level since June 2008.

But the PMI Manufacturing Index, which has lagged the ISM index in this recovery, increased a little in April to 60.5 from 59.1 in March.

Factory Orders increased by 1.1% in March. In addition, February’s orders were revised higher to a decline of 0.5% compared to a decline of 0.8% that initially was reported.

Businesses continue to pay more for employees. The Employment Cost Index increased by 0.9% in the first quarter, following a 0.7% increase in the fourth quarter of 2020. Over 12 months, the index increased 2.6%.

GDP increased at an annualized rate of 6.4% in the first quarter of 2021, according to the first estimate from the Commerce Department. That’s up from the 4.3% rate for the fourth quarter of 2020.

The first-quarter growth rate is the second-fastest quarterly growth rate since the second quarter of 2003. The fastest was the third quarter of 2020.

Consumer spending increased 10.7% in the first quarter, compared to 2.3% in the fourth quarter. Spending growth on goods far exceeded spending growth on services.

The savings rate in the first quarter increased to 21% from 13% in the fourth quarter.

The Markets

The S&P 500 lost 0.46% for the week ended with Tuesday’s close. The Dow Jones Industrial Average gained 0.49%. The Russell 2000 declined 2.26%. The All-Country World Index (excluding U.S. stocks) fell 1.52%. Emerging market equities are 2.38% lower.

Long-term treasuries rose 0.74% for the week. Investment-grade bonds increased 0.40%. Treasury Inflation-Protected Securities (TIPS) added 0.68%. High-yield bonds gained 0.25%.

In the currency arena, the U.S. dollar rose 0.49%.

Energy-based commodities increased 2.87%. Broader-based commodities rose 1.82%, while gold gained 0.12%.

Bob’s News & Updates

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