Bob’s Journal for 7/8/21

Threats to Earnings and Profit Margins Increase

Profit margins have been at historic highs in recent years, and stocks are priced with the expectation those margins will continue and perhaps increase.

Investors should examine the threats to those margins. For example, representatives from 130 countries agreed on July 1 to impose a 15% minimum corporate tax rate but the move also can imperil corporate profit margins.

Under current law, global companies can use various techniques to have a lot of their profits earned and taxed in low- or no-tax countries.

Under the agreement, the minimum tax rate will take effect in 2023 after being enacted into all the countries’ laws in 2022. Initially, the law would affect companies with at least €20 billion ($24 billion) in revenues.

Goldman Sachs estimates the minimum tax would reduce S&P 500 earnings by only 1% to 2%. But there would be more of an effect on information technology and health care companies. Their earnings would be trimmed by up to 5%.

Information technology and health care firms have among the highest profit margins now, and their shares are priced to maintain or increase those margins. They are at the greatest risk of fallout from the agreement.

A group of countries also is working on an agreement about how digital services should be taxed, so that companies don’t have to deal with a patchwork of taxes. But currently the companies aren’t paying taxes on digital services in most countries. An agreement would be another decrease in profit margins.

Antitrust measures in the United States and elsewhere aim to reduce the strength of the largest technology companies. At a minimum, threats of new antitrust laws and lawsuits under existing laws are likely to make the tech giants more cautious and reduce their growth.

Many companies also appear likely to face more regulations, as well as rising labor costs. These and other actions are reversals of trends that favored the largest companies for many years and allowed them to increase profit margins to historic levels.

Actions that reduce profit margins are likely to cause investors to revalue how much they are willing to pay for stocks of companies with the highest profit margins.

Most Americans Don’t Know How to Generate Retirement Income

Half of Americans age 45 or older don’t have any strategies to generate income in retirement, according to the Schroders 2021 U.S. Retirement Survey.

Only about 5% said they would wait until age 70 to claim the maximum Social Security benefit, and 46% said they still didn’t know when they will claim Social Security.

I am not surprised that 74% said they don’t know how to draw down their assets or generate income in retirement. A retirement spending plan or a plan to turn a nest egg into cash flow is the biggest gap in most retirement plans.

Instead of having a plan, most of the respondents said they will simply take money from their investment accounts when they need it.

Such strategies worked out when retirement lasted only five to 10 years. But now retirements routinely last at least 20 years, and many last 30 years or longer.

As I’ve explained in past issues of Retirement Watch, the Spotlight Series, and in my book, The New Rules of Retirement-Second Edition (Wiley), you should have a plan that determines the maximum amount of money you can spend each year. The plan should be flexible, so that it makes automatic adjustments for inflation and changes in the markets.

Americans Age 50 and Over Are Carrying More Debt

In 2016 Americans ages 50 and older carried significantly more debt than the same age group did in 1989, according to the Government Accountability Office (GAO).

In 2016, 71% of households led by someone 50 or older carried debt, while only 58% did so in 1989.

More importantly, the median amount of debt was about three times higher in 2016 than in 1989. In 2016, the median debt was $55,300, while in 1989 it was $18,900 in 2016 dollars.

All types of debt increased over the period. But student loan debt increased significantly for older households. Mortgage debt peaked in 2007 and slowly declined through 2016. The percentage of older households with credit card debt increased from less than 30% in 1989 to about 40% in 2016.

Having debt in retirement isn’t necessarily a bad move. Some financial advisors recommend that with interest rates so low and investment markets doing well, it’s a good strategy to have a home mortgage so your capital can be invested instead of being used to increase home equity.

Certainly, for the last 10 years and longer, a person would have come out ahead by having a mortgage and increasing the amount of money invested in the stock indexes. But the advantage would be less for anyone who invested in assets with lower returns.

Whether or not to carry debt in retirement depends more on subjective factors. Some people feel more secure knowing they don’t have mortgages on their homes and don’t have to worry how mortgage payments will be paid during periods when the markets sink.

Others expect that over time their investment returns will be much higher than the interest rate on a mortgage. They believe their cash flow is secure enough that they won’t struggle to make mortgage payments during down markets.

But the GAO study found that higher debt levels were maintained by those in lower income levels. That indicates the increase in debt for older Americans often isn’t a strategy to maximize net worth but is a struggle to pay bills.

The Data

Growth in the services sector slowed a little in June, according to the ISM Services Index. The index declined to 60.1 in June from 64.0 in May.

The final PMI Composite Index for June had a similar finding. The Services Index declined to 64.6 in June from 70.4 in May. The Composite Index for the total economy declined to 63.7 from 68.7.

Last Friday’s Employment Situation Reports were better than expected.

The reports said payrolls increased by 850,000 in June. In addition, May’s number was revised higher to 583,000 from the 559,000 jobs initially reported.

Most of the new jobs were in hospitality. The sector added 343,000 positions, with 194,000 of them in bars and restaurants.

The reports indicate that the total number of jobs still is 7.13 million lower than it was in February 2020 before the economy closed for the pandemic.

Wages increased 0.3% in June and 3.6% over 12 months. In February 2020 before the pandemic, the 12-month wage increase was 3.0%.

New unemployment claims hit a new low for the pandemic. They came in at 364,000 for the latest week, much better than economists’ expectations of 390,000, and 51,000 lower than the previous week.

Continuing claims increased by 56,000 to 3.47 million.

The total number of Americans receiving some form of unemployment compensation declined by 180,890 to 14.66 million.

Manufacturing continues to grow at a healthy rate, according to the ISM Manufacturing Index. The index declined a little to 60.6 in June from 61.2 in May.

The PMI Manufacturing Index held steady at 62.1 in June.

Factors Orders increased 1.7% in May, compared to a 0.1% decline in April. The April decline initially was reported as 0.6%.

Nondefense orders, excluding transportation, which is considered a good measure of business investment, increased 0.1% in May after declining 0.1% in April.

Core capital goods orders, another measure of business investment, increased 1.1%.

The JOLTS (Job Openings and Labor Turnover Survey) report showed little change in the labor market in May compared to April.

There was stability in job openings, hires and separations. The only data point to note is that the rate of layoffs and discharges decreased just enough to establish a new low for this report.

The Markets

The S&P 500 rose 1.22% for the week ended with Tuesday’s close. The Dow Jones Industrial Average gained 0.86%. The Russell 2000 declined 1.52%. The All-Country World Index (excluding U.S. stocks) lost 1.43%, while emerging market equities fell.

Long-term treasuries gained 2.24% for the week. Investment-grade bonds increased 0.67%. Treasury Inflation-Protected Securities (TIPS) added 0.91%. High-yield bonds rose 0.31%.

In the currency arena, the U.S. dollar gained 0.53%.

Energy-based commodities lost 0.13%. Broader-based commodities fell 0.52% but gold increased 2.06%.

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.

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 Series, click here.

A recent five-star review of my book 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.