Bob’s Journal for 8/11/22

Earnings Estimates are Falling, But Stock Prices Aren’t Following

Stocks did poorly in the first half of 2022, but the price declines were attributable almost entirely to higher interest rates.

Earnings forecasts generally held steady, and stock prices indicated investors expected earnings to stay the same or increase in 2022. Concerns about a recession recently have increased, and that has started to affect the earnings outlook.

In July, earnings per share estimates for the S&P 500 declined by 2.5%, according to an aggregate of consensus projections for individual companies compiled by FactSet. That’s a larger monthly decline than the historic average and the largest earnings forecast reduction in the first month of a quarter in more than two years.

In addition, a number of companies have announced disappointing earnings and warned that earnings for the rest of 2022 will be lower than previously anticipated. Major technology companies, as well as retailers Walmart and Target, were among many that had pessimistic reports.

But you wouldn’t know this from the stock market indexes and valuations.

Stock indexes increased after mid-June. Valuations also are higher despite the lower earnings outlook. In mid-June, the S&P 500 was trading at a valuation of 15.3 times its expected earnings over the next 12 months. Now, it’s at 17.5 times expected earnings, which is higher than the 10-year average.

Market prices indicate investors still are expecting the Federal Reserve to execute a soft landing for the economy. Investors believe inflation will decline to the Fed’s target without the U.S. central bank having to increase interest rates much more. Plus, investors anticipate either the economy won’t enter a recession, or any recession will be very brief. Any result worse than that is likely to cause stock prices to decline.

Don’t Make This Tax Loss Harvesting Mistake

Tax loss harvesting is a good strategy when investments in a taxable account decline, but you want to avoid some traps.

Tax loss harvesting is simply selling investments in taxable accounts that have paper losses. After selling a losing investment, you have a deductible capital loss.

On your tax return, capital losses first offset any capital gains you have for the year. Each dollar of taxable loss you recognize allows you to recognize a dollar of capital gains tax free.

If capital losses for the year exceed capital gains, up to $3,000 of excess losses can be deducted against the other income on your tax return. When capital losses for the year exceed capital gains plus the $3,000 deduction, the excess losses can be carried forward to future years to be used in the same way.

You can see that selling a losing investment can be a smart move.

Of course, you probably purchased the investment because you expected it to appreciate. If you still like the investment’s longer-term prospects, you can buy it back after selling it. But you must avoid the wash sale rule.

The wash sale rule says you have to wait more than 30 days (not 30 days — more than 30 days) to repurchase the investment or a substantially identical one. If you don’t wait long enough, the loss isn’t deductible. It is added to the basis of the new investment and effectively is deducted when that investment is sold.

The wash sale rule also applies if you bought the substantially identical investment within 30 days before you sold the losing investment.

So, the first rule is to avoid buying a substantially identical investment within 30 days of selling the investment. You can buy an investment within 30 days that isn’t substantially identical. For example, you can sell one tech stock and purchase a different tech stock, even one in the same sector. Or sell a biotech stock and buy shares in a biotech ETF.

Another action you can’t take is to buy a substantially identical investment in an IRA or 401(k). The IRS ruled some years ago that the wash sale rule is violated when an individual investor sells an investment in a taxable account and within 30 days buys the same investment in an IRA or 401(k). It is one case when the IRA isn’t treated as a separate taxpayer.

Here’s a related point. When you have a losing investment in an IRA, you won’t be able to deduct the loss on your individual tax return. A loss in an IRA is deductible only in the rare case when you fully distribute all your IRAs of the same type (traditional or Roth), and the proceeds are less than your aggregate cost basis in the IRAs.

Look Out for Medicare Part D Prescription Drug Policy Surprises

For those 65 and older, an insurance policy issued under Medicare Part D usually is the best way to minimize the amount spent out of pocket on prescription medications. But you must monitor a policy after purchasing it.

Unlike most other policies, the terms of Part D policies aren’t locked in for the year. In particular, the prices you pay for drugs can change any time during the year. In addition, a manufacturer can change its pricing of a drug.

A recent study from AARP found that price changes can be frequent and sudden. Prices are most likely to change for frequently prescribed brand name drugs.

Here’s what AARP found:

AARP’s Public Policy Institute examined list price changes for the 100 brand name drugs with the highest total Medicare Part D spending in 2020. We found that 75 of these top brand name drugs already increased their list price between the end of December 2021 and the end of January 2022; none of the top brand name drugs experienced a list price decrease.

Price increases ranged from 2.0% to 7.9%, and more than half the price increases were for 5.0% or more.

The lesson is that when you’re taking brand name prescription medications, you have to regularly monitor your Part D policy as well as the drug manufacturer’s pricing for any changes to your out-of-pocket cost.

On Track for a Big Social Security COLA in 2023

Social Security beneficiaries could receive their highest cost of living adjustment (COLA) ever for 2023, according to several estimates.

If the Consumer Price Index (CPI) doesn’t increase at all in the last three months of the fiscal year ending with September’s CPI, the COLA for 2023 will be 9%. If the CPI continues increasing at its recent pace, the COLA will be 11.4%.

That’s according to independent estimates from the Committee for a Responsible Federal Budget, the Senior Citizens League, and the National Association of Registered Social Security Analysts.

The Data

The Consumer Price Index (CPI) was unchanged in July and increased 8.5% over 12 months. Excluding food and energy, the core CPI increased 0.3% in July and 5.9% over 12 months.

Those numbers are below economists’ expectations and well below June’s numbers. But the 12-month increase in the CPI still is near 40-year highs.

Declines in energy, especially gasoline, restrained the CPI in July. But prices for services and housing continued to increase.

The Small Business Optimism Index from the National Federation of Independent Business (NFIB) increased slightly in July to 89.9 from 89.5 in June. July was the sixth consecutive month the index was below its 48-year average of 98.

Small business owners reported that inflation is their biggest problem, and the percentage saying so was the highest since the fourth quarter of 1979.

A net negative 52% of business owners expected better business conditions over the next six months. That’s nine points better than June’s level, but June’s level was the all-time low.

There were 528,000 new jobs created in July, according to last week’s Employment Situation reports. In addition, June’s number of new jobs was revised higher to 398,000 from 372,000.

As of the end of July, the total number of people on payrolls returned to its pre-pandemic level.

In addition, the unemployment rate declined to 3.5%, tying the half-century low established just before the pandemic.

Average hourly earnings increased 0.5% in July and 5.2% over 12 months.

New unemployment claims increased by 6,000 to 260,000. That’s just below the 2022 peak of 262,000 reached in early July. It is also well above the 2019 pre-pandemic average of 218,000.

Continuing claims increased by 48,000 to 1.4 million. That’s the highest level since last spring.

Consumer credit increased at an annual rate of 10.5% in June. Revolving credit, mostly credit cards, increased at a 16.0% annualized rate for the month, while nonrevolving credit (vehicle and student loans) increased at an 8.8% annual rate.

Productivity declined in the second quarter but not by as much as in the first quarter. The second-quarter productivity change was negative 4.6%, following a negative 7.4% change in the first quarter.

Because of lower productivity, unit labor costs increased 10.8% in the second quarter, which follows a 12.7% increase in the first quarter.

The Markets

The S&P 500 rose 0.81% for the week ended with Tuesday’s close. The Dow Jones Industrial Average gained 1.19%. The Russell 2000 increased 1.71%. The All-Country World Index (excluding U.S. stocks) added 0.44%. Emerging market equities increased 1.34%.

Long-term treasuries gained 0.33% for the week. Investment-grade bonds lost 0.18%. Treasury Inflation-Protected Securities (TIPS) fell 0.10%. High-yield bonds decreased 0.03%.

In the currency arena, the U.S. dollar gained 0.25%.

Energy-based commodities fell 0.73%. Broader-based commodities rose 1.18%. Gold increased 1.94%.

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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