Day: September 18, 2024

The long-awaited moment has arrived. The Federal Reserve is meeting this week, and economists are predicting policymakers will launch the first interest rate cut in four years. The Fed began lifting rates back in 2022 to calm raging inflation and since has lifted the benchmark rate 11 times, leaving it at 5.5% today. That’s the highest level in more than 20 years.

These moves have done their job, with inflation dropping over this period. Right now, it’s at 2.5% and nearing the Fed’s goal of 2%. Why that level? Because it “is most consistent with the Federal Reserve’s mandate for maximum employment and price stability,” according to the Federal Open Markets Committee.

So economists and traders have been speculating that on Wednesday the Fed will lower the benchmark rate by at least 25 basis points, and some even predict a 50 basis point cut. As an investor in the stock market, you may be wondering what the market will do following the Fed’s move. Let’s look to history for some clues.

Why is a rate cut such a big deal for stocks?

First, let’s consider why a rate cut is such a big deal for the stock market in general and for investors in particular. Higher rates can hurt corporate earnings and investor appetite for stocks due to a couple of factors. As the fed funds rate goes up, so do other borrowing costs for individuals and companies.

For example, high-growth companies relying on loans to build their businesses will see these expenses climb. As a result, potential investors may worry about their ability to fund growth and may stay away from these sorts of stocks. As for individuals, higher borrowing costs eat into their budgets, and that means they probably won’t have as much discretionary income to spend.

Investors, seeing this unfold, often lose confidence in stocks most vulnerable in this sort of environment. They might hesitate to buy shares of those young growth companies — often technology players — and they may stay away from companies, such as those in entertainment or travel, that rely on discretionary spending.

Investors might even rein in their investments in the stock market as a whole and opt for investments that tend to flourish in a higher-rate environment, such as bonds.

Of course, as interest rates fall, the situation shifts, with borrowing becoming easier and cheaper for companies and individuals, while consumers find themselves with more money to spend on non-essentials. All of this paints a brighter picture for corporate earnings, and that, in turn, makes investors more confident about putting their dollars into the stock market.

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The S&P 500’s performance after past rate cuts

Now, as we await the Fed‘s next move, let’s consider how the stock market reacted in the past to rate cuts. In the past two cycles of cuts, from the initial rate decrease, the S&P 500 index (SNPINDEX: ^GSPC) rose in the double digits in the 12 months following that move. Those rate cuts were on March 3, 2020 and Aug. 1, 2019, and the S&P 500 rose 27% and 10%, respectively, over the year to follow.

Prior to that, rate cuts happened during the Great Recession and a crash in the housing market over the 2007 and 2008 period. The first rate cut then happened in September of 2007, and this time it took a lot longer for the S&P 500 to climb back to previous levels.

^SPX data by YCharts.

It’s important to note, though, that the Great Recession was a particularly difficult time worldwide, so it doesn’t represent a good point of comparison for the S&P 500 today.

What does all of this mean for the stock market moving forward? It’s impossible to predict what the index will do next, but recent history shows us a favorable trend. That said, if the Fed lowers rates as expected or makes an even more aggressive cut this week, this won’t ease the borrowing situation for companies and individuals overnight. It will take a series of cuts to produce concrete results.

But the good news is that a potential rate cut this week will get things moving in the right direction — and that could help the S&P 500 follow the recent historical trend and rise in the coming year.

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The Fed May Cut Interest Rates This Week. History Says Stocks Will Do This Next. was originally published by The Motley Fool

By Noel Randewich

(Reuters) – Shares of Donald Trump’s media company fell for a second session on Tuesday ahead of the end of restrictions on share sales by the former U.S. president and other insiders.

Trump Media & Technology Group, which is 57% owned by the Republican presidential candidate, fell 3.6%, bringing its loss this week to 7%.

Trump Media’s stock jumped 12% on Friday after Trump told reporters he does not plan to sell his now $1.9 billion stake in the company, reversing weeks of steady losses partly due to worries about the end of insider trading restrictions related to its stock market debut in March.

Newly listed companies often see pressure on their stocks ahead of the end of so-called lock-up restrictions due to expectations that insiders may sell their shares and flood the market.

Trump Media, which operates the Truth Social app, saw its value balloon to nearly $10 billion following its Wall Street debut, lifted by retail traders and Trump supporters who see it as a speculative bet on his chances of securing a second four-year term as president.

Other Trump Media insiders who will be allowed to begin selling shares when the lock-up ends include United Atlantic Ventures and Patrick Orlando, whose fund, ARC Global Investments II, sponsored the blank-check company that merged with Trump Media. They own a combined 11% of Trump Media, according to a company filing.

Trump Media’s market capitalization on Tuesday stood at $3.3 billion, with shares at $16.68, down about 75% from their March closing peak of over $66. The slide has accelerated in recent weeks after President Joe Biden gave up his reelection bid and Trump lost a lead in opinion polls ahead of the Nov. 5 presidential election.

The company’s revenue is equivalent to two Starbucks coffee shops and it is burning cash.

If Trump Media’s stock price remains at or above $12 through Thursday, then Trump and other insiders will be free to sell shares beginning on Friday. Otherwise, they are eligible to sell shares beginning on Sept. 26.

(Reporting by Noel Randewich; Editing by David Gregorio)

Though retirees are only required to take a certain portion of their retirement savings out as distributions each year, a study from JPMorgan Chase shows that there is likely good reason to take out more. A withdrawal approach based solely on required minimum distributions (RMDs) not only fails to meet retirees’ annual income needs but can also leave money on the table at the end of their lives, the financial services firm found.

A financial advisor can help you right-size your retirement income. Find an advisor today.

Using internal data and an Employee Benefit Research Institute database, JPMorgan Chase studied 31,000 people as they approached and entered retirement between 2013 and 2018. The vast majority (84%) of the retirees who had already reached RMD age were only withdrawing the minimum. Meanwhile, 80% of retirees still had not reached RMD age were yet to take distributions from their accounts, the study found, suggesting a desire to preserve capital for later in retirement.

Retirees’ prudence surrounding withdrawals may be misguided, though.

“The RMD approach has some clear shortcomings,” JPMorgan Chase’s Katherine Roy and Kelly Hahn wrote. “It does not generate income that supports retirees’ declining spending in today’s dollars, a behavior that we see occurs with age. In fact, the RMD approach tends to generate more income later in retirement and can even leave a sizable account balance at age 100.”

What Are RMDs?

An RMD is the minimum amount the government requires most retirees withdraw from their tax-advantaged retirement accounts at a certain age. In 2020, the RMD age was raised from 70.5 to 72. The JPMorgan Chase study examined data that predated this change.

While most employer-sponsored retirement plans and individual retirement accounts (IRAs) are subject to RMDs, owners of Roth IRAs are exempt from taking minimum annual distributions.

The following retirement accounts all come with required minimum distributions:

An RMD is calculated by dividing a person’s account balance (as of Dec. 31 of the previous year) by his current life expectancy factor, a figure set by the IRS. For example, a 75-year-old has a life expectancy factor of 22.9. If a 75-year-old retiree has $250,000 in a retirement account, he would be required to withdraw at least $10,917 from his account that year.

A financial advisor can help you navigate the rules of RMDs.

RMD Approach vs. Declining Consumption Strategy

Using an RMD approach, a retiree simply sticks to the minimum required distributions each year. This strategy does have several notable advantages over a more static technique, like the 4% rule. For one, using actuarial statistics, the RMD approach factors in a person’s expectancy based on his current age; the 4% method does not. Also, by only withdrawing the minimum each year, the account owner will lessen his tax bill for the year and maintain maximum tax-deferred growth.

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However, Roy and Hahn of JPMorgan Chase note that a more flexible withdrawal strategy tied to actual spending behaviors of retirees is more effective for meeting income needs and lowering the possibility of dying with a considerable account balance left over.

Assuming people spend more earlier in retirement than during their latter years, a withdrawal strategy should match this declining consumption, even if it means taking more than the required minimum distribution, Roy and Hahn wrote.

“On the consumption front, we believe the most effective way to withdraw wealth is to support actual spending behaviors, as spending tends to decline in today’s dollars with age,” they wrote. “Unlike the RMD approach, reflecting actual spending allows retirees to support higher spending early in retirement and achieve greater utility of their savings.”

In comparing the RMD approach to the declining consumption strategy, JPMorgan Chase found that a 72-year-old with $100,000 in retirement savings could spend more money each year using the declining consumption strategy approach until age 87 when the RMD strategy would support higher spending.

Meanwhile, the same retiree would still have more than $20,000 in his account by the time he turns 100 if he limited his distributions to the minimum amount. A 72-year-old using the declining consumption approach would only have a couple thousand left over by age 100.

Though RMD approach may increase a retiree’s odds of being able to leave money to loved ones, a retiree who’s more concerned with meeting his own needs would likely benefit from an option tied to his declining consumption later in life. Consider matching with a financial advisor if you need help with an RMD strategy.

Bottom Line

A whopping 84% of retirees who reached RMD age were limiting their retirement account withdrawals to the minimums that are required, a JPMorgan Chase study found. This method may leave a retiree with not enough annual income than what is needed. A withdrawal approach more closely aligned with a retiree’s spending needs will provide more retirement income and lessen the chances that retirement funds will outlast the retiree.

Tips for Retirement Saving

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• If you’re still years or decades away from retiring, knowing where you stand on the path to retirement is still important. SmartAsset’s free 401(k) calculator can help you determine how much you can expect your savings to grow over time and how much you may have when the time comes to retire.

• Keep an emergency fund on hand in case you run into unexpected expenses. An emergency fund should be liquid — in an account that isn’t at risk of significant fluctuation like the stock market. The tradeoff is that the value of liquid cash can be eroded by inflation. But a high-interest account allows you to earn compound interest. Compare savings accounts from these banks.

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