• Stocks recently rallied on signs that decreasing inflation could prompt a Fed pivot
• Inflation is proving to be ‘sticky’ and may result in interest rates staying higher longer
• Market experts are moving into real assets to preserve wealth during the uncertainty

Data Points to ‘Sticky’ Inflation

The promise of shrinking inflation propelled a rally in risk assets. Yet Jamie Dimon, CEO of JPMorgan Chase, said “People should take a deep breath on this one before they declare victory.” Experts agree that the rally will be short-lived due to ‘sticky’ inflation. Combined with a surprisingly strong jobs report, inflation may give the Fed no choice but to raise interest rates higher for longer.¹

Fed Chair Powell said disinflation has begun. December’s CPI was the smallest year-over-year increase since October 2021. It was at 6.5% on an annual basis, down from a 9.1% peak in June 2022.²

But that isn’t painting the most accurate picture of the economy. The Fed is monitoring a category that’s become known to Wall Street economists as “supercore” inflation. Supercore inflation is service industry inflation minus energy and housing. Supercore inflation surged to a 40-year high of almost 7% last fall. It has only slowed to a 6.3% rate.³

In addition, economists are factoring in the routine revisions to 2022′s inflation data. The new data shows that inflation hasn’t been falling as fast as the original reports had suggested. The chief U.S. economist at Morningstar said, “Based on the revisions to recent historical data, the decline in core inflation now looks less impressive than previously shown.” Overall, the signs indicate that inflation will be more persistent than once forecasted. ⁴

Sticky Inflation and Stock Prices

Analysts expect S&P 500 earnings to decline 3.7% and 3.1% in the first two quarters of 2023. Tim Drayson is the Head of Economics at Legal & General Investment Management. He expressed his doubts about the future of equities. He said, “I don’t see how you can get inflation back to target without a recession, and that means equities will be disappointed either on inflation or on earnings.” Michael Farr of Farr, Miller, and Washington shared this opinion. He said he “certainly wouldn’t be a buyer of the stock market. The risk is higher, and the potential reward is much lower right now.”⁵

Michael Burry of ‘The Big Short’ fame warned that recent rallies remind him of previous irrational tech buying sprees. To him, investors are ignoring the reality of inflation. Burry sees inflation decreasing as we enter a recession. Only for the Fed to pivot and stimulate the economy. This will result in inflation spiking to double digits. Burry isn’t sitting in cash waiting for the market to crash. Instead, he is investing in recession-proof, real assets that perform when the economy suffers, and inflation is high.

The Fed and Wall Street are waking up to the fact that inflation is going to be with us for a long time. Like Michael Burry, investors should look to real assets to protect the value of their portfolios. Precious metals are highly accessible real assets proven to preserve value during periods of sticky inflation. Contact us today to learn how a Gold IRA can help you.

Notes:
1. https://www.yahoo.com/now/jamie-dimon-fears-markets-may-164412929.html
2. https://www.cnbc.com/2023/02/13/a-new-inflation-warning-for-consumers-coming-from-the-supply-chain-.html
3. https://www.marketwatch.com/story/cpi-in-the-spotlight-fed-worried-about-sticky-inflation-f56efd9e
4. https://www.morningstar.com/articles/1137589/january-cpi-report-shows-sticky-inflation-is-back
5. https://www.reuters.com/markets/us/us-stock-rally-faces-uphill-climb-after-mixed-inflation-data-2023-02-14/

Stock Buyback Taxes Could Hurt 401(k) Value

During State of the Union, President Biden proposed a tax that could harm the retirement savings of anyone with a 401(k), IRA or pension plan. He proposed quadrupling the taxes on corporate stock buybacks. Biden and the Democrats see buybacks as an unjust windfall for executives. In reality, they are a pillar of support for the stock market. And when that pillar is gone, prices can come crashing down.

This tax comes at a terrible time. 401(k) plans and IRAs have lost roughly $1.4 trillion and $2 trillion respectively since the end of 2021. Biden tried to pass this tax before in his bloated “Build Back Better” social justice bill. The Congressional Budget Office had determined it would be a $124 billion tax hike.¹

Biden justified the tax hike by claiming that stock buybacks reduced corporate investment. The Tax Foundation found the opposite to be true. “A large body of evidence supports the idea that companies generally only consider stock buybacks when they have exhausted their investment opportunities and met their other obligations.”²

Buyback Benefits

Buybacks have been a major reason behind stock market gains over the past decade. This tax threatens that growth. “Corporate buybacks – a major catalyst for the bull market since the Great Financial Crisis – will likely be dramatically reduced going forward,” warned Bensignor Investment Strategies.³

The benefits of corporate buybacks include:

Increased Stock Prices and Earnings Per Share: When a company buys back its own shares, it reduces the number of outstanding shares. This increases the demand for the remaining shares. The increase in demand drives up the stock price. The reduced number of outstanding shares also results in greater earnings per share.

Improved Financial Performance: Companies buyback their stock when they have excess cash and believe it is undervalued. This shows confidence in their financial future. The appearance of a strong financial position can increase investor demand and raise stock prices.

Increased Dividends: Companies may also increase their dividends after a buyback. Dividends can provide an additional source of income for 401k plan participants. Increased dividends can signal to investors that the company is financially stable. It also shows a commitment to returning value to its shareholders. This commitment can improve corporate governance and lead to better financial performance.

Unforeseen Consequences

This administration will rush to get these new taxes into effect. They need revenue to continue funding their agenda. But not enough research is being done to reveal the impact the taxes will have on stocks, retirement funds, or the economy.

In addition, any new taxes come with new issues of compliance. Years of legal wrangling are inevitable. As noted by global tax law firm Skadden, “Because of how the provision defines a ‘repurchase,’ the excise tax could be triggered in many mergers and acquisitions that do not appear to involve stock repurchases as that term is commonly understood.” The new law creates revenues for lawyers and costs for companies. And those costs get carried forward to the consumer.⁴

These new taxes target the securities found in retirement funds. To protect the value of your funds, you can move to assets that are not targeted by the new law. Precious metals in a Gold IRA can preserve your wealth from the new taxes. Contact us today to learn more.

Notes:
1. https://www.atr.org/dems-stock-buyback-tax-hits-401ks-iras-and-pension-plans/
2. https://www.atr.org/dems-stock-buyback-tax-hits-401ks-iras-and-pension-plans/
3. https://www.marketwatch.com/story/receding-share-buybacks-imperil-pillar-of-support-for-u-s-stock-market-in-2023-11671472890?mod=article_inline
4. https://www.atr.org/dems-stock-buyback-tax-hits-401ks-iras-and-pension-plans/

• The Federal Reserve’s eighth interest rate increase is the smallest since March
• Wall Street is rallying on hopes of a Fed pivot, despite Fed assurances that hikes will continue
• As Wall Street and the Fed fight, investors can come out ahead by turning to physical precious metals

Wall Street and the Fed Battle over Rate Hikes

Federal Reserve officials made their eighth interest rate increase in a year on Wednesday. They raised it a quarter-point in their continued fight against inflation. Wall Street and the Fed are finding themselves in a standoff. Investors are eager for the Fed to pivot on rate hikes so markets can rebound. The Fed is focused on bringing down inflation even it means crashing stock prices. There is a way to come out ahead as these two forces clash.

Investors and policymakers have been deadlocked for a while now. The Federal Reserve insists rates will rise above 5% and stay there for some time. Money markets see the Fed struggling to get rates above 5% and have priced in cuts by year-end. This view has helped fuel a tech- and growth-led rally for stocks in 2023.

This scene has repeated several times over the past year. Stocks, bonds, and crypto rally as Wall Street hopes for a halt in rate hikes. The stop doesn’t happen, and prices come crashing back down.

Fed Chair Powell tried to deflate this unfounded investor optimism. “I just don’t see us cutting rates this year,” he said. But he inadvertently fueled that hope. Stocks turned sharply upward after Mr. Powell said that future decisions on rates would be made meeting by meeting. In other words, investors could hope rate hikes might stop at any time.¹

The resulting rallies don’t help the Fed’s effort to tame inflation. Higher stock and bond prices increase capital companies can spend. This can stoke more demand and potentially drive-up prices and keep inflation elevated.

There will be no ‘Fed put’ as it is called. Since the late 1980s, traders had been taught that the Fed was always there to prop up financial markets. It would scrap plans to hike rates or maybe even start cutting them. Even though that era slammed to a stop last year, traders still hold faith in the idea.

Neel Kashkari is President of the Minneapolis Fed. He warned investors: If they doubt the central bank’s resolve to properly finish the job on inflation, even at the cost of putting millions of Americans out of work, they are mistaken. “They are going to lose the game of chicken, I can tell you that.”²

The Fed’s View on Inflation

“Inflation has eased somewhat but remains elevated,” officials said in their statement announcing the rate decision. They repeated that ongoing increases in the target range will be appropriate. “We’re talking about a couple more rate hikes,” said Powell.³

Powell did say that disinflation has begun. But the Fed doesn’t want to prematurely declare victory over inflation. He thinks inflation is still running hot despite recent drops. Powell expects to keep rates high through 2023. The chairman said it would be bad to realize, months from now, that the Fed had not done enough to bring inflation under control. And while
Powell is still holding out hope of a soft landing, he is being very careful not to build expectations.

How to Come Out Ahead

Wall Street and the Fed are two powerful institutions in the U.S. economy. Right now, they are at loggerheads. The Fed wants to return to low inflation while Wall Street wants to return to profits. The means to achieve their ends stand in direct opposition.

The way to get ahead in this conflict is to step outside of it. Investors should look beyond paper securities and into safe haven assets like physical precious metals. Gold prices are on track for their third monthly gain. They surged above $1,900 an ounce on expectations that rates will soon stop rising. This brought Treasury yields and the dollar down. Central banks also bought bullion. A Reuter’s poll of 38 analysts predicted the price of gold to keep rising through the year and into the next.⁴ Learn how a Gold IRA can be your path to wealth preservation and profit. Contact us today.

Notes:
1. https://www.nytimes.com/live/2023/02/01/business/fed-interest-rates-inflation
2. https://www.bloomberg.com/news/articles/2023-02-01/fed-interest-rate-hike-is-latest-salvo-in-wall-street-battle
3. https://www.usatoday.com/story/money/economy/2023/02/01/federal-reserve-interest-rate-decision-meeting-live-updates/11135680002/
4. https://www.reuters.com/markets/commodities/gold-edges-higher-track-third-straight-monthly-gain-2023-01-31/

• The Inflation Reduction Act’s new taxes on business have taken effect
• The ill-timed taxes can hurt corporate earnings and lower stock prices
• Investors turn to precious metals since they are not subject to the new taxes

Higher Business Taxes Threaten 401(k) Savings

Business taxes are rising as the economic forecast grows worse. Biden signed the Inflation Reduction Act into law in August 2022. It includes a corporate alternative minimum tax (CAMT). The CAMT is a 15% minimum tax on large corporations. Also, parts of the 2017 tax overhaul are set to expire. These new business taxes are likely to hurt the value of retirement funds as they cause corporate earnings and stock prices to drop.

Biden tweeted, “It’s 2023. That means the largest, most profitable corporations will have to start paying a 15% minimum tax. The days of the wealthiest companies not paying taxes are over.” These taxes are going to pay for the left-wing agenda found in the Inflation Reduction Act. However, the Joint Committee on Taxation (JCT) found that revenue from the bill won’t cover the costs of all the new programs. It will come up about $100 billion short.¹

Creating more taxes and adding more debt is bad for the economy. Adding new taxes on businesses during a recession is even worse. Around 200 of the country’s largest corporations will feel the brunt of the new taxes. The JCT estimates that the taxes will hit US manufacturing the hardest. Their new tax burden will be over $150 billion. 401(k) anchors like Tesla, Ford Motor, Amazon, and Salesforce are also targeted. Aerospace and defense company Raytheon Technologies said their tax bill spiked by $1.5 billion.

Experts expect the new taxes to drag on 2023 earnings. Goldman Sachs said, “We estimate that all of these provisions would lower 2023 S&P [earnings per share] by three percent.”²

“On the impact of tax increases in a recessionary period, we are highly concerned,” said Chris Netram from the National Association of Manufacturers. He continued, “Some of the items that have already taken effect, that Congress failed to reverse at the end of last year, are causing a lot of pain for our members.” A fragmented Congress is highly unlikely to do anything to help despite calls from the business community.³

Effect on the Economy

The policies of the Biden administration are the exact opposite of what usually happens during a downturn. Taxes and interest rates are normally reduced to help business. Now, taxes are increasing. And the Federal Reserve is raising interest rates at an unprecedented pace to combat inflation. Together, they are stifling growth and encouraging recession.

These new taxes can harm the value of 401(k)s and IRAs by reducing the value of stocks held within them. Investors can defend their retirement funds from Biden’s agenda-driven taxes. They can preserve their wealth by diversifying with assets that are out of the Democrat’s grasp. Safe haven assets like precious metals can protect the value of a 401(k) from the new business taxes. Contact us today to learn how our Gold IRA defends your nest egg from taxes, inflation, and recession.

Notes:
1. https://finance.yahoo.com/news/corporate-alternative-minimum-tax-now-182026379.html
2. https://www.foxbusiness.com/economy/business-taxes-rising-us-economy-heads-choppy-water
3. https://www.foxbusiness.com/economy/business-taxes-rising-us-economy-heads-choppy-water

• CEOs meeting at the World Economic Forum (WEF) in Davos expressed a negative outlook on the global economy
• The WEF found inflation to be the leading short-term crisis
• The UN Secretary General joined business leaders in expressing concern for a global recession

A Negative Outlook from the World Economic Forum

The World Economic Forum is underway in Davos, Switzerland. Judging from the dismal predictions of the nearly 600 CEOs in attendance, the key theme is negativity about the global economy. The macroeconomic forces they are addressing will impact the financial well-being of everyone on the planet.

The World Economic Forum Annual Global Risks Report found the inflation crisis poses the greatest short-term risk facing the world right now. The report determined the Ukraine war, and the pandemic turned the energy crisis, food scarcity and inflation into the most pressing global issues. The report has been published for the Davos summit for 17 years. It factors in the views of 1,200 figures across the private and public sectors. And the World Economic Forum survey found 63% of chief economists think we are heading into a global recession.

The UN Secretary General offered his bleak view of the global economy at Davos. He said, “We are looking into the eye of a Category 5 hurricane. Our world is plagued by a perfect storm on a number of fronts. Start with the short term, the global economic crisis. The outlook, as we all know, is bleak. Many parts of the world face recession and the entire world faces a slowdown.” He said we are facing a “clear recession perspective” due to the war in Ukraine, soaring inflation, rising interest rates and supple chain disruptions.¹

He fears what he calls the Great Fracture – the global economy splitting between China and the West. This could result in two different sets of trade rules, dominant currencies, and internets. The IMF reported that such a divided world economy could cut global GDP by $1.4 trillion.

Outlook from the C-Suite

CEOs shared an overall negative outlook on the global economy. UBS CEO Ralph Hamers said the “era of higher inflation is here to stay”. He continued, “what we do believe is that certainly inflation is on the way back, both in the U.S. as well as in Europe.”²

Standard Chartered CEO Bill Winters said, “Inflation is not done” and suggested the Fed “has got a way to go.”³

Swiss Re CEO says inflation won’t fall back to low levels for at least 10 years. “I wouldn’t get too excited about the end of the Fed hiking cycle.”⁴

If CEOs are negative, so are everyday people. Inflation hovers around 40-year highs. The World Bank warned the global economy was perilously close to recession. And the IMF director said global economic growth will slow down in 2023. A global survey of more than 32,000 people across 28 countries found 60% of people believe they will be worse off in five years. The report has been conducted for more than two decades. It found economic optimism is at “all-time lows”.

The elites are meeting to discuss the fate of their business fortunes in Davos. Yet, their personal fortunes are unlikely to be in real danger. This cannot be said for everyone else. As they argue policy and proposals, individuals concerned about their financial future need to act. A Gold IRA from American Hartford Gold can protect the value of your retirement fund during a global downturn. Contact us to learn more about it today.

Notes:

1. https://www.foxbusiness.com/economy/global-economy-heading-eye-category-5-hurricane-un-secretary-general-warns
2. https://www.cnbc.com/2023/01/17/the-year-of-inflection-top-bank-ceos-weigh-in-on-inflation-outlook.html
3. https://www.cnbc.com/2023/01/17/the-year-of-inflection-top-bank-ceos-weigh-in-on-inflation-outlook.html
4. https://www.cnbc.com/2023/01/17/the-year-of-inflection-top-bank-ceos-weigh-in-on-inflation-outlook.html

• Subjective inflation data is used to try and predict which way the markets will go
• Wall Street traders see inflation going down vs. the Fed who thinks inflation will linger
• As a result, the only thing investors can count on is higher market volatility

What Inflation Data Means to Investors

Before every Consumer Price Index inflation report comes out, there is tense speculation. Is inflation falling or rising? Will the market rally or collapse? Every bit of data is analyzed to determine what the Fed will do next. Even though the Fed clearly states their position. There is what the markets want and what the Fed wants. Somewhere in between, lies the best course of action to protect the value of your retirement funds.

Economic data so far has been unclear. Overall inflation is dropping. But core inflation, the rate when volatile fuel and food have been removed, is increasing. Wage growth is easing which should reduce inflation. Yet unemployment is also easing, which means inflation should remain steady.

Based on trade data, Wall Street expects inflation to fall faster than economists and Fed officials do. The Fed Fund Futures market bets on the inflation rate. It sees inflation coming down to 2.5% in the next seven months.

Federal Reserve projections say inflation will remain well above 3% until 2024. Fed officials have clearly signaled that interest rates must be raised above 5% to hit their 2% inflation target.¹

Investors seem to be forgetting a basic rule. Don’t fight the Fed. The disconnect between Wall Street and the Fed will result in more market volatility ahead. “I think at some point the markets will realize, ‘oh we can’t get to 2%,” and then the markets probably do sell off on that. I think maybe in short term [the stocks go] up and then in the second quarter, they go back down as people realize that 2% is not realistic,” said chief strategist at Spouting Rock Asset Management.²

BlackRock is the world’s largest asset manager. They have $10 trillion in assets under management. They warn that investors are underestimating the threat of stubborn high inflation and elevated interest rates. They see inflation running hot well into 2023. The firm sees little chance of the Federal Reserve cutting rates even if the economy slides into recession. “Even with a recession coming, we think we are going to be living with inflation,” they wrote. “We do see inflation cooling as spending patterns normalize and energy prices relent – but we see it persisting above policy targets in coming years.”³

As the ‘will they’ ‘won’t they’ debate plays out about interest rate hikes, the market continues to struggle. All three major indexes fell this past year. The Dow Jones Industrial Average ended the year down 8.8%, the best of the three. The S&P 500 sank 19.4%, while the tech-heavy Nasdaq Composite plunged 33.1%.⁴

Longest Bear Market in History

A study by Motley Fool shows that this may turn into the longest bear market in history. Most bear markets turn around in under a year. As of the closing bell on Jan. 4, 2023, the S&P 500 had spent 282 calendar days in a bear market. And it doesn’t look close to hitting bottom. The Fed published its “Summary of Economic Projections.” It said not to expect interest rate easing until 2024. If that’s the case, and the S&P 500 adheres to this century’s average timeline to find a bottom, we’re talking about a bear market that could easily top more than 1,000 calendar days. It will become the longest on record. As of now, the longest bear market occurred between 2000 and 2002 and lasted 929 calendar days.⁵

Wall Street vs. the Fed. Optimism vs. history. With all the subjective data, the path to protecting the value of your retirement funds doesn’t seem clear. 99% of us aren’t in a position to know the whole truth. Investors should tune out the noise and rely on what is tried and true. The one safe haven asset that outperformed a sinking market this past year is gold. Contact us today to learn how our Gold IRA can preserve the value of your funds, no matter what Wall Street or the Federal Reserve does.

Notes:
1. https://www.cnn.com/2023/01/11/investing/premarket-stocks-trading/index.html
2. https://www.marketwatch.com/story/why-thursdays-u-s-cpi-report-might-kill-stock-markets-hope-of-inflation-melting-away-11673449025
3. https://www.foxbusiness.com/markets/markets-may-be-underestimating-threat-high-inflation-blackrock-warns
4. https://www.foxbusiness.com/markets/markets-may-be-underestimating-threat-high-inflation-blackrock-warns
5. https://www.fool.com/investing/2023/01/08/this-may-be-the-longest-bear-market-in-history/