Financial advisors in Troy NY

Representatives from the Biden Administration as well as from the Federal Reserve seem preoccupied with conveying to the American public that the United States economy has not yet fallen into recession. And technically, they are correct as the National Bureau of Economic Research (NBER), the body that defines exactly what constitutes a recession defines one as “a significant decline in economic activity that is spread across the economy and lasts more than a few months.” In addition to the subjectivity of the above statement, the specific criteria the NBER uses in determining exactly what constitutes a recession is only know to a few. Moreover, the NBER quite often determines if a mild recession has occurred only after it has passed.

The reason for the debate is given the fact that the NBER has not made public the specific criteria used in determining exactly what constitutes a recession, economists as well as others have made their own definition, that is two consecutive quarters of negative growth in the economy as represented by Gross Domestic Product (GDP), released by the Bureau of Economic Analysis. This past week, GDP for the second quarter was released which showed that the economy contracted at an annualized pace of 0.9% which comes on the heels of a 1.6% drop recorded during Q1.

Several components to the economy negatively impacted second quarter GDP, namely the purchase of both durable as well as nondurable goods, residential and business investment, a decrease in inventories as well as weak government spending.

In addition to the weakness in the data noted above, what struck us as most telling was contained within the update provided by Walmart for their second quarter and fiscal year 2023. This stated that “comp [comparable] sales for Walmart U.S., excluding fuel, are expected to be about 6% for the second quarter. This is higher than previously expected with a heavier mix of food and consumables, which is negatively affecting gross margin rate. Food inflation is double digits and higher than at the end of Q1. This is affecting customers’ ability to spend on general merchandise categories and requiring more markdown to move through the inventory, particularly apparel.”

Walmart CEO Doug McMillon noted that “the increasing levels of food and fuel inflation are affecting how customers spend, and while we’ve made good progress clearing hardline categories, apparel in Walmart U.S. is requiring more markdown dollars.” Simply put, inflation is forcing lower end consumers to allocate a larger percent of their budget to the necessities of life thereby leaving less room for the extras.

Toward the other end of the spectrum are customers of Chipotle which reported earnings per share above expectations as the fast casual dining chain has had success raising prices as their input costs have increased. During their earnings call Chipotle’s CEO, Brian Niccol stated that “the low-income consumer definitely has pulled back their purchase frequency. Fortunately for Chipotle, you know, the majority of our customers are a higher household income consumer.”

Due to the level of inflation for necessities exacerbated by the imbalances in the supply chain along with, up until recently too easy of a monetary policy, we would define this economy as one that is weakening and perhaps either having just entered or on the threshold of a mild recession. However, it is one that the stock market has mostly priced in. That said, should the Fed continue to pursue a policy that seeks to equalize the supply demand equation on those that are already seeing their purchasing power shrink, then the recession may be more severe. That is precisely why, at this time, after having

just increased the federal funds rate by another 0.75% this past week, we believe the Fed should raise interest rates by only 0.25% at their upcoming meeting in September and then take a wait and see attitude.

Please note that all data is for general information purposes only and not meant as specific recommendations. The opinions of the authors are not a recommendation to buy or sell the stock, bond market or any security contained therein. Securities contain risks and fluctuations in principal will occur. Please research any investment thoroughly prior to committing money or consult with your financial advisor. Please note that Fagan Associates, Inc. or related persons buy or sell for itself securities that it also recommends to clients. Consult with your financial advisor prior to making any changes to your portfolio. To contact Fagan Associates, Please call 518-279-1044.

Shareholders of General Electric are painfully aware of the fact that taxes are a secondary consideration when deciding whether or not a particular holding should be sold. After investors ceased believing that G.E. was a proxy for the broader equity markets, some listeners to our radio show stated that they nonetheless felt trapped in the stock as the tax on the gain, if realized, wasn’t worth it. In hindsight and despite the potential tax on the capital gain that would have accompanied the sale of G.E., investors would have been wise to have sold at almost any time over the past decade as opposed to riding it down from an all-time split adjusted high of around $480/share to where it currently trades at approximately $63/share.

We could have used as an example IBM, Eastman Kodak or any number of former blue chip companies that may still produce quality products, but whose stock price has languished due to factors within or outside their control. Buy and hold is dead because it never really existed. We strongly prefer buy and monitor, that is to say prudent investors keep a wary eye on all of their investments, regardless of the perceived quality. They have a plan in case that particular investment does not initially work out in their favor or as with General Electric, does perform for decades but then at some point in time begins to underperform relative to its competitors as well as the overall stock market.

Given the impact of taxes upon your net investment return, investors should work closely with their advisors regarding investment tax planning. Investors who are managing their own accounts should be able to calculate the impact of a capital gain/loss on their tax return.

The recently legislated tax reform specifies that long-term transactions, defined as those in which the underlying security has been held for one year or longer are generally taxed at zero percent for those taxpayers filing jointly with taxable income of $83,350 or less; at fifteen percent for those with taxable income between $83,350 and $517,200 and at 20% for those fortunate enough to have taxable incomes above $517,200. Short-term transactions, those which the security has been held for less than one year are taxed as ordinary income and subject to the same tax rate as your wages or dividend income. For most taxpayers, the rate is between twenty-two and thirty-two percent for the Federal Government. In both instances, for taxpayers in New York State, long-term and short-term capital gains are taxed as ordinary income.

The bottom line – have a plan that includes the impact of taxes, but do not make the avoidance of taxes paramount in the decision making process.

Please note that all data is for general information purposes only and not meant as specific recommendations. The opinions of the authors are not a recommendation to buy or sell the stock, bond market or any security contained therein. Securities contain risks and fluctuations in principal will occur. Please research any investment thoroughly prior to committing money or consult with your financial advisor. Please note that Fagan Associates, Inc. or related persons buy or sell for itself securities that it also recommends to clients. Consult with your financial advisor prior to making any changes to your portfolio. To contact Fagan Associates, Please call 518-279-1044.

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This morning the Bureau of Labor Statistics reported that retail inflation for the month of June as measured by the Consumer Price Index (CPI) rose a hotter than expected 1.3% m/m and by 9.1% y/y, its highest level since November 1981.  Energy prices jumped 7.5% m/m and by 41.6% y/y while food costs rose 1.0% y/y and by 10.4% y/y.  As we have recently noted within our Weekly Snapshot, “we are still of the mind that this inflationary cycle is slightly more secular than transitory as we believe elevated energy prices (perhaps not at this level, but higher as compared to the past two decades) are here to stay as are higher wages. The impact of permanently higher wages will be felt more severely in the United States than in developing countries as we are a service economy. That said, we do expect wages to plateau shortly as the workforce reappears, having spent their COVID windfall”.  As you can see from the chart below, commodity prices and producers have all been hit sharply over the past 3 months, signaling that some inflationary pressure might be starting to wane.  These could be early signs that the Federal Reserve’s effort to reduce demand is having an impact.

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Given the larger than expected increase in the CPI, investors will be interested in what the Fed has to say at the conclusion of their meeting in a couple of weeks.  We believe traders have fully priced in a 75 bp rate hike.  However, we would not be surprised if a 100 bp rate hike is on the table.  

We are anxiously anticipating the upcoming corporate earnings season, paying close attention to any slowdown in demand during the second half of the second quarter, downward revisions to forward guidance, any impact from the disruption in the supply chain or the appreciating dollar, as many companies within the S&P 500 derive more than 50% of their revenues outside the United States.  We remain cautious over the short-term and optimistic as the year wanes, noting within our Weekly Market update that “our base case currently is for investors to expect volatility and perhaps more downside to the tune of five to ten percent, especially over the first half of the third quarter. However, as the quarter rolls on, investors will begin to focus on the opportunities within the financial markets rather than the risk thereby setting a floor and allowing them to proceed higher, albeit in an uneven fashion.”  

All information is as of the market close on July 12, 2022. Please note that all data is for general information purposes only and not meant as specific recommendations.  The opinions of the authors are not a recommendation to buy or sell the stock, bond market or any security contained therein.  Securities contain risks and fluctuations in principal will occur.  Please research any investment thoroughly prior to committing money or consult with your financial advisor.  Please note that Fagan Associates, Inc. or related persons buy or sell for itself securities that it also recommends to clients.  Consult with your financial advisor prior to making any changes to your portfolio.  To contact Fagan Associates, Please call 518-279-1044.

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