THE MARKETS

📈 U.S. stocks finished the week up nearly 1%, led by mid-cap stocks which gained 1.7% on the week.

The biggest financial story last week was the release of the latest inflation data and the Federal Reserve’s response. More on that later in our newsletter.

Apart from the inflation report, a number of other economic metrics came in this past week.

🏠 To start, the 30-year fixed-rate mortgage dropped to 6.3% for the first week of April – the 5th consecutive drop.

🛒 Retail sales dropped 0.4% on a monthly basis for February, led by decreases in furniture sales, food and beverages, and retail.

💼 And jobless claims rose to 239,000 for the week ended April 8th.

In other news, President Joe Biden has always been in favor of electric vehicles. But, on Wednesday, he took it one step further by proposing heightened greenhouse gas emission standards for all cars and trucks sold in the US. If this new proposal passes, it could result in EVs making up 67% of all new car sales within a decade. Since EVs made up just 6% of sales last year, this would kick the electric auto industry into high gear.

 What to be on the lookout for this week

This week will be a big week for earnings announcements, particularly from financial companies. In particular, Goldman Sachs, Morgan Stanley, American Express, Bank of America, and BNY Mellon are all set to report. 

 Several other companies reporting earnings next week include IBM, Lockheed Martin, P&G, United Airlines, AT&T, Tesla, and Netflix. This will be Netflix’s first earnings announcement without founder and long-time CEO Reed Hastings. Instead, co-CEOs Greg Peters and Ted Sarandos will take the stand and speak on the streaming company’s crusade against password sharing, as well as the initial performance of its ad-supported tier. 

As far as economic reports, be on the lookout for another update on the number of people filing for unemployment, a revision to the average 30-year fixed-rate mortgage, housing starts and permits, and the number of existing homes sold in March.

Reflects performance at market close 4/14/23​

INFLATION UPDATE

🧊 Inflation Continues Its 9-Month Decline

Inflation Cools in March

The widely anticipated March inflation report was released this past Wednesday. It came in at 5%. This marked the ninth consecutive monthly decline for the metric since peaking at 9.1% last June, and the lowest point seen in almost two years, since May 2021.

This decline was led by a 0.3% drop in grocery prices – specifically, egg prices. Since peaking at just over $5 per dozen at the height of “eggflation” in the beginning of the year, the national average price for a carton of eggs is back to around $3.

Overall, this report was generally considered good news for investors, consumers, and the economy as a whole.

What This Means

Inflation is a metric that tracks the rise in prices, or the devaluation of a currency over time. So, to say that inflation is 5% means that, on average, prices of goods have risen 5% since last year.

Usually, prices increase by a manageable 2-3% each year. But, in the wake of the pandemic, inflation skyrocketed, peaking over 9% in June 2022. This created a scenario in the US where prices were increasing faster than most people’s earnings. In other words, the cost of living was quickly becoming unaffordable for many Americans.

In response to rising inflation, the Federal Reserve, America’s central bank, started to increase interest rates. Increasing rates is a tactic that can help slow the US economy by making it more expensive to borrow money. To see how this works, let’s consider the US housing market…

During the pandemic, interest rates sat at record lows, which made it incredibly cheap to borrow money. The average mortgage rate in 2021 hovered at just 3%. So, if you put an offer down on a home, there were many other people bidding against you. This competition led to an increase in home prices as buyers attempted to outbid each other. 

In response, the Federal Reserve began raising interest rates at its fastest pace since the 1980s. Today, the average mortgage rate is 6.3%. Since it’s more expensive now to get a mortgage, fewer people are incentivized to buy houses, and the lack of competition helps bring home prices back down.

This is how the Federal Reserve attempts to balance interest rates, inflation, and asset prices. But mortgage rates are only one factor, and, as always in the economy, there are many more at play.

Looking Forward

The good news is that inflation has been coming down and is already notably lower than it was a few months ago. But 5% is still more than double the Fed’s 2% target. On top of that, the recent collapse of Silicon Valley Bank is a sign that the economy is not exactly stable. In fact, Fed officials still expect the US to enter a recession later this year.

With more inflation and a recession potentially on the horizon, the Fed appears conflicted on what to do next. Should it continue to raise rates to squash out inflation? Or does it ease off to help stabilize the economy?

Based on prices for Fed funds futures contracts—a contract that allows investors to bet on the prevailing Fed funds interest rate at a given point in the future—the market is forecasting that the Fed will raise rates in May, but then expects the Fed not to raise rates in June. Further, while the Fed has repeatedly suggested they will not lower rates this year, the market—based on Fed funds futures pricing—is expecting the Fed to start lowering rates by July! 

YOUR ECONOMY​

🧾 Tax Filing 101

Breaking Down Taxes

If this is your first year filing taxes, don’t worry if you’re a little intimidated. In fact, if you’ve been filing taxes for decades, don’t worry if you’re a little intimidated. Filing taxes in the US is a complicated process. It’s natural to not always know where to start.

The most important thing to know is the deadline – and, not to intimidate you further, but it’s rapidly approaching. On or before April 18th, you’ll need to submit a financial snapshot to the government in the form of a tax return outlining all of your income from the previous calendar year. 

So, this April you will be reporting your income from January 1, 2022 to December 31, 2022.

How To File

You can file your taxes online using the IRS’s Free File system or a third party service, such as TaxAct or TurboTax.

Regardless of which one you use, you’ll have to upload all of your necessary financial documentation. This typically includes tax forms from your employer, banker, investment platforms, loan servicer, or the state. You shouldn’t have to worry about asking for these forms, as these organizations already know to send them. But be careful, as forms can get lost in the mail or sent to an old email address.

 It’s important to remember that you must report all of your income. This includes:

• Income from your employer

• Self-employment income

• Service tips

• Severance payments

• Unemployment benefits

• Investment income

• Gambling winnings

• Large cash gifts

 The IRS even includes a clause asserting that US taxpayers must report illegal income. And it may not even be entrapment. The IRS exists to enforce a single law: tax law. As long as you are paying the correct amount of tax on all your taxable income, the IRS may well leave you alone.  

The IRS gets a copy of your forms from any companies that pay you. If there is a discrepancy between those and what you report on your tax filing, it will get flagged in the system and risk triggering an audit. An audit is when the IRS dispatches agents to look over your accounts and finances to ensure your taxes were correctly reported and collected.

You’ll also need to file two returns: one with the federal government and one with the state government – unless, that is, you live in Alaska, Florida, Nevada, South Dakota, Texas, Washington, or Wyoming.

Other Things To Know

In addition to reporting income, the government also lets you legally “reduce” your income by claiming tax credits or writing off approved expenses. By legally reducing your income, you pay a lower amount in taxes. 

In particular, claiming tax credits can be an easy way to reduce the amount you pay in taxes and potentially increase the size of your refund check. 

A few common tax credits to explore are:

• Earned Income Tax Credit. This credit is intended to help employees who earned less than $59,187, especially those with children.

• Education credits. There are credits available for those enrolled in school who are footing the cost of their education. 

• Saver’s Credit. This is a federal match for lower-income earners’ retirement contributions, up to $2,000 a year.

• Child Tax Credit. This credit allows parents to claim up to $2,000 for each child.

At the end of the day, the tax code is deeply complex, and you’re not expected to memorize it. Even for the most experienced taxpayers, filing your taxes may still feel like you’re figuring it out as you go along. But, as long as you’re honest and transparent every tax season, you have nothing to worry about.

🚗 Turmoil in the Used Car Market

Americans Fall Behind on Car Loans

The delinquency rate on subprime auto loans just hit its highest level in over a decade. In other words, more people are refusing to pay their car loans. For many, this is likely the result of overpaying for a car in 2021 or early 2022. 

To get a new set of wheels over the past two years, many buyers took out overpriced auto loans. Despite being expensive, these loans were for cars that already had plenty of mileage and were due for repairs. If the cost to fix the car is the same or higher than the value of the car itself, it makes more sense to not fix the car and stop repaying the loan. 

This less-than-ideal scenario can be traced back to the pandemic.

Pandemic Fallout

During the pandemic, auto manufacturers were hit with a shortage of auto parts after supply chains broke down. Since manufacturers couldn’t get the necessary parts, they couldn’t produce enough new cars to meet the demand. As a result, people flocked into the used car market in search of a ride and prices surged.

As of February, the average price for a used car hit $28,000, up about 36% over the past three years. Compare this to the beginning of 2020, when the average used car was selling for about $20,000. 

Due to these inflated prices, many shoppers were essentially forced to pay top dollar, even when buying an older car. Now, just a year or so later, these cars are breaking down and putting their buyers in a lurch.

The bad news continues for car owners, as the cost of car maintenance is also up significantly. In 2022, car owners spend about $800 per year on car maintenance. Before the pandemic, car owners only paid about $600 on average. Experts don’t expect the cost of car maintenance to drop anytime soon.

Shifting Gears

Lenders have taken notice of the rise in auto loan defaults and have been tightening their lending standards. This is yet another factor making it harder for Americans to purchase a reliable mode of transportation. 

 For many people, the three choices are:

1. Overpay for an old car that may need maintenance soon.

2. Try to finance a car that will guzzle most of their savings.

3. Forego buying a car entirely.

That said, if you’re still in the market despite the unideal conditions, there is one strategy that could help: getting pre-approved for a car loan through a third-party lender.

Doing so helps you establish a budget beforehand so that you know exactly what you can afford while shopping. It also lets you shop around at multiple lenders to get the best interest rate possible. If you resort to using a dealership’s financing, you’ll only get one offer for a rate, and it probably won’t be the best one.

On the flipside, with ubiquitous rideshare companies like Uber and Lyft, it’s easier to get around without a car these days than ever before. Considering the cost of a monthly car payment, gas, insurance, and maintenance, and depending on where you live, it might even be the cheaper option.

POCKET CHANGE

Promising housing data, particularly dipping interest rates, could signal that the market’s downturn is coming to an end. This is especially true with the strong spring selling season coming up.

Officials at the Federal Reserve expect the US to enter a “mild” recession later this year. This concern was sparked by the recent turmoil in the banking sector triggered by the collapse of Silicon Valley Bank and Signature Bank.

Another corporate earnings week is about to kick off and analysts don’t have high expectations. The general consensus is that most S&P 500 companies will report a second consecutive decline in earnings.

Recent data shows only 27.5% of private businesses allowed remote work from August 2022 to September 2022. Despite the popularity of working from home, nearly ¾ of companies are still in-person.

The Fed has stated it plans to pause interest rate hikes at some point this year. Now that this has been established, investors will want to see signs that the economy is strengthening in the near future.