Monthly Update
Summary
  • Smooth Ride Into September
  • Interest Rate Showdown
  • Presidential Polls & Tax Policy Points
  • Checklist & Tips for College Applicants
  • The Path to Independence


Smooth Ride into September


The thrill of sliding down a water slide happens at the beginning. Initially, there is a sharp, breathtaking decline, followed by a level area that is quick and smooth, after which the rider is deposited into a refreshing pool.


While less than a perfect analogy for financial market activity in August, the water slide comes close.


Stocks fell at a breathtaking clip early in the month, declining by 6% in the first three trading days (see our August Mid-Month Update for more details).


But the fast ride down leveled out, and ultimately stock prices moved back up. For stock investors who maintained their investment strategy, August results were pleasing.


US Large Company stocks rose by 2.3%, and foreign stocks increased by 3.3%. Technology stocks did less well, climbing by 1%.


US small-company stocks struggled, dropping by 1.7%, following a stellar performance in July. Stocks generally have now risen for four straight months, with the last monthly decline occurring in April.


Thus far in 2024, financial market returns have been constructive: Technology, 20.5%; US Large Company, 19.3%; Foreign, 12.1%; US Small Company 10.2%. Bonds returned 1.5% in August and are up 3.2% year-to-date.


Positive stock market returns likely are one factor influencing consumer confidence, as recent data show an upward shift in sentiment.


The Conference Board, a New York-based research organization, said on Tuesday that its consumer confidence index rose in August from July, matching its highest level since February.


Other consumer confidence polls, such as the University of Michigan’s consumer sentiment gauge, and a recent Wall Street Journal survey, point in the same direction.


Below is a snapshot of financial market performance for August.

US Small Co = Russell 2000 Index; Foreign Stocks = MSCI EAFE Index; US Bonds = Bloomberg US Aggregate Bond Index; US Large Co = S&P 500 Index; Tech Stocks = Russell 1000 Technology Index

Interest Rate Showdown


In poker, the “showdown” is a situation where, if more than one player remains after the last betting round, remaining players expose and compare their hands to determine the winner.


The showdown for interest rates occurred on August 23 in Wyoming – absent horses, cowboy hats, pistols, and booze.


The Jackson Hole Economic Symposium is an annual three-day international conference hosted by the Federal Reserve Bank of Kansas City at Jackson Hole, Wyoming.


The keynote speaker is the Chair of the Federal Reserve Board of Governors (the leader of the Fed), whose comments typically focus on the US economy and monetary policy.


This year, Fed Chair Powell played the interest rate showdown during his Jackson Hole speech, when he said:


  • “my confidence has grown that inflation is on a sustainable path back to 2%”
  • “we (the Fed) do not seek or welcome further cooling in the labor market”
  • “the time has come for (interest rate) policy to adjust”


What gives the Fed Chair such confidence? Pandemic-driven inflation peaked at 9% in 2022, but has declined since, and recent readings show inflation has dropped below 3%.


The chart below shows the Consumer Price Index since 1965. According to this data series, inflation had ticked down to 2.9% in July.

Source: New York Times

Along with inflation, the jobs market has cooled, too – meaning jobs are still available, but harder to find now than a year ago.


Borrowing costs at their current level may be unnecessarily high, pressing down too much on the economy and inflation. Concerns about the possibility of an economic slowdown are likely behind the Fed’s signaling of future interest rate reductions.


So, the parlor game played by Wall Street people, where prognosticators pontificated and professionals speculated on the direction of interest rates, ended with the Jackson Hole speech.


What’s important to bear in mind is that the Fed has direct control over the overnight cost of funding for big banks (the Fed Funds rate) which is a very short-term interest rate.


The Fed Funds rate then affects other interest rates, such as the Prime Rate, which sets the cost of borrowing for consumers.


Currently, the Fed Funds target rate is 5.25% - 5.5%, and the Prime rate, which is usually about 3 percentage points higher than the Fed Funds target rate, is 8.5%.


The decline in short-term interest rates will begin soon, and most likely on September 18, when the Federal Reserve concludes its next board meeting.


Fed Funds futures contracts are financial instruments which allow Wall Street traders to speculate on what the Fed Funds target rate will be next month, or next year.


Fed Fund futures now anticipate a steady decline in short-term interest rates during the next 15 months.


These contracts currently anticipate Fed Funds declining in September, continuing to fall during the next sixteen months, and dropping by 2 percentage points from today’s level, to around 3.5% by the end of 2025.


What does this mean for Main Street people?


  1. It will get cheaper to borrow money (mortgage rates have already started to drop)
  2. “Safe” returns from CDs and High Yield savings accounts will start to come down
  3. Lower interest rates should provide a tailwind for stocks


Fixed rate mortgages have already begun to decline. The average 30-year mortgage was over 8% in late 2023. Today the mortgage rate sits at 6.5%. As short-term rates and the Prime Rate fall, it’s reasonable to expect that mortgage rates will continue to decline, too.


For savers, there is likely limited time to earn 5%+ yields on CDs, High Yield savings, and Money Market accounts. If you’re counting on that income to meet expenses, you should expect to receive less of it in the months ahead.


Since short-term rate declines should proceed at a measured pace, short-term yields above 4% should be around for a bit longer. But expect those yields to fall below 4% by the end of 2025.


For stockholders, the impending interest rate declines should be beneficial. Typically, a Fed easing cycle is a tailwind for stocks when the economy is growing (no recession, like today's environment) at the time of the first rate cut.


The chart below shows that on average, stocks have significant gains during the year after the Federal Reserve reduces interest rates.

Source: Edward Jones

The chart measures time along the horizontal axis in weeks prior to and following the first “Fed cut”, or reduction in short-term interest rates by the Federal Reserve.


Stock market performance has been much less satisfactory when interest rates are declining during recessionary times.



Presidential Polls & Tax Policy Points


We are now a little more than two months away from the next US Presidential election. Many of our clients are interested in following the contest, and the Presidential race currently looks like it will be close.


In their US Election 2024 section, The Economist magazine publishes a daily update on the Presidential polls. I like following this format because it’s assembled by a respected organization domiciled outside of the US.


Based on The Economist model, the latest projection, from August 30, shows Harris winning by 274 electoral votes to 264, with 270 electoral votes required to win.


Source: The Economist

From the perspective of the possible impact on personal finances, tax policy marks one of the bigger gaps between Democrats and Republicans.


Many provisions in the 2017 tax law, which reduced taxes, are scheduled to expire in 2026 if Congress takes no action.


Candidate Trump wants the 2017 law made permanent, while Candidate Harris has pledged no tax hikes on those making less than $400,000.


Below are other tax ideas that Harris supports (source is The Kiplinger Tax Letter):


Tax ideas for individuals, supported by Harris:


  • Bring back the top 39.6% income tax rate for people making $400,000 or more (currently the top tax bracket is 37%)
  • Hike the 3.8% net investment income surtax to 5% for $400,000 earners
  • For taxpayers filing Jointly with incomes over $1,000,000, long-term capital gains tax would be imposed at ordinary tax rates up to 39.6% (44.6% with the 5% Net Investment Income tax added in); for separate filers, the income breakpoint is $500,000
  • Tax unrealized gains upon death, with capital gains and losses reported on the decedent’s final income tax return, with a $5 million lifetime gain exclusion
  • Apply a 25% minimum income tax on the ultrarich (those with $100 million in wealth); this tax would apply to unrealized capital gains
  • Bring back expansions to the child credit: boost to $3,600 per child (from current $2,000), with monthly payments and full refundability
  • A new one-time credit of $6,000 per child claimed in the first year of the child’s life
  • Give first-time home buyers a credit of up to $10,000
  • Allow more people to get credits for buying health insurance through the Health Insurance Marketplace
  • Make tipped income tax free


Tax ideas for businesses, supported by Harris:


  • Raise the 21% corporate tax rate to 28%
  • Increase the 15% alternative minimum tax on large corporations to 21%
  • Quadruple the 1% excise tax on stock buybacks by publicly held firms


It’s likely that additional tax ideas will be floated by both campaigns in the weeks ahead.


It’s also important to recognize that, regardless of who becomes 47th US President, the composition of the House and Senate will be critical in determining which policy proposals actually become law.



Senior Year is Here: A Financial Aid & Admissions Checklist + Tips for College Applicants


Our colleague and college specialist Donna Cournoyer contributed the following update for college planning


Senior year for a high school student and their family is usually quite busy. Settling into the new school year schedule and activities begins in earnest as Labor Day brings summer to a close.


Organization can keep a college-bound senior and their family on top of the to-do’s and deadlines, ensuring this last leg of college preparation and the application phase goes smoothly.


To help in this effort, I've provided need-to-know information in the following five sections:


  1. Key Considerations for High School Seniors
  2. FAFSA Application Form Availability & Deadlines
  3. FAFSA Formula & Net Price Calculator
  4. Merit Scholarships
  5. The Fall Checklist


Key Considerations for High School Seniors


Eligibility for financial need-based Federal financial aid from the US Government and need-based grants and aid from US colleges is based on the Federal FAFSA application (Free Application for Federal Student Aid) and its formula.


This includes free grant money from the government such as the Pell Grant, the colleges’ free grants, Federal Subsidized student loans and the Federal Work Study program.


The following link to studentaid.gov website runs through the Types of Federal Student Aid.


Eligibility for the student is determined by the financial aid office at the college or university to which the student is applying.


Even if you are likely not eligible for financial aid and need-based funds, I strongly recommend that everyone complete the FAFSA form.


Schools often award some free grant money to students for completing the FAFSA form regardless of eligibility and some schools require it for the student to be considered for a merit scholarship, even though those are not based on financial need.


FAFSA Application Form Availability & Deadlines


The traditional opening date of the FAFSA form is October 1 for the following academic year. (October 1, 2024, for the 2025-2026 year).


However, last fall due to major changes in the form for the first time in many years, there were many hiccups and delays from the Department of Education and the 2024-2025 application did not open until January 1, 2024. From there, issues continued for months.


In August, The Department of Education announced that the FAFSA is expected to open for testing with a limited set of students and institutions on October 1. The DoE also stated they will make the application available to all students on or before December 1.


Be sure to check the financial aid pages on the websites of your college list to keep up with the opening date of the FAFSA and each school’s required forms, and check online on the Federal Student Aid website- look for “2025-26 FAFSA form” here: FAFSA.


For schools on your list check to see if any also require the CSS Profile


FAFSA Formula & Net Price Calculator

 

The FAFSA formula uses some key figures to determine a student’s eligibility for financial aid, some key elements in that formula are:


  • Parents’ Adjusted Gross Income (AGI)
  • Parents’ Taxes paid
  • Parents’ investments OTHER than personal retirement accounts. (not including accounts such as your IRA, 401(k), etc.)
  • Number of family members


Another way to estimate financial aid ahead of access to the FAFSA and college financial aid letters is to use each college’s Net Price Calculator.


  • The simplest way to find a school’s Net Price Calculator is to search the name of the college followed by “npc”, such as: yourschoolnpc.
  • Keep in mind that they do not all include merit scholarship estimates, which will help your net cost if the student is awarded one with admission to the school.

 

Merit Scholarships

 

Merit Scholarships are school-awarded scholarships NOT based on the FAFSA form and financial need.


Merit Scholarships (also called Academic Scholarships) are based on the student’s overall admissions application which includes GPA, essays, possibly SAT or ACT scores and interviews, and any other requirements from the admissions office.


Schools usually have a range of amounts they may offer students, and Merit Scholarships are usually awarded for four years and may have a GPA requirement for continued eligibility. Each school will have different criteria and amounts available according to their own policies. Eligibility is determined by the admissions office.


Be sure to get your admissions applications and the Common App done early, to help put yourself in the best position to be awarded a merit scholarship. And make a list of the application deadlines for each school you are applying to.


The Fall Checklist


  • Deadlines: Make a list of deadlines for admissions and financial aid for your college list
  • FAFSA: Watch for the opening of the FAFSA and complete as soon as possible
  • Net Price Calculator: Estimate Your Net Cost for schools on your list (use NPCs for now, and merit and financial aid offers later)
  • Your Budget: Estimate how much you are able and willing to spend and / or borrow for your student’s education
  • Complete the Common App/Admissions Applications Early: Be sure to get applications done early. Early applicants are likely to receive decisions the earliest.
  • SAT/ACT: Decide if your student will submit scores and/or retake any tests.
  • Engage with your Admission Representatives: For your top schools reach out to your admissions counselors and let them get to know you so they can advocate for your admission and merit scholarship.
  • Make Another School Visit: If you are having trouble narrowing your list, or deciding which school is at the top, try to visit the school again. It is also good to tour when students are there.
  • Make a List of Pros and Cons for Each School: Look at programs, school size, student resources and activities, location, cost estimate and of your important decision factors for your college choice. This is helpful as you start applications, and the process gets closer to decision making time.


If you are interested in some guidance, we offer hourly college planning services, and a complimentary 30-minute consultation to discuss your personal situation. You can schedule an appointment here on our website: Schedule an Introductory Meeting.


Good luck and have a great year, seniors!



The Path to Independence


Many clients wonder how their own finances will change as their children become independent young adults.


Where do parents draw the financial line with their children? What steps can parents take now, and in the future, to help keep themselves on track for personal and financial success as their children become independent young adults?


Our friends at fpPathfinder, a financial planning research organization, have put together a checklist (lick on the picture to enlarge and download) to ensure that you’re addressing critical planning concerns during your child’s transition into adulthood.


Topics on the ‘Path to Independence’ checklist include:


  • Do you have access to your child’s important records?
  • Is your child still able to be on your health insurance?
  • Are you planning to help your child with large upcoming expenses?
  • Do you need to review your taxes might change once your child becomes independent?
  • Are you concerned that your child is (or will be) fiscally irresponsible?
  • Are you concerned about your child’s actions or behaviors causing future liability issues for you?
  • Do you need to review your budget and expenses once your child leaves the house?


You can click on this link or on the image below to download the two-page checklist.


Holiday Wishes


Susan, Donna and I wish you a restful holiday and hope you’re able to spend time in the company of people who bring you happiness as the summer season draws to a close!

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