Weekly Market Commentary August 26 2024

The Markets

The near future is more predictable than the distant future.

Last year, the St. Louis Federal Reserve explored the accuracy of recession forecasts. They found that short-term predictions about whether there would be a recession in the subsequent quarter were fairly accurate. However, projections for economic growth a year ahead were far less accurate. The researchers concluded, “Even though forecasts can help, we must live with significant uncertainty about future economic conditions.”

Investors experienced some of that uncertainty last week as economic data created confusion about the state of the economy. The Department of Labor released its preliminary revision of the employment report, which showed the number of jobs created from March 2023 to March 2024 was significantly lower than previously thought.

“The new estimates suggest monthly job growth of about 174,000, instead of the roughly 240,000 previously understood… At the end of the day, the revisions imply that the total number of jobs in the U.S. is just 0.5 [percent] smaller than previously thought,” reported Natalie Sherman of BBC News. She cautioned that the preliminary revision will be adjusted again and that, “Over the last four years, the final estimates of job growth have ended up higher than indicated in August.”

Other figures released last week weren’t particularly helpful. In August, manufacturing data was softer than expected. However, sales of existing homes rose in July as supply increases and interest rates fell, reported Seana Smith and Madison Mills of Yahoo! Finance.

The Economist also weighed in on the state of the U.S. economy last week. It asked whether America was already in a recession as some rules of thumb have suggested. It concluded:

“Recession rules are based on the premise that once news gets bad enough, it will worsen further. Historically, that has been a decent bet: unemployment shoots up quickly and then falls slowly; central banks tend to raise interest rates until something breaks. Yet today the Federal Reserve has room to ease and, given the unusual labor-market recovery, some bumpiness does not spell disaster. Although America’s gangbusters expansion is calming, a gradual slowdown is not a crash—no matter what the rules say.”

Up North, the Bank of Canada remains optimistic that the economy's downturn is over after cutting interest rates by 25 basis points in July to

4.5%. However, its sentiments have been put to the test by signals of trouble from two crucial economic areas.

While Canada has managed to avoid a recession thus far, this positive outlook cannot be extended to the manufacturing industry. Sales in factories fell to their lowest point in nearly two and a half years in June, affirming weakness in the economy.

Manufacturing capacity utilization remains lower than before the pandemic. Economists fear there is little chance of significant improvement even as the central bank moves to cut interest rates further.

The economists' concerns reflect the findings of the Bank of Canada's own business survey, indicating that investment plans are lower than usual. The bank noted that companies are more focused on maintenance and fixing rather than growing or enhancing efficiency due to elevated interest rates, low demand, and economic instability.

On Friday, investors were reassured by Federal Reserve Chair Jerome Powell who indicated he is confident “inflation is on a sustainable path back to 2 percent,” and “the time has come for policy to adjust.” Many market watchers interpreted that to mean a rate cut is ahead in September. Major U.S. stock indices finished the week higher and yields on most maturities of U.S. Treasuries moved lower.

Source: FactSet

SKINNY ON THE SOCIAL SECURITY. Social Security was a source of income during retirement for 91 percent of current retirees who participated in the Employee Benefit Research Institute's (EBRI) 2024 Retirement Confidence Survey. Sixty-two percent of participants reported that Social Security was a major source of income. However, both retired and working participants were concerned that significant changes may be ahead.

They’re not wrong to be concerned. According to the most recent Trustees report, the trust fund that supports Social Security and Medicare will pay 100 percent of scheduled benefits until 2033. After that, benefits are expected to drop by about 21 percent.

Meanwhile, Canada is making solid strides in topping up old-age benefits for seniors in response to the high cost of living. In July, the benefit payments for Canadian seniors increased slightly as the Old Age Security service responded to retirement becoming unaffordable for many in the country.

The number of benefits that went out were up by a significant 2.8% compared to what the seniors received the same period last year, a promising increase. Likewise, the Old Age Security benefits from the July to September period is expected to increase by 0.7%, further boosting the optimism for the future.

In July 2022, the OAS (Old Age Security) pension was raised by a fixed 10% for individuals aged 75 and above. These are regular taxable benefits distributed to Canadians who are 65 years or older. The figures are adjusted four times annually - in January, April, July, and October - to account for rising living expenses, as determined by the Consumer Price Index (CPI).

So far, US Congress has not been enthusiastic about addressing the issue because many of the solutions being considered are unpalatable to one group of voters or another. Various solutions are being considered, including:

• Raising the official retirement age. Currently, the full retirement age is 67 for anyone born after 1960. Since people are living longer and working longer, one idea under consideration is that full retirement age be pushed back to age 70 for Americans born after 1977, reported Mike Townsend of Schwab.
• Changing the payroll tax that funds Social Security and Medicare. Under the current system, payroll taxes of 12.4 percent fund retiree benefits. The tax is split between employers and employees. Working people pay 6.2 percent on earnings up to $168,600, and earnings above $168,600 are exempt. One proposal suggests that payroll tax also be assessed on earnings above $400,000, reported Peter Grieve of Money.
• Investing the trust fund differently. An alternative approach that is being considered is diversifying the Social Security trust fund. “Social Security funds are now 100 percent invested in U.S. Treasury bonds, which are very safe but offer a relatively low rate of return. One idea is to put some portion of Social Security taxes into a newly created sovereign wealth fund that would invest in stocks and have the potential to earn a higher rate of return,” reported Townsend.

If you have concerns about the future of Social Security and would like to explore other sources of guaranteed retirement income, please get in touch.

Weekly Focus – Think About It

A Time to Talk
by Robert Frost

When a friend calls to me from the road
And slows his horse to a meaning walk,
I don’t stand still and look around
On all the hills I haven’t hoed,
And shout from where I am, What is it?
No, not as there is a time to talk.
I thrust my hoe in the mellow ground,
Blade-end up and five feet tall,
And plod: I go up to the stone wall
For a friendly visit.

Best regards,

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Disclaimer:

Information in this article is from sources believed to be reliable, however, we cannot represent that it is accurate or complete. It is provided as a general source of information and should not be considered personal investment advice or solicitation to buy or sell securities. The views are those of the author, Eric Muir and Derek Lacroix and not necessarily those of Raymond James Ltd. Investors considering any investment should consult with their Investment Advisor to ensure that it is suitable for the investor’s circumstances and risk tolerance before making any investment decision. Raymond James Ltd. is a Member Canadian Investor Protection Fund.