Bob’s Journal for 12/19

Households Close to Historic High Stock Holdings

U.S. households are more exposed to ups and downs of the stock indexes than at almost any time.

By several measures, household holdings of stock are at or near historic levels.

The percentage of families that own stocks is at its highest level ever, even higher than at past market peaks. Previous peaks in the percentage of families owning stocks were in 1998, 2007, 2019 and 2022.

Also, this is not a case of more of America’s well-off families buying stocks. The percentage of families owning stock is at a record high in each income quintile, which hasn’t happened since 2007.

Another way to examine the data is the percentage of household wealth that’s in equities. That percentage isn’t quite at the record high reached in 2022, but it is very close.

Several factors account for the increased exposure to stocks.

Most people don’t rebalance their portfolios regularly. So, the post-pandemic bull market increases the share of wealth people hold in stocks.

Also, the strength of the labor market means people haven’t had to sell stocks to raise cash. Employment income (plus government subsidies) have been sufficient to allow higher spending.

Of course, the record highs reached by most market indexes are a factor spurring additional investments. Many people follow the recency effect, believing that the future will be like the recent past.

Significant changes in how people can invest in stocks also increased participation. There now are many ways to invest small amounts of money. And most ways of investing now carry low or no fees and expenses.

More people are participating in 401(k) plans or other employer-sponsored plans, which increases their exposure to stocks.

The exposure of U.S. households to stocks is worth considering for several reasons.

Historically, stock returns and valuations peak around the same time household participation in equities peaks.

A more important consideration is the wealth effect.

The Federal Reserve began deliberately supporting stock prices during the financial crisis because of the wealth effect. When people feel wealthier because asset prices are higher, they feel more secure and are more willing to spend. The spending stimulates economic growth.

But the wealth effect can work in reverse. When asset prices decline, people lose confidence and are likely to spend less and save more.

The higher household exposure to equity risk means that if there is a bear market, people are likely to reduce their spending and make any economic downturn worse than it would have been if less household wealth had been tied in the stock markets.

Differences Between RMDs for IRAs and 401(k)s

The rules for required minimum distributions (RMDs) are largely the same for IRAs and 401(k)s. But there are a few important differences.

The IRS recently updated a helpful chart on its website that lists the similarities and differences in key provisions.

One key difference is the starting date for RMDs.

For IRAs, RMDs must start no later than April 1 of the year after turning 73.

For 401(k)s, the starting date is the same, except it is delayed for someone who’s still working for the employer sponsoring the plan (if the plan allows the delay and the worker isn’t a 5% or greater owner of the employer). The worker can delay the first RMD until after leaving the employer.

Another important difference applies to individuals who have multiple accounts of the same type.

When a person has multiple IRAs, the RMD is calculated separately for each IRA. But the individual is allowed to add the RMDs into an aggregate RMD and take that aggregate RMD from the IRAs in any portion he or she desires.

But when an individual has multiple 401(k) accounts, the RMD must be calculated separately for each 401(k) account and taken from that account. There is no aggregating, except for someone with multiple 403(b) tax sheltered annuity accounts.

Other than that, the major RMD rules are the same for IRAs and 401(k)s.

Keep in mind that RMDs are for traditional IRAs and 401(k)s. Original owners of Roth IRAs and designated Roth accounts (also known as Roth 401(k)s) don’t have to take RMDs.

A To-Do List for the DOGE

President-elect Donald Trump created a task force named the Department of Government Efficiency (DOGE). The group is directed to identify ways to reduce the federal bureaucracy and wasteful government spending.

A starting point for DOGE, and some interesting reading for you, is the report recently issued by the Cato Institute.

The report begins with a statement of general principles that support DOGE’s mandate, with an emphasis on reducing regulations and the role of government. It then lists quite a few ways to reduce spending or curb bureaucracy, with explanations for each suggestion.

Three suggestions in the report are particularly good guideposts to how successful DOGE will be.

One suggestion is to limit the subsidies to and protection of U.S. sugar growers. There’s no economic or national security basis for these rules. They simply enrich a very few people at the expense of the rest of the country.

Another suggestion is to eliminate the mandate to use ethanol in gasoline and a group of laws related to that.

There seems to be a general agreement that mixing ethanol in gasoline does little or nothing to improve the environment. It even could make the environment worse and certainly increases the cost of gasoline. We could go back to eating corn at affordable prices instead of burning it in our vehicles.

A third suggestion is to limit or eliminate federal employee unions. Presidents at least as far back as FDR said the reasons for employees to unionize didn’t apply to government employees.

These suggestions have been around for a long time, and there seems to be general consensus that the changes should be made. But nothing has happened yet.

If the DOGE can’t make at least two of them happen, the prospects for more significant changes aren’t good.

You can go through the report and identify changes you’d like to see. Then, let your congressional representative and U.S. Senators know your thoughts.

The Data

Retail sales increased 0.7% in November, which followed a 0.5% increase in October. Excluding gas and autos, sales increased 0.2% in both November and October.

The Producer Price Index (PPI) increased 0.4% in November, following a 0.3% rise in October. The 12-month increase in the PPI was 3.0% in November and 2.6% in October.

After excluding prices for food, energy, and trade services, the PPI rose 0.1% in November after increasing 0.3% in October.

That measure of PPI was up 3.5% for the 12 months ended in both November and October.

Optimism among home builders was unchanged in December. The Housing Market Index from the National Association of Home Builders (NAHB) was 47 in December, the same level as in November.

But expectations for future sales of new homes increased to their highest level since April 2022. That optimism was based on expectations that regulatory relief is forthcoming.

Housing starts declined 1.8% in November, following a 3.2% fall in October. The number of starts in November was the lowest in four months.

Most of the decline was in apartment starts, which were 24.1% lower in November. Single-family home starts increased 6.4%.

The Empire State Manufacturing Index has had a volatile three months. The index was negative 11.9 in October, jumped to positive 31.2 in November, and fell to positive 0.2 in December.

The PMI Manufacturing Flash Index for mid-December showed a decline to 48.3 from 49.7 at the end of November.

The PMI Services Flash Index increased to 58.5 in mid-December from 56.1 at the end of November.

The PMI Composite Flash Index for mid-December was 56.6, compared to 54.9 at the end of November.

Industrial production fell 0.1% in November, which followed a 0.4% drop in October. Over 12 months, industrial production was down 0.9% through November and 0.5% through October.

Manufacturing production increased 0.2% in November after rising 0.7% in October. But over 12 months, manufacturing production was down 0.1% through November and down 0.7% through October.

New unemployment claims increased by 17,000 to 242,000 in the latest week.

Continuing claims, which lag a week behind new claims, increased to 1.886 million from 1.871 million. The latest number is a little below the three-year high recorded in early November.

The Markets

The S&P 500 rose 0.25% for the week ended with Tuesday’s close. The Dow Jones Industrial Average lost 1.83% and had its longest consecutive-day losing streak in more than 40 years. The Russell 2000 fell 2.09%. The All-Country World Index (excluding U.S. stocks) declined 1.15%. Emerging market equities retreated 0.78%.

Long-term treasuries lost 2.62% for the week. Investment-grade bonds decreased 1.25%. Treasury Inflation-Protected Securities (TIPS) fell 0.91%. High-yield bonds dropped 0.56%.

On the currency front, the U.S. dollar rose 0.63%.

Energy-based commodities increased 0.42%. Broader-based commodities lost 1.30%. Gold declined 1.81%.

Bob’s News & Updates

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