Bob’s Journal for 1/16

American Airlines Violated 401(k) Plan Rules

A federal district court judge ruled that American Airlines violated the employer’s fiduciary duties to plan participants with the investment funds it offered in the plan.

At issue was the plan’s choice to offer funds managed by BlackRock as the investment options in the plan.

BlackRock publicly stated that it would incorporate environment, social responsibility and corporate governance (ESG) principles when selecting investments in the funds it manages.

ESG investing generally means the investment manager will consider factors such as a business’s efforts to reduce its negative impact on the environment, promote diversity in its workforce and in society, and address concerns about social justice.

This investment practice previously was known as socially responsible investing and is linked with the diversity, equity and inclusion (DEI) movement.

The lawsuit was brought by an American pilot, who argued that it was improper for the investment manager to consider the ESG principles and that the principles were a factor that caused the funds to underperform.

The judge ruled that federal retirement plan law doesn’t allow non-financial or non-economic factors, such as ESG principles, to influence investment decisions. The plan must act solely in the best financial interests of the plan participants.

The judge said he would consider damages and any other sanctions at a future hearing.

Many companies recently have been distancing themselves from ESG and DEI policies, and the case is likely to accelerate the shift, unless the case is reversed on appeal.

Higher Interest Rates Could Affect Bank Stocks

The recent spike in interest rates is generating losses for banks and their investment portfolios.

Banks were encouraged to buy treasury bonds and mortgages during the pandemic. Many banks still have significant bond and mortgage holdings. Bonds and mortgages lose value when interest rates rise.

The bond-heavy portfolios triggered the regional bank crisis of early 2023. The Federal Reserve’s 2022 interest rate increases caused the bonds and mortgages to lose significant value.

Investors and depositors realized that practice caused the capital levels at some of the banks to decline substantially. Depositors moved their deposits out of the banks, causing some prominent regional banks to fail. Other banks had to be shored up.

The same thing could happen soon. The yield on the 10-year treasury bond has gone from 3.63% in mid-September to almost 4.80% recently.

Bank of America has the largest portfolio losses in the banking industry, according to Barron’s. The losses could go to $100 billion. The article estimates that the industry’s losses could top $500 billion.

It’s important to recognize some unique features of bank accounting.

As long as a bank doesn’t plan to sell a bond and classifies it as “held to maturity,” a decline in a bond’s value doesn’t reduce the bank’s reported capital. The bond is carried at its cost to tabulate the bank’s capital.

Also, the values contained in the next reports will be as of December 31, 2024. They won’t include the additional losses incurred in the first half of January.

Unlike some of the regional banks in the 2023 crisis, BofA holds substantial capital outside of its “hold to maturity” portfolio and probably isn’t as dependent on short-term deposits that can leave the bank quickly. The flight of short-term deposits is what crippled the regional banks.

Some other banks, such as J.P. Morgan Chase, have smaller “hold to maturity” portfolios than BofA.

BofA says bonds in the portfolio are maturing steadily with the proceeds being reinvested, probably to earn higher yields than the matured bonds. The portfolio is maturing at about a 6% to 7% annual rate.

When a bond matures, the potential loss to reported capital disappears.

BofA and the other major banks have their deposits insured by the FDIC.

Americans Continue to Move to Lower-Tax States

Americans who migrate from one state to another continue to favor states with low taxes or competitive tax codes over higher-tax alternatives, according to recent analysis by the Tax Foundation.

The state with the highest net inbound migration for the second year in a row was South Carolina, according to Census Bureau data. Net migration increased the state’s population by 1.26%. The data covered the period July 1, 2023, through June 20, 2024.

The data look at net migration, recognizing that a state that attracts a lot of new residents might also see some previous residents leave.

The other states leading the nation in net inbound migration were Idaho, Delaware, North Carolina, Tennessee, Nevada, Alabama, Montana, Arizona and Arkansas.

The state losing the greatest share of its population to other states was Hawaii. The next four states losing significant shares of the population were New York, California, Alaska and Illinois

The Tax Foundation also looked at moving data issued by U-Haul and United Van Lines and found similar though not identical results.

The analysis compared the net migration data with the Tax Foundation’s studies on state taxes.

Among the 26 states with overall state and local per capita tax burdens below the national average in 2022, 18 had net positive inbound migration in 2024. And 17 of the 25 states with tax burdens at or above the national average had net negative migration. (The District of Columbia is counted as a state in the study.)

The analysis looked at other factors, such as the top marginal income tax rate and whether a state has an income tax. States that had lower income tax rates or no income tax also tended to be among the leaders in net inbound migration. The opposite also was true.

Flat-rate income taxes also are popular. There are 12 states with single-rate income taxes, and eight of them had net positive inbound migration.

The analysis also looked at where states ranked in the Tax Foundation’s annual State Tax Competitiveness Index. It found that 20 of the states in the top 25 of that ranking had net positive inbound migration.

You want to look at more than taxes before deciding where to move. But taxes also affect other important factors, such as economic growth, job opportunities and cost of living.

The Data

The Small Business Optimism Index from the National Federation of Independent Business (NFIB) increased to 105.1 in December, the highest level since October, from 101.7 in November.

December is the second consecutive month the index was above the long-term average of 98. Before that, it hadn’t been above 98 since December 2021.

NFIB attributed the rise in the index to expectations of improved economic policies after the November elections.

The Consumer Price Index (CPI) increased 0.4% in December, up from 0.3% in November. The 12-month increase for the CPI is 2.9% through December and 2.7% through November.

The core CPI, which excludes food and energy prices, rose 0.2% in December after rising 0.3% in November. The 12-month increase in the core CPI was 3.2% through December and 3.3% through November.

The Producer Price Index (PPI) increased 0.2% in December, down from a 0.4% rise in November. Over 12 months, the PPI increased 3.3% through December and 3.0% through November.

A measure of core producer inflation is the PPI excluding prices for food, energy and trade services. That measure increased 0.1% in both December and November. The 12-month increase in that measure was 3.3% through December and 3.5% through November.

The Empire State Manufacturing Index fell to negative 12.60 in January, the lowest level since May, from positive 2.10 in December. The index has been negative in nine of the last 12 months.

The amount of consumer credit outstanding declined by 1.8% in November following a 4.1% increase in October. December was the first month since August 2023 in which consumer credit outstanding declined.

Revolving credit, which is mostly credit cards, tumbled 12.0%. Nonrevolving credit, which is mostly vehicle and student loans, increased 2.0%.

There were 256,000 new jobs created in December, according to last week’s Employment Situation reports, compared to 212,000 in November. The unemployment rate fell to 4.1% from 4.2% in November.

Average hourly earnings increased 0.3% in December following a 0.4% rise in November. The 12-month increase in average hourly earnings was 3.9% through December and 4.0% through November.

There were no changes in the labor force participation rate (62.5%) or average weekly hours (34.3).

The Consumer Sentiment Index from the University of Michigan declined in the first part of January to 73.2 from 74.0 at the end of December, which was the highest level in eight months.

Sentiment about current conditions increased while expectations declined. Inflationary expectations increased.

The Markets

The S&P 500 fell 1.09% for the week ended with Tuesday’s close. The Dow Jones Industrial Average declined 0.04%. The Russell 2000 lost 1.35%. The All-Country World Index (excluding U.S. stocks) decreased 1.60%. Emerging market equities retreated 1.74%.

Long-term treasuries lost 0.73% for the week. Investment-grade bonds fell 0.59%. Treasury Inflation-Protected Securities (TIPS) dropped 0.06%. High-yield bonds retreated 0.29%.

On the currency front, the U.S. dollar gained 0.54%.

Energy-based commodities increased 3.49%. Broader-based commodities rose 4.11%. Gold advanced 1.04%.

Bob’s News & Updates

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I’m a senior contributor to the Forbes.com blog. You can view my contributor page here.