Bob’s Journal For 5/23

The Bull Market in Stocks is Global

U.S. stock indexes underwent a correction in mid-2023, with downturns ranging from 9% to 18%, depending on the index.

The correction was followed by a sharp rally in the last two months of 2023 that continued into 2024. Almost all the major U.S. indexes set new highs in the last month and have gains of 23% or more from their 2023 lows.

What many investors aren’t noticing is that the stock rally is worldwide.

The MSCI All-Country World Index contains most of the investable stocks in markets in 47 countries. As of last week, 75% of the markets in the index (accounting for 93% of the index’s market capitalization) were above their 200-day moving averages, according to Ned Davis Research.

U.S. stocks now are 63% of the index, but the pattern of the U.S. stock indexes over the last year has been shadowed closely by indexes comprising Europe (excluding the U.K.), emerging markets and Asian markets (excluding Japan). All those regional indexes recently hit new highs.

You can see the returns by looking at charts of the ETFs iShares MSCI ACWI (ACWI) and iShares MSCI ACWI ex-U.S. (ACWX).

New highs and widespread rallies above 200-day moving averages typically are signs of strong markets. These and other factors are what market technicians call confirmations and indicate most stock markets around the world should register additional gains.

The IRS is Going After Donor-Advised Funds

Recent proposed regulations from the IRS could hinder or stop the growth of donor-advised funds (DAFs) if the regulations are finalized.

DAFs have been around a long time, but their popularity increased in the last 15 years or so. The enactment of the Tax Cuts and Jobs Act in 2017 triggered a fresh surge of interest in DAFs. Contributions to DAFs doubled from 2019-2022 to $86 billion.

A taxpayer contributes money or property to a DAF, where it is held in an investment account. The taxpayer qualifies for a charitable contribution deduction when the donation is made to the DAF.

But the DAF doesn’t have to distribute its money to charity right away. The donor is allowed to designate when and to whom final charitable contributions are made. In the meantime, the money held by the DAF is invested and can grow to a larger sum.

A taxpayer can donate several years’ worth of charitable contributions or more now and decide over time which charities receive the gifts.

Bunching years of contributions into one year makes it more likely the taxpayer can take the charitable contribution deduction, because the 2017 tax law doubled the standard deduction.

You deduct a charitable contribution only when total itemized expense deductions exceed the standard deduction. Few taxpayers deduct itemize expenses since the standard deduction was doubled.

The proposed IRS regulations would impose an excise tax on a DAF account when it pays fees to an investment advisor to manage the account’s investments.

There’s a belief, not supported by data, that most of the surge in DAF contributions is the result of advice by financial advisors who want their clients to receive tax deductions today but don’t want the money to go to public charities yet. DAF contributions allow the advisors to keep collecting investment management fees as long as the money remains in the DAF.

There’s also an anti-DAF movement that argues money sits in the DAFs for years instead of being received by charities who could use it now for charitable purposes. An anti-DAF argument is that advisors recommend against distributing DAF money to charities, because they’ll lose the fees from managing the money.

Existing DAF regulations say there’s an excise tax when the investment management fees exceed reasonable compensation. The proposed regulations would expand the tax to cover all investment management and consulting fees.

The proposed regulations still are under consideration, and there’s been considerable opposition from various groups representing fund firms, investment advisors and others.

If the regulations are finalized, a number of DAF contributors might turn to DAFs that don’t allow outside investment advisors to direct investments or to other ways of contributing to public charities.

How Inflation Harms Retirement Finances

Inflation affects retirees and near-retirees more than most of them realize, and how people respond to inflation determines how much it affects their wealth over the long term.

I’ve long said that inflation is one of the most overlooked components of retirement plans. Many people don’t realize how long retirement is likely to last and how much even a modest inflation rate can reduce purchasing power over that time.

The very low inflation of the decades before 2021 caused people to downplay inflation even more.

When inflation spikes higher, as it did after 2020, retirees tend to maintain their spending by withdrawing additional amounts from their savings, according to a recent study from the Center for Retirement Research at Boston College.

The economists who undertook the research found that in the recent inflation surge households increased their withdrawals from existing savings and reduced any new saving.

The result was recent consumption levels and standards of living were maintained, but future wealth and consumption were reduced substantially.

The study estimated that middle-income retirees experienced an average 14.2% long-term decline in financial wealth because of the recent inflation and their responses to it. If the inflation had been accompanied by a recession, the wealth would have declined by 16.6%.

Wealthier households were less affected but still had their financial wealth decline by an average of 4.3%.

Those who weren’t retired yet fared even worse. They both reduced new savings and took distributions from existing savings to maintain their consumption levels. On average, the near retirees in the lower third of wealth levels saw a 21.7% decline in their financial wealth.

The harm can be reduced when the households have income or investments that keep pace with inflation. Wealthier households tend to be harmed less by the recent inflation because they had more money invested in stocks and there was no recession. Prices of stocks and homes increased during the inflation.

Having fixed-rate debt also reduces the financial loss. The amount of the debt payments doesn’t change, and the debt is paid back in dollars with less purchasing power.

Many people enter retirement believing they are in good financial shape because their income at least equals their expenses. But income often has to increase over time because of inflation, and that must be factored into retirement plans.

The Data

The Leading Economic Indicators index from The Conference Board declined 0.6% in April following a 0.3% fall in March.

The Conference Board said the index no longer points to an imminent recession, but shows the economy faces “serious headwinds.” The Conference Board projects real gross domestic product (GDP) growth in the second and third quarters will be less than 1%.

The Philadelphia Fed Manufacturing Index declined to 4.5 in May from 15.5 in April (a two-year high). The May number indicates the sector still is expanding.

Industrial production was unchanged in April after rising 0.1% in March.

Over 12 months, industrial production declined 0.4% through April after being up 0.1% through March.

Manufacturing production fell 0.3% in April, following a 0.2% increase in March. Over 12 months, manufacturing production fell 0.5% through April and rose 0.6% through March.

Housing starts increased 5.7% in April after declining 16.8% in March. March’s starts were revised lower from the initial release.

Single-family home starts declined 0.4% in April while multi-family starts increased 31.4%.

Existing home sales fell 1.9% in April, the second consecutive month of declines and the lowest sales level in three months.

The median sale price of an existing home was $407,600 in April, a 5.7% increase over 12 months. The median sale price also was the highest ever for April, and April was the 10th consecutive month the 12-month price change was positive.

New unemployment claims decreased by 10,000 to 222,000 in the latest week.

Continuing claims, which lag a week behind new claims, increased to 1.794 million from 1.781 million.

The Markets

The S&P 500 rose 1.54% for the week ended with Tuesday’s close. The Dow Jones Industrial Average gained 0.96%. The Russell 2000 increased 0.72%. The All-Country World Index (excluding U.S. stocks) added 0.81%. Emerging market equities advanced 0.72%.

Long-term treasuries gained 0.80% for the week. Investment-grade bonds increased 0.62%. Treasury Inflation-Protected Securities (TIPS) added 0.42%. High-yield bonds rose 0.34%.

On the currency front, the U.S. dollar declined 0.24%.

Energy-based commodities increased 2.19%. Broader-based commodities rose 4.41%. Gold advanced 2.80%.

Bob’s News & Updates

A recent review on amazon.com of my latest book said, “Carlson is a unique national Asset while alive! Get the book, dude!” Look for “Retirement Watch: The Essential Guide to Retiring in the 2020s” (Regnery Capital: 2023) at amazon.com, barnesandnoble.com, booksamillion.com and regnery.com.

My previous book, “Where’s My Money: Secrets to Getting the Most out of Your Social Security,” is receiving mostly five-star reviews on Amazon for telling you clearly what your benefit options are in different situations and how to determine the best choice for you. You can find it on amazon.com or Regnery.com.

The number of regular viewers for my Retirement Watch Spotlight Series continues to increase. You should sign up because I make in-depth presentations of key retirement finance topics. You can watch these online seminars from the comfort of your home or office at times you choose. To learn more about my new Spotlight Series, click here.

A recent five-star review of my book, “The New Rules of Retirement” on amazon.com said, “A complete retirement guide! One of the best books on this topic!” Click for more details about the revised edition of “The New Rules of Retirement.”

If you’re interested in my books, check my amazon.com author’s page.

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