Bob’s Journal for 6/26

The Risks of Using Long-Term Data: A Case Study

Long-term data and averages can be useful tools when developing investment and financial plans, but they must be used with care.

Here’s a recent example. Those who study stock index data know that historically June 20 through the end of June is a bad time to be invested. Since 1980, the S&P 500’s median return during the period has been a 0.09% decline with a positive return only 44% of the time, according to Bespoke Investment Group.

It doesn’t matter how the index was performing before June 20. When the S&P 500 had a strong year-to-date return to that point, it still had a median decline of 0.23% during the period and positive returns in only 43% of the years.

Suppose you’d crunched those numbers a few years ago and used them to position your portfolio by selling or hedging your stock positions by June 20. That would have cost you a lot of money.

In each of the last four years the S&P 500 had positive returns from June 20 through the end of June. In the last three years, the returns were 3.1%, 3.0%, and 1.4%.

There was another string of positive years from 2012-2014.

Long-term data such as average and median returns can be a useful starting point when developing financial plans. But they’re only a starting point.

You should consider the economic environment during the past periods and how the current environment might be different. Even then, don’t position your entire portfolio to benefit from one expected outcome. There are likely to be surprises, so maintain some balance and diversification.

Check State Law Before Converting an IRA

Before converting a traditional IRA to a Roth IRA, residents of states with income taxes should review how their states will treat the transactions.

Under federal tax law, the owner of a traditional IRA can roll over some or all of the account to a Roth IRA. The amount rolled over will be included in gross income, to the extent of its pre-tax contributions and earnings, as though it were distributed.

But the amount rolled over stays in the Roth IRA to compound tax free, and eventually the account can be distributed tax free to either the owner or the beneficiary.

Most states treat a conversion the same way, but there are differences and nuances.

The states without income taxes of course don’t tax a conversion. New Hampshire has an income tax on interest and dividends, but not on IRA distributions. So, a conversion by a New Hampshire resident isn’t taxed by the state.

Pennsylvania, though generally a high-tax state, allows IRA conversions tax free. Iowa excludes up to $6,000 of retirement income for residents ages 55 and over, and an IRA conversion qualifies for the exclusion.

But in some states, it doesn’t take much additional income to move from one tax bracket to a higher bracket. Residents of those states need to know where they stand in the tax brackets and how much can be converted before pushing them into a higher tax bracket.

Massachusetts and California impose an additional tax when income is $1 million or larger. IRA conversions could trigger substantial additional taxes on residents in those states who already have high incomes.

Some states don’t allow deductions for IRA contributions. If you live in one of those states and made IRA contributions that couldn’t be deducted on the state tax return, those amounts shouldn’t be taxed by the state when the IRA is converted. Be sure you take advantage of this and don’t pay unnecessary state taxes.

Some states have even trickier laws.

In New Jersey, for example, a taxpayer age 62 or older can exclude all pension income, which includes IRA distributions. But the exclusion phases out when income exceeds $100,000 and is eliminated when income exceeds $150,000. A New Jersey resident might want to limit the amount of an IRA conversion to avoid losing the exclusion.

Federal income taxes should be the major driver of whether or not to convert all or part of a traditional IRA to a Roth IRA. But state taxes also matter. Examine state tax law and know how a conversion would affect your tax bill.

Sales of Homes Decline, but Prices Rise to a Record High

The sale prices of existing homes increased 5.9% from May 2023 to May 2024, according to the National Association of Realtors. That brought the median existing home sale price to $419,300, a record high since 1999 when the NAR data begins.

As a benchmark, in February 2020, the median sale price of an existing home was $270,400.

But the number of home sales declined 0.7% in May from April’s level, and May was the third consecutive month the number of sales declined. Over 12 months, the number of sales fell 2.8%.

Sale prices are rising because there is a limited number of homes for sale, and higher mortgage rates are a major reason for the small inventory of homes for sale.

Many current owners of homes essentially can’t afford to move. They took out mortgages when interest rates were at historic lows. But over the last year, mortgage interest rates have bounced around 7%.

When the higher mortgage rate is combined with the higher prices for homes, an existing homeowner likely would incur a substantial increase in monthly costs by selling a current home and buying another home. Many homeowners believe they are locked into their current homes because of the higher prices and mortgage interest rates.

The limited inventory of homes for sale means that in many areas there still are bidding wars over the few homes available for sale.

Though the pool of buyers is limited by mortgage rates and high home prices, the few buyers compete aggressively for the available homes.

Cash buyers have a big advantage over those who need to obtain mortgages. The number of buyers purchasing for cash is up to 28% of sales from 25% 12 months ago.

Another factor pushing up the median selling price is that there are more sales of higher-priced homes than of mid- or low-priced homes.

The Data

The Consumer Confidence Index from The Conference Board fell to 100.4 in June from 101.3 in May.

Assessments of the present situation improved from May to June, but expectations for the short-term future fell. The Expectations Index declined to 73.0 in June from 74.9.

The Expectations Index has been below 80 for five straight months. The Conference Board says a reading below 80 usually signals a recession is ahead.

The Leading Economic Indicators index from The Conference Board declined by 0.5% in May after falling 0.6% in April.

The Conference Board reported that the index is not signaling a recession, though growth is likely to be 1% or less in the second and third quarters of 2024.

The PMI Services Flash Index for the first half of June was 55.1, up from 54.8 at the end of May.

The PMI Manufacturing Flash Index rose to 51.7 through mid-June from 51.3 at the end of May.

The PMI Composite Flash Index for the economy inched up to 54.6 from 54.5 at the end of May.

Home prices increased 1.4% in April after rising 1.6% in March, according to the S&P Corelogic Case-Shiller Home Price Index.

Over 12 months, the index was up 7.2% through April and 7.5% through March.

The FHFA House Price Index lagged behind, reporting only a 0.2% increase in home prices in April and no change in March. Over 12 months, the Federal Housing Finance Agency (FHFA) index rose 6.3% through April and 6.7% through March.

The FHFA index tracks only prices of single-family homes that have federally insured mortgages.

Housing starts declined 5.5% in May after rising 4.1% in April. The annualized rate of starts in May was the lowest since July 2020.

Single-family home starts fell 5.2% and multi-family home starts dropped 10.3%.

Existing home sales fell 0.7% in May after declining 1.9% in April and 3.7% in March. The median sale price of an existing home increased to a record $419,300.

New home sales dropped 11.30% in May, following a 2% increase in April. The number of new home sold in May was the second lowest in the last 12 months and lowest since November 2023.

The Philadelphia Fed Manufacturing Index fell to 1.3 in June from 4.5 in May. That’s the lowest level since January but marks the fifth consecutive month the index was in positive territory.

The Dallas Fed Manufacturing Index was negative 15.1 in June, an improvement from negative 19.4 in May, which was a four-month low. The index has been negative, which indicates the sector is contracting, since May 2022.

The Richmond Fed Manufacturing Index fell to negative 10 in June from 0 in May. The index has had only two positive readings in the last 12 months, in September and October 2023.

New unemployment claims decreased by 5,000 to 238,000 in the latest week.

Continuing claims, which lag a week behind new claims, increased to 1.828 million from 1.813 million.

The Markets

The S&P 500 lost 0.35% for the week ended with Tuesday’s close. The Dow Jones Industrial Average gained 0.71%. The Russell 2000 dropped 0.09%. The All-Country World Index (excluding U.S. stocks) added 0.17%. Emerging market equities fell 0.75%.

Long-term treasuries lost 0.10% for the week. Investment-grade bonds fell 0.24%. Treasury Inflation-Protected Securities (TIPS) added 0.05%. High-yield bonds gained 0.08%.

In the currency arena, the U.S. dollar rose 0.42%.

Energy-based commodities lost 1.03%. Broader-based commodities fell 1.59%. Gold declined 0.41%.

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.