February 3, 2024 | Employment Situation, Job Openings, Investment Grade Debt, Liquid Cash and Tax Filing Review

Smart Investing with Brent & Chase Wilsey

Employment Situation

The numbers for nonfarm payrolls blew away expectations as they expanded by 353,000 in the month of January. This easily topped the estimate for 185,000. Job growth was widespread as it grew in every major category except for mining and logging which saw a decline of 6k in the month. Two areas that remained extremely strong were health care and social assistance (+100.4k) and professional and business services (+74k). Other areas of strength included retail trade (+45.2k), government (+36k), and manufacturing (+23k). The previous two months also saw upward revisions with an upward revision of 117k in December and 9k in November. There was some concern that maybe this report was too strong and that it could impact the Fed’s rate cut path. The major concern on the inflation front came from average hourly wages which jumped 4.5% and easily exceeded the forecast of 4.1%. While this could have an impact on inflation, it is important to remember that data doesn’t always move in a straight line. Also, the average hours worked fell to 34.1 which was 0.2 hours lower than the previous month and would have an impact on total labor cost. I was also happy to see in a separate report that the Employment Cost Index increase by just 0.9%, which was the smallest quarterly gain since the second quarter of 2021. Looking at year-on-year, labor costs increased 4.2% in Q4 which marked the smallest rise since Q4 of 2021. Overall, I think this report shouldn’t throw a wrench in the idea of the Fed cutting rates in the back half of the year.

Job Openings

It is looking like the economy could navigate a pretty remarkable feat with decelerating inflation rates, growth in the economy (albeit limited), and a resilient labor market. In the month of December, job openings rose to 9.0 million which easily topped the estimate of 8.7 million and marked a three-month high. This is well off the high of around 12 million that was achieved in 2022, but it still is a healthy level considering pre pandemic job openings were around 7 million.

Investment Grade Debt

I was surprised to learn that the amount of investment grade debt was $168 billion so far in the month of January. One would think that these corporations would do everything they could to hold off until the second half of the year when rates should be lower. Investors would have to go back 34 years to find this much debt issued in January. It makes one wonder do they know something we don’t know and maybe rates won’t be falling? I still remain very confident we will see rates fall in the second half of the year.

Liquid Cash

As of the third quarter of 2023, cash in money markets and CDs has reached an all-time high of $8.8 trillion. The last peak for CDs and money markets was reached in 2008 when it climbed above $6 trillion. At US lenders, total deposits fell to $17.4 trillion from the peak of $18.2 trillion, but when you combine the two you have around $26 trillion of liquid money. The question is, as rates fall where will this money go and how much will be transferred to longer term investments like real estate and equities? I don’t believe we will see much action here until probably the last quarter of 2024 and even more likely happening in 2025. However, as an investor, I would rather be investing early than late because that will hurt your long-term returns. I think investing in the right equities on sale over the next six months will provide good returns when you look at December 31st, 2025.

Financial Planning: Tax Filing Review

With tax season coming up, it is helpful to review your tax return before filing to catch any mistakes. Some of the most common errors include misreporting 1099-Rs, missing rental expenses, incorrectly reporting capital gains, and missing IRA contributions. Any time money leaves a retirement account a 1099-R is generated, even with Roth accounts. However just because a 1099-R is generated, does not mean the distribution is taxable. Roth withdrawals and more commonly rollovers to other retirement accounts are not taxable. We have seen cases where a non-taxable distribution is reported as income due to the receipt of a 1099-R, so if you had retirement account distributions in 2023, make sure you’re only paying for taxable withdrawals. With rental properties it is common to have insurance, property taxes, interest, HOA or management fees, and depreciation all listed as expenses. If any of these are missing or seem low after reviewing the Schedule E, it may be necessary to go back and recount all your rental expenses to confirm you are receiving all possible deductions. When selling assets like a business or property there is no 1099 generated, so it is helpful to double check how a taxable sale is reported on the Schedule D. We’ve seen sales reported as a short-term gain instead of a long-term gain which can result in substantially more taxes. Lastly if you made any contributions to pre-tax retirement accounts like an IRA or SEP, be sure these contributions are reported and deductible. When making a contribution to an IRA, a Form 5498 is generated, but this form isn’t available until after taxes are due. This means you have to remember to report the contribution because there will be no tax form showing it. There’s many possible errors or omissions when filing a tax return, but these are some of the more common ones to keep an eye out for.