Economic reports and corporate earnings will be front and center this week.
This Wednesday we’ll hear June’s Consumer Price Index (CPI). The estimate is for the headline number, which includes food and energy, will come in at 8.8% (an increase from 8.6%). The Core CPI is estimated to track lower at 5.7%, down from 6% in May. Assuming the estimates are close to accurate, it appears the Fed will increase rates by another .75% later this month. What will be the stock and bond markets reaction? We’ll know shortly!
On Thursday, we’ll hear June’s Producer Price Index (PPI). What the producers of goods are paying absolutely impacts the cost to consumers. This will also be watched closely.
On Friday, we’ll hear June’s retail sales report. I never try to guess what will be reported, however it’s hard to see retail sales falling sharply, on the back of last Friday’s strong employment report. Last Friday, we learned we added 372k jobs – higher than anticipated, however the trend is slowing.
This week kicks off second quarter profit reports, with PepsiCo and Delta Airlines. Banks are also reporting this week – including JP Morgan Chase, Morgan Stanley, Wells Fargo, Citigroup and PNC.
Profit estimates are projected to grow by 5.7% in the 2nd quarter, and are still projected to rise for the remainder of 2022. Guidance from companies will be important as profit projections instantly impact the Price to Earnings ratio of the markets. Stocks quickly adjust to any changes! Profits and consumer spending have been (unexpectedly) resilient during these times. Let’s hope this continues, and if we do have a recession, it’s as mild as many are suggesting!
On a side note, I received a call from my wife letting me know that the car dealership she works at has ZERO new cars. Yes… zero new cars. So much for supply chain improvements. I’m sure they will receive some new inventory as the week progresses, however it’s the first time they are at zero that I can recall.
Major stock indexes all finished higher last week with the Dow up .82%, the S&P 500 rising 1.98%, the Nasdaq 4.58% and the Russell 2000 2.43%.
Over the pond, Foreign stocks rose .97% and Emerging Markets up .98%.
Bond yields rose slightly with the 2-Year and 10-Year treasury ending the week with yields of 3.12% and 3.10%. Yes, the curve is inverted and has swung back and forth for weeks!
So far, the month of July has stocks higher across the board with growth stocks rising more than value.
Prior to 2018, annual inflation adjustments for tax brackets and write-offs were based on the Consumer Price Index. “Economists” argued the CPI overstates inflation because it does not account for how people change their spending habits as prices rise. For example, if beef costs rise, we’ll simply buy more chicken!! The economists claimed the “Chained Weighted CPI” is a better measure of inflation. I wonder if these same economists actually go food shopping…..!
When we have inflation, tax brackets widen, meaning you can have more income in a lower bracket. With the new “chained” system, that amount will be smaller and so will the compounding impact. Simply means brackets will not widen as quickly so more of your earnings may find their way into a higher bracket.
Two areas that are NOT inflation adjusted are the home-sale exclusion and tax on your Social Security Benefits.
Since 1997, if you have a capital gain from the sale of your main home, you may qualify to exclude up to $250,000 of that gain from your income, or up to $500,000 of that gain if you file a joint return, assuming you have used and owned the home for 2 out of the last 5 years.
For Social Security, the income levels that start to tax Social Security also have not changed. For singles, it’s $25K and for married filing jointly it’s $32K.
For potential ways to lower your income taxes, please feel free to schedule a consultation!