Happy Labor Day! For many, this is a nice 3-day weekend. For our retired friends, it is just another day to enjoy the fruits of your hard work and do as you please. Some of us are even relishing the fact that the three major Florida universities won their college football games (had to get that in there).
True confession time: usually I try to get these monthly notes out to you very shortly after the end of a month – mostly to recap the markets' performance and opine on topics important to all of us. This week, I have “labored” with what topics to cover to ensure that we can bring some positivity to you about things as we see them.
Due to the rancor and derision that emanates from some mainstream media us, that is sometimes a difficult proposition.
August 23rd saw the election of a new school board in Sarasota County. For the sake of educators and students, I hope those newly elected members can set aside their politics and remember who they serve and will do the right things to ensure quality education is the number one priority - not pandering.
While it may be wishful thinking, I really hope that as the fall election cycle heats up, the rhetoric will be toned down, compromise can be found, and the insidious anger can be replaced with diplomacy and caring. Or maybe I have spent too much time in the sun.
Good News: Landmark Bill Signed into Law that Should Cut Drug Prices
Finally, some help for seniors paying outrageous prices for some medications.
On August 16, President Biden signed the Inflation Reduction Act of 2022. There are numerous components to this legislation, and as is true with any legislation (or sausage-making), the devil is always in the details. So, here is a summary.
On the healthcare side, two things of note. The first is that the current Obamacare credits, the premium assistance tax credit would continue for about an additional four years. At lower incomes, the credit would be enhanced, but the big news is that there would be no cliff still for the coming few years at 400% of the federal poverty line income. Prior to those changes, once you hit 400% of the federal poverty line income, your credit went to zero, whether you were $1 over or $1 million over.
THE BIG, GOOD NEWS is the changes in healthcare are largely related to part D and part D prescription drugs. in 2025, the 5% co-insurance on catastrophic instances for part D would put a cap on out-of-pocket cost of $2,000. On top of that, Medicare would begin to be able to negotiate with drug companies for certain drugs. Now, admittedly, it would start with only 10 drugs and only part D, but it would expand to up to 20 drugs in part D and B by 2029. The hope there of course is that by negotiating prices, Medicare would be able to reduce its cost and be able to reduce the cost to participants.
The new law also caps the cost of Medicare-covered insulin at $35 a month and eliminates out-of-pocket costs for most vaccines under Medicare.
On the energy efficiency side, there’s a slew of credits in there: either extension of existing credits, enhancements to credits, and brand-new credits. For instance, there would be a new credit for the purchase of a used energy efficient automobile, that could be up to $4,000. So, in today’s crazy car market, that could be significant.
One more change that’s worth noting is that the IRS would get an infusion of cash for a variety of purposes, including beefing up taxpayer services. So maybe when you call the IRS in the future, you might get someone on the phone. There would also be a big increase of cash to help enforcement efforts.
Some of the naysayers have touted the hiring of 87,000 new IRS agents as being bad for the middle class. What we should see is the reversal of the precipitous decline in audits over the past decade. That may stop and reverse course and begin to increase righteous audits again going forward. The thought there is that by spending some of those dollars, they should be able to not only recover that cost but recover tax revenue from those that have been swindling the government by avoiding paying their fair share.
Market Update – The Not-So-Good News
With two consecutive quarters of negative GDP growth, high inflation and markets that have persistently delivered bearish returns, the hope was that the U.S. Federal Reserve was busily looking for a way to execute a ‘soft landing’—meaning, basically, a return to modest economic growth, higher market returns and lower inflation. It now seems clear that that is not the Fed’s plan.
In a recent speech in Jackson Hole, WY, Fed Chair Jerome Powell announced that he will do whatever it takes, pretty much to the exclusion of economic growth and better market returns, to drive inflation down to the 1.8% annual goal that has been recent Fed policy. He said, bluntly, that “reducing inflation is likely to require a sustained period of below-trend growth.” Translated, that means higher short-term bond rates and an indifferent attitude toward more economic pain.
The speech even seemed to be attacking the nation’s historically low 3.5% unemployment rate, the lone bright spot among a lot of otherwise grim economic statistics. Powell surprised many economists by asserting that, in his view, the labor market was “clearly out of balance” because the demand for workers exceeds supply.
Overall, the speech seemed to hint at another 75-basis point increase in the Fed Funds Rate later this month. If (when) that happens, it will grab headlines, but it might not be the most significant growth-slowing measure the Fed will be taking. The U.S. central bank is also accelerating the process of selling off the Treasury and mortgage bonds on its balance sheet, doubling the monthly sales from $47.5 billion to $95 billion. It’s important to note that when the Fed was buying these bonds, the so-called QE (quantitative easing) buoyed the stock market. The opposite, called quantitative tightening (QT to some), might have the opposite effect.
Most of us know that the economy will eventually recover from its current doldrums, and the Fed’s current policy will ease up as inflation declines. What we are seeing now is the inevitable ‘pay the piper’ moment where the bill comes due from the enormous (and, of course, unsustainable) stimulus that the government injected into the economy to end the Great Recession and, not so long afterwards, to pull the country out of the Covid-driven downturn. The hope now is that it won’t be long before the Fed decides that the piper is paid off, and once again prioritizes growth and profitability in the economy.
Ultimately, this too shall pass.
As always, thank you for the trust and confidence you place in us. It is something we never take for granted and sincerely appreciate. Please do not hesitate to reach out whenever you have questions, concerns or whenever we may be of service to you.
Joe Downs, CFP® & John Cunningham, CFP®