| February 13, 2024

Macro Overview

Financial markets started the year off with an eye on earnings, the upcoming election, and developments in the Middle East and Ukraine. Markets are eagerly awaiting for the Fed to finally commence its rate reduction trajectory. Analysts vary on when it will happen, but are expecting that decreases will start before the middle of the year.

Stock performance was mixed in January, as some sectors lagged while others excelled. Sectors including consumer discretionary, real estate, and utilities lagged in January, while financials, healthcare, and communication stocks rose. Analysts deem such a disparity among sectors as “sector rotation”, which is indicative of a possible change in the economic direction of the nation’s economy.

Gross Domestic Production (GDP) for the 4th quarter of 2023 came in at 3.3%, stronger than expected by economists. Concurrently, consumers are contributing less to economic growth as measured by Personal Consumption Expenditures (PCE), representing roughly 67.6% of GDP. Consumers contributed 69% to GDP nearly two years ago, when consumer expenditures were higher. Economists track this dynamic closely since two-thirds of GDP is driven by consumer expenditures.

Companies are carefully tracking their labor costs and how best to maintain existing margins. The Labor Department reported this past month that labor productivity increased 3.2% in the fourth quarter of 2023, meaning that workers are producing more with the amount of hours worked. Companies sometimes need to impose wage increases in order to keep the most productive workers.

The Federal Reserve continues to struggle with the threat of lingering inflation. Fed officials are mixed about when the Fed will begin to reduce rates and how much the initial reductions will be. For now, the Federal Reserve has held rates steady but may change course should economic data and the economy prove otherwise.

Federal government bank regulators, such as the FDIC, the Office of the Comptroller of the Currency and, the Federal Financial Institutions Examination Council have been increasingly focused on the liquidity of smaller banking institutions. Last year’s bank failures prompted an increase of surveillance on various banking institutions and their financial integrity.

The Baltic Dry Index, which measures the cost of transporting commodities and essential goods globally, has fallen back to pre-pandemic levels. Shipping costs and transportation rates rose sharply during the pandemic, causing price increases from commodities to finished products worldwide. Many economists believe that the drop in shipping and commodity prices is indicative of lower inflation and a possible global slowdown of commerce activity.

Sources: Federal Reserve, Labor Dept., FDIC, OCC, FFIEC, Baltic Dry Index

Stocks Start Year Off With Slight Gain - Domestic Equity Overview

Domestic equity indices were mixed in January, as selective sectors outperformed other sectors. The disparity in performance, known as “sector rotation”, can be driven by a shift in consumer sentiment and economic activity. Major equity indices started the year with gains, as optimism surrounding a pending Fed rate cut and gradual economic growth helped fuel a slight rise in stock prices. The Dow Jones Industrial Index, the S&P 500 Index and the Nasdaq index all gained above 1% for the year as of the end of January.

Sources: Dow Jones, S&P, Nasdaq

Rates Hold Steady - Fixed Income Review

Interest rates held steady as the Federal Reserve opted to maintain current levels as inflation worries still were a concern for several Fed members. The yield on the 10 year Treasury Bond ended January at 3.99%, up slightly from the 2023 close of 3.88%. Short term bond yields remain higher than longer term bond yields, indicative of a continued inverted yield curve. Some analysts expect yields to level out when the Fed begins to unwind its tightening policy as it lowers short term rates.

Sources: U.S. Treasury, Federal Reserve

Car Prices Are Falling – Auto Industry Review

Years of consecutive increases in U.S. auto sales have put a glut of vehicles on U.S. highways. In addition, a significant number of those sales were with a lease, leading to a rising tide of cars flowing back into the market as lease terms expired.

As automakers have added manufacturing capacity, they have also been aggressive in offering larger incentives on new vehicles in order to maintain record sales momentum. That has put downward pressure on the entire market.

Consequently, the number of drivers that owe more on their cars than they are worth is surging. Americans are paying on a record $1.6 trillion of auto loans currently, according to the most recent Federal Reserve data. That represents roughly half of all licensed drivers in the U.S. Among those that carry loan balances, the Federal Reserve estimates that auto loans make up between 10 percent and 23 percent of their total financial obligations.

Auto prices soared as the pandemic took hold in 2020 through 2022, as supply constraints for critical auto components hindered manufacturing and distribution of automobiles globally. Low interest rates on auto loans helped subsidize rising auto prices as consumer demand continued on.

Sources: Federal Reserve Bank of St. Louis

Benefits Of A Trust Versus A Will - Estate Planning

A properly drafted will or trust is essential for anyone that has assets to leave to heirs. Either a will or a trust allows you to designate anyone you wish as beneficiaries. Both a will and a “revocable living trust” allow you to identify who the heirs to your assets will be.

The main difference between the two is that assets held in a trust will avoid probate upon one’s passing, which is inhibitive to the heirs and costly. A trust structured as a revocable living trust can help shelter family assets from taxes by properly placing assets within the trust. For 2024, the first $13.61 million (per individual) $27.22 million (per married couple) is excluded from estate taxes with any assets over that amount taxed at the Federal Estate Tax Rate.

If you own property in another state, a living trust eliminates the need to probate that property in that state. A living trust can immediately transfer management of your property if you become incapacitated either physically or mentally. There is no need to go to court to appoint a guardian or conservator.

If you choose to create a living trust, you should also create what is called a pour-over will. It provides for the distribution of any property that is not included in the trust. It will also allow you to name a guardian for any minor children.

Source: IRS

Brief History of U.S. Freight Railroads – Historical Note

Since Cornelius Vanderbilt established the first railroads for commerce and shipping in the early 1860s, transportation has become more efficient and cost effective.

By 1917, there were roughly 1,500 railroads in operation with over 250,000 miles of track nationwide and employing about 1.8 million people, at the time more than any other industry.

Goods and products are primarily shipped by truck, rail and water throughout the United States. When measured on a tons-per-miles basis, railroads haul over 44% of goods and products. When measured on a dollar value, trucks carry over 73% of all goods and products. Such a difference is because the bulk of what rails transport is heavy, sizable commodity loads, while trucks deliver more finished and expensive products such as sports equipment and electronics.

Most of what railroads transport include lumber, vegetables, coal, orange juice, grain, automobiles, chemicals, and scrap iron. Railroads also connect businesses with each other across the country as well as markets overseas. They contribute billions of dollars each year to the economy through investments, wages, purchases, and taxes.

Over the years, government regulations were introduced to curtail the near monopoly the railroads had in transporting shipments. One regulation disallowed the railroad companies from reducing rates in order to not hinder business being generated with U.S. ports and waterways. So in order to better address the competition, railroads developed modular railcar containers, which eventually synergized with international containers arriving at coastal water ports. These would then be transported via rail inland to manufacturing and distribution locations within the Midwest and inner areas of the country. Ironically, the railroads had developed a transit process that the ports absolutely needed in order to achieve cost effective and competitive distribution.

Sources:  Assoc. of American Railroads, Dept. of Transportation

**Market Returns: All data is indicative of total return which includes capital gain/loss and reinvested dividends for noted period. Index data sources; MSCI, DJ-UBSCI, WTI, IDC, S&P. The information provided is believed to be reliable, but its accuracy or completeness is not warranted. This material is not intended as an offer or solicitation for the purchase or sale of any stock, bond, mutual fund, or any other financial instrument. The views and strategies discussed herein may not be appropriate and/or suitable for all investors. This material is meant solely for informational purposes and is not intended to suffice as any type of accounting, legal, tax, or estate planning advice. Any and all forecasts mentioned are for illustrative purposes only and should not be interpreted as investment recommendations.