Asteroids, Federal Reserve, RSUs Oh My!

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Market Now


Planet Killer Asteroid Spotted Hiding in Sun's Glare.  Stock markets and interest rates really don’t matter anymore.  We are all gonna die!  Well, I guess that’s not going to happen and more mundane events seem more important like the Federal Reserve, employment, consumer spending, savings, interest rates, real estate and inflation! 


 This week, with October ending with a very positive month in terms of market performance and boom, the November Federal Reserve meeting ended that rally.  As the Federal reserve responds to inflation and economic growth by raising interest rates, the Fed is looking for signs of an economic slowdown and declining inflation.  A problem is that as the Fed increases interest rates, with 30-year mortgage rates exceeding 7% and a severe slowdown in mortgage refinancing this is not enough to convince the Fed that economic activity is slowing down. 


 Normally, as Americans, we would hope that the economy remains robust and jobs are available for any willing to work American, consumers continue to have funds to spend, housing prices become more affordable, wages rise, and asset values increase at a steady rate and Americans feel confident in their current and future financial situation.  The problem with that scenario, which is true now, is viewed by the Fed as “bad news.” The Fed wants to see the lagging impact of interest rate increases happen now, slowing the economy, increasing unemployment and layoffs, decreased wages, a pullback in general demand in the economy, and consumer expectation that inflation will not continue to go higher.  Most of us would call what the Fed wants bad news but paradoxically that bad news would be taken by the stock and bond market as “good news.”  This is the classic “bad news is good news” at least as wall street is concerned-not main street.


  Friday, we have updated employment numbers and increased unemployment will probably be viewed as “good news” by markets and “bad news” by main street. 


The economy could be described year to date as two steps forward and one step back.  We could be seeing that change right now as layoffs begin at some of our larger corporations along with hiring freezes.  We have a fair number of clients who work at large tech companies, a prospect of one of these today mentioned his company is entering a hiring freeze.


It is impossible to forecast when the dramatic increase in interest rates will impact the economy.  Categorizing economics as a science is questionable.  As Howard Marks discusses, forecasting markets is an exercise in futility. With this in mind it is easy to understand that any conclusive forecast should immediately be questioned.  Nevertheless, the Fed is driving towards a strategy designed to slow inflation to a target somewhere around 2%.  I have referred to the St. Louis Fed forecast of the 5-year inflation rate based on The breakeven inflation rate represents a measure of expected inflation derived from 5-Year Treasury Constant Maturity Securities (BC_5YEAR) and 5-Year Treasury Inflation-Indexed Constant Maturity Securities (TC_5YEAR). The latest value implies what market participants expect inflation to be in the next 5 years, on average.

Starting with the update on June 21, 2019, the Treasury bond data used in calculating interest rate spreads is obtained directly from the U.S. Treasury Department.

So here we have another forecast.  I choose to believe it because this prediction would be favorable for both Wall Street and Main Street.



Investor Strategy: Company Equity RSUs, ESPP, and more


Last week the SAS blog mentioned that selling RSU stock share gains and then offsetting those capital gains with equal capital losses from elsewhere in your household taxable portfolio offers an excellent diversification opportunity. The opposite may also be true: harvesting long term capital losses from RSU sales with an equal long term capital gain elsewhere in the portfolio. It is the most aggressive risk position to have granted RSUs held without a diversification strategy to liquidate compared to selling immediately, even if those immediate sales are subject to the highest taxation risk or higher short term capital gains tax, on the resulting gains only.



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