Top 3 Market Commentaries: Market Correction Territory, SECURE ACT 2.0, and Opportunity in Down Market Valuation
Markets Week Ending 7/1/2022
From the depths of correction territory and a 20% decline, markets rallied across the board last week.
Interest rates stabilized with the yield curve remaining pretty flat between 2 year and 30 year maturity.
The bond market remains skeptical of economic growth past 2 years time from today.
Earnings season for the 2nd quarter begins in July with not a great deal of visibility and analysts still expecting growth of 4.8% for the S&P 500.
SECURE ACT 2.0
- A significant development this week is the Secure Act 2.0 passing in the House on a vote of 414-5.
- Two committees in the Senate voted to move the RISE and SHINE, yes you got it right “Retirement Improvement and Savings Enhancement to Supplement Healthy Investments for the Nest Egg,” RISE and SHINE.
- That was just one committee name. The other committee named the bill Enhancing American Retirement Now (EARN) Act.
- Nevertheless, the two bills are very similar.
- As the Senate reconciles differences among committees, the House and Senate will have to reconcile their differences and vote on the final bill by the end of 2022 or they will have to start over.
SECURE ACT 2.0 Provisions
- Immediate increase in the age to begin Required Minimum Distribution to 73 and a gradual increase in RMD age to 75.
- Increase in the “catch-up” contribution for individuals aged 50 and above.
- Allows employers to match employee’s student loan payments with contributions to the employees 401(k) plan. More details when the final legislation is being voted on.
Silver Lining Opportunity and Lower Stock Market Valuations
An opportunity with markets in correction would be to convert pre-tax retirement funds into Roth IRA funds. The idea is that with portfolio values lower, the tax cost of converting is lower, and if funds are invested for more than 3 years, markets should move higher and distributions from Roth IRA are tax-free with certain restrictions (Roth IRA account must have existed for 5 or more years to meet the 5 year holding period, withdrawals occur after the account holder has met the age 59 ½ age requirement to qualify for no taxes or penalties on the withdrawals). Roth IRA Withdrawal Rules
Modern Monetary Theory
As interest rates increase so is the cost of paying back new Treasury and other federal debt. In the next 10 years the federal debt, with current higher rates, will be over 100% of Gross Domestic Product or the primary measure of the economy. This is based on current interest rates and current legislation. Modern Monetary Theory has been popularized as a strategy to continue a loose monetary policy and continue funding productive investments in our economy. It is a controversial theory because it involves no attention to federal deficits and instead focuses on productive economic investment. As a theory, it is controversial.
The reality is the MMT was the reality of the economy for the past 12 years of low-interest rates and loose monetary policy. The fear was this strategy would cause inflation. Well, here we are with inflation after a period of the reality of MMT and we are waiting for the fiscal and monetary policy reaction. We have the monetary policy reaction of raising interest rates and tightening the money supply. Will this work and how quickly remains to be seen.
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