Economic Update

Where’s That Recession?

While rising inflation and interest rates have commanded our attention for over a year, lurking in the background has been the prospect of a recession. And yet, after another quarter of positive corporate earnings reports, the recession has yet to make its appearance. What’s going on?

The Positives

Not only are corporate earnings reports favorable (more about that in a moment):

• Gas prices are holding steady.
• American Express reports that consumer spending was up eight percent in the latest quarter (a rise it attributes to spending on travel and entertainment).
• Unemployment remains low.
• Consumer confidence in July was at its highest since September of 2021.

The Dual Effect of Interest Rates

As this newsletter was in production, the U.S. Federal Reserve Board met (July 25 to 26). We’ll go out on a limb with most analysts and project that it raised rates simply because the inflation rate has not fallen to Chairman Jerome Powell’s target level of two percent.

As we’ve noted before, rising rates have a chilling effect on borrowers, including individuals in the housing market and corporations. Since 1975, increases in the Fed’s rate and increases in corporate net interest payments have gone hand in hand, and higher interest rates put pressure on corporate profits and margins.

Well, over the past 15 months, corporate interest payments have fallen.

Corporate Borrowing

When interest rates were near zero, companies refinanced a significant amount of their liabilities into low-fixed-rate, long-term debt. According to the Bank of America, 76 percent of the debt of S&P 500 companies is in long-term fixed debt (maturing in 2025, 2026 and 2027). Albert Edwards of Société Générale observed that, “Companies have effectively played the yield curve in reverse and become net beneficiaries of higher rates, adding 5% to profits over the last year instead of deducting 10%+ from profits as usual.”

Higher corporate profits have averted the layoffs that could have set off a recession. But that doesn’t mean we won’t see one.

• The US ISM Purchasing Managers’ Index fell to 46 in June, its lowest point since May of 2020, and a level commonly associated with a recession. (The PMI is one indicator of the health of the service and manufacturing segments of the economy.)
• The Consumer Price Index (CPI) for all urban consumers continues to increase: up 0.2 percent in June and 3.0 percent over the past 12 months.
• If companies refinance their debt at higher rates, we may see the typical squeeze on profits and margins.

As always, we’ll continue to watch the interest, unemployment, and inflation rates carefully as well as market and confidence indicators carefully. If you have any questions, please don’t hesitate to contact us.

Lifestyle

Building a Sustainable Wardrobe

Reduce, Reuse, Recycle. Since the 1970s we’ve seen the three-green-arrow symbol and have applied the slogan to the way we use and dispose of food and beverage containers, paper, electronics, paint, and even smoke alarms and bike tires.

Fashion is one of the fastest growing, next generation of products to come under the sustainability microscope. Many designers are using organic fibers and materials (like cotton), hemp, silk, and bamboo) and avoiding dying textiles. Consumers are flocking to subscription rental services for everything from bridal gowns and high-end fashion and jewelry to office and ski wear.

As with almost all sustainability programs, success is a subject of debate. Consumers demand cheap footwear and apparel, typically made from petroleum-based synthetics, and are more fashion-trend oriented than ever. According to the World Economic Forum, in the last 15 years, “the time clothing is worn before it is thrown away has fallen by around 40%. When it is thrown away, 73% will be burned or buried in landfill.”

We’re happy to report that several Obsidian team members are doing their part. How else can we explain the t-shirts featuring alma maters and the hair bands of the 80s and the grunge and boy bands of the 90s that appear every time Casual Friday rolls around?

Conversion from TD Ameritrade to Schwab

August 1: Login Creation Day

If you currently receive statements from TD Ameritrade, please take a moment to read this article and a more detailed version in our July 8 newsletter.

An important milestone date—August 1—in the process of converting accounts from TD Ameritrade as a trading platform to Schwab is upon us. That’s the first day you can create your Schwab login ID and password. You may have already received site information from Schwab either by email or USPS, depending on your delivery preferences.

Please keep in mind that your account information, assets, cost basis and margin and options permissions will transfer along with your account statements (10 years), confirmations (two years), tax documents (seven years), and trade confirmations (two years). The last day you will be able to access to your accounts on TD Ameritrade AdvisorClient site is September 1.

How we help

Navigating an Inherited IRA

Many of us use IRAs (traditional, SEP, SIMPLE and Roth) as retirement planning tools. There’s one more IRA that we can help you set up for heirs or manage if you are the beneficiary of an Inherited IRA or employer sponsored retirement account. Rather than take a lump-sum distribution, beneficiaries can use Inherited IRAs for tax-deferred growth. As with any tax-advantaged vehicle, however, the IRS imposes certain withdrawal requirements. . . requirements that have recently, and are constantly, changing. If you’d like to know more, please don’t hesitate to give us a call. 

Advisory Services offered through Obsidian Personal Planning Solutions, LLC. Securities are offered through Triad Advisors, member ​FINRA/SIPC.​ Obsidian Personal Planning Solutions, LLC, and Obsidian Personal Planning Solutions, Inc, are not affiliated with Triad Advisors.