Inflation Deflates Markets
Stocks suffered their worst day in more than two years last Tuesday as markets were caught off-guard by a higher-than-anticipated August inflation report.
Markets expected the August report to show a substantial cooling of inflation, potentially allowing the Fed to ease up on interest rate hikes. Instead, the elevated inflation number not only undercut those easing hopes but raised the possibility of a more significant rate hike. On Tuesday, traders assigned a 28% probability of a 100 basis point hike, from a 0% chance just the day before. Price action remained choppy for the remainder of the week, closing the week with additional losses as a global package-delivery company warned of a worldwide recession.4
August CPI Disappoints
August’s Consumer Price Index (CPI) rose 8.3% from a year ago, showing a continued deceleration in price increases (July’s CPI was 8.5%, and June’s was 9.1%). Despite moderating price increases, traders were disappointed, given the general expectation of a more substantial slowdown in inflation.5
Core inflation (excluding food and energy) was particularly alarming to investors, which jumped 6.3% year-over-year. That number was well above the 5.9% rate from June and July. From the market’s perspective, sufficient inflationary pressures exist for the Fed to maintain its hawkish interest rate policy for possibly longer than investors had hoped.
FACT OF THE WEEK
On September 20, 1946, the first annual Cannes Film Festival opens in the resort city of Cannes on the French Riviera. The festival had intended to make its debut in September 1939, but the outbreak of World War II forced the cancellation of the inaugural Cannes.
The world’s first annual international film festival was inaugurated in Venice in 1932. By 1938, the Venice Film Festival had become a vehicle for Fascist and Nazi propaganda, with Benito Mussolini’s Italy and Adolf Hitler’s Germany dictating the choices of films and sharing the prizes among themselves. Outraged, France decided to organize an alternative film festival. In June 1939, the establishment of a film festival at Cannes, to be held from September 1 to 20, was announced in Paris. Cannes, an elegant beach city, lies southeast of Nice on the Mediterranean coast. One of the resort town’s casinos agreed to host the event. Films were selected and the filmmakers and stars began arriving in mid-August. Among the American selections was The Wizard of Oz. France offered The Nigerian, and Poland The Black Diamond. The USSR brought the aptly titled Tomorrow, It’s War. On the morning of September 1, the day the festival was to begin, Hitler invaded Poland. In Paris, the French government ordered a general mobilization, and the Cannes festival was called off after the screening of just one film: German American director William Dieterle’s The Hunchback of Notre Dame. Two days later, France and Britain declared war on Germany.
The Cannes Film Festival stumbled through its early years; the 1948 and 1950 festivals were canceled for economic reasons. In 1952, the Palais des Festivals was dedicated as a permanent home for the festival, and in 1955, the Palme d’Or (Golden Palm) award for best film of the festival was introduced, an allusion to the palm-planted Promenade de la Croisette that parallels Cannes’ celebrated beach. In the 1950s, the Festival International du Film de Cannes came to be regarded as the most prestigious film festival in the world. It still holds that allure today, though many have criticized it as overly commercial. More than 30,000 people come to Cannes each May to attend the festival, about 100 times the number of film devotees who showed up for the first Cannes in 1946.
FINANCIAL STRATEGY OF THE WEEK
Are you confident your money’s in the best type of retirement account for you? There are a few options, including a 401(k) (or equivalent for public sector employees), a traditional IRA, and a Roth IRA. In general, it’s possible to contribute to all three each year, they have their own tax benefits, and all have specific penalties and restrictions. So, how can you know which is right for you?
Let’s focus on the traditional IRA
What are the basics? A traditional IRA works a lot like a 401(k). Any money you add to the account can be deducted from your taxable income each year, assuming it's pre-tax (that’s not a complicated step: contact your HR or payroll department to set up a payroll deduction that adds pre-tax money directly to your IRA each time you get paid.).
Contributions can lower taxable income. Under current law, you may contribute up to $6,000 per year to a traditional IRA, or $7,000 per year if you’re 50 years old or older. If made on a pre-tax basis, 100% of those contributions can be claimed as a deduction on your income tax return, reducing your taxable income. So, if you made $100,000 last year and contributed $6,000 to your traditional IRA, then your taxable income is now $94,000.
A quick caveat: under current law, the deductibility of IRA contributions may be reduced or eliminated if you or your spouse are covered by a retirement plan at work and earn above a specific adjusted gross income level.
Flexible investing options. Most 401(k)s have a limited set of investment options to choose from. IRAs, on the other hand, let you invest in practically anything you want. All gains in the account are tax-deferred, meaning that you pay taxes only when you withdraw funds from the account. This flexibility means we can potentially tailor your portfolio to align with your financial goals.
No taxes until retirement. Distributions from a traditional IRA are penalty-free after reaching age 59.5. Any withdrawals are then taxed at your ordinary income rate (no taxes in, taxes out).
Is a traditional IRA the missing part of your holistic financial plan? Contact our office today to discuss your retirement goals.
Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Past performance is no guarantee of future results. Please note that individual situations can vary. Therefore, the information presented here should only be relied upon when coordinated with individual professional advice.
Have a great week!