Financial Intel Monthly

The Markets (as of market close August 31, 2023)

August proved to be a tough month for stocks, with each of the benchmark indexes listed here ending the month notably lower. Investors tried to decipher mixed economic data throughout the month, attempting to gauge the course of the economy, while trying to determine what the Federal Reserve will do with interest rates moving forward.

Speaking of the Federal Reserve, it did not meet in August, so interest rates remained unchanged. However, Fed Chair Jerome Powell spoke at the Jackson Hole Economic Symposium (see below) and reiterated the Fed's intent to continue its restrictive policy until interest rates fell to 2.0%.

In its annual Retirement Confidence Survey of current workers and retirees, the Employee Benefit Research Institute found that workers' confidence in their ability to fund retirement fell by the largest extent since the financial crisis of 2008, to levels not seen since 2018. Retirees' confidence also took a substantial hit. Overall, just 20% of respondents felt very confident they will be able to afford a comfortable retirement.

The Markets (as of market close July 31, 2023)

Stocks closed higher in July, with each of the benchmark indexes listed here posting notable gains. Both the stock market in particular, and the economy in general, have proven to be resilient in 2023, despite rising interest rates.

The Federal Reserve, in its endeavor to bring inflation down to the government's 2.0% target, hiked interest rates another 25.0 basis points in July, to the highest level in 22 years (see below). However, there are clear signs that inflation is finally receding. The Consumer Price Index and the personal consumption expenditures price index saw their respective 12-month rates fall to the lowest levels in nearly two years. Import and export prices dipped lower in July, as did producer prices.

On June 8, 2023, the S&P 500 index closed at 4,293.93, just over 20% higher than its lowest recent closing value of 3,577.03 reached on October 12, 2022.¹ According to a common definition of market cycles, this indicated that the benchmark index was officially in a bull market after a bear market that began in January 2022. By this definition, the current bull market began on October 13, 2022, the day after the bear market ended at its lowest point.

The Markets (as of market close October 31, 2022)
October saw stocks close higher for the first monthly gain since July. Investors were uplifted by hopes that the Federal Reserve will pull back from its aggressive interest-rate hike policy. In addition, solid third-quarter earnings could be a sign that the economy can withstand the battle to lower inflation. Each of the benchmark indexes listed here posted notable gains led by the Dow, which rose nearly 14.0%. The Russell 2000 gained about 11.0%, followed by the Global Dow, the S&P 500, and the Nasdaq.

Many employees who are waiting to commence their pension lump-sums, are now seeing a significant decrease in their value. When these interest rates move up or down, your lump sum amount will move in an inverse direction, so if interest rates increase, your lump sum amount will decrease and vice versa. Through the pandemic, interest rates dropped dramatically which greatly increased many lump sum payments. However, since then this trend has shifted, as interest rates have been increasing rapidly, causing a large reduction in pension lump-sum values.

The Markets (as of market close August 31, 2022)

Through the first half of August, the stock market continued to ride July's rally. Including the first two weeks of August, stocks had posted four consecutive weekly gains — the longest weekly rally of 2022. The latest inflation data showed prices had fallen in July, bolstering investor confidence that the Fed may begin to reel in its aggressive interest-rate hike policy. By mid-August, the S&P 500 had recouped half of its losses from the beginning of the year, and the Nasdaq had risen over 20.0% from its low in June. U.S. corporate profits rose 9.1% to a fresh record high of $2.62 trillion in the second quarter of 2022, following a 4.9% drop in the previous period. It appeared that even if the Fed continued its hawkish push to get inflation down to the 2.0% target, the economy had thus far been resilient, with the labor market continuing to show strength, while industrial production advanced.

The Inflation Reduction Act, signed into law on August 16, 2022, includes health-care and energy-related provisions, a new corporate alternative minimum tax, and an excise tax on certain corporate stock buybacks. Additional funding is also provided to the IRS. Some significant provisions in the Act are discussed below.

Medicare
If you are an Fortune 500 employee who may be eligible for Medicare, it is imperative that you have a thorough understanding of the law in order to properly plan for the future. The legislation authorizes the Department of Health and Human Services to negotiate Medicare prices for certain single-source, high-priced medications. Despite this, only ten of the most expensive medications will be selected initially, and the negotiated prices will not be implemented until 2026. In subsequent years, additional negotiated pharmaceuticals will be added.

A $2,000 annual cap (adjusted for inflation) will apply to out-of-pocket costs for Medicare Part D prescription pharmaceuticals beginning in 2025. This information may be useful for Fortune 500 employees in determining how much to save for a medical emergency and what Medicare benefits they are entitled to.

In 2023, Medicare Part D and Part B will no longer impose deductibles on insulin products covered by Medicare Part D or insulin furnished as durable medical equipment under Part B. In addition, the copayment for covered insulin products will be limited at $35 for a one-month supply.

Health Insurance
Beginning in 2023, a high-deductible health plan may exclude certain insulin products from the deductible. As an Fortune 500 employee, you must account for this information if you or a loved one needs to purchase insulin in 2023.

The Affordable Care Act subsidies that enhanced health insurance premium affordability and were set to expire at the end of 2022 have been extended through 2025. The indexing of percentage contribution rates used to determine a taxpayer's required share of premiums is postponed until after 2025, thereby preventing larger premium increases. Additionally, households with incomes exceeding 400% of the federal poverty line remain eligible for the premium tax credit until 2025. If you are an Fortune 500 employee whose income exceeds 400% of the federal poverty limit, you may want to factor your eligibility for the premium tax credit into your financial planning.

Energy-Related Tax Credits
Numerous existing tax credits related to energy have been modified and extended, and a few new credits have been added. Some of the credits are available to individuals, while others are available to businesses like Fortune 500. The next two credits are substantial revisions and extensions of an existing electric vehicle tax credit.

Beginning in 2023, a tax credit of up to $7,500 is available for the purchase of new electric vehicles that meet certain requirements and are environmentally friendly. If you are an Fortune 500 employee considering the purchase of an electric vehicle, you should be aware that credit is not available for vehicles that retail for more than $80,000 for SUVs and pickups and $55,000 for other vehicles. If the purchaser's modified adjusted gross income (MAGI) exceeds $150,000 ($300,000 for joint filers and surviving spouses, $225,000 for heads of household), the benefit is not available. Individuals can transmit the credit to the dealer as payment for a vehicle beginning in 2024. Fortune 500 employees may wish to contemplate purchasing an electric vehicle in 2024 in order to directly apply their credit at the dealership.

Similarly, a tax credit of up to $4,000 is available for the purchase of certain pure electric vehicles that have been previously owned from a dealer. If you are an Fortune 500 employee interested in purchasing a used electric vehicle, you are not eligible for the credit if the vehicle's sales price exceeds $25,000. If the purchaser's MAGI exceeds $75,000 ($150,000 for joint filers and surviving spouses, $75,000 for heads of household), the credit is unavailable. A person may transmit the credit to the dealer as payment for the vehicle.

Corporate Alternative Minimum Tax
Fortune 500 corporations (other than S corporations, regulated investment companies, and real estate investment trusts) with an average annual adjusted financial statement income of more than $1 billion will be subject to a new alternative minimum tax (AMT) of 15% for taxable years beginning after December 31, 2022.

Adjusted financial statement income refers to the net income or loss of the taxpayer as reported on the corporation's financial statement (commonly referred to as book income), after certain adjustments. If regular tax exceeds the estimated AMT, the excess can be carried forward and used as a credit against the AMT in subsequent years.

Excise Tax on Repurchase of Stock
A new 1% excise tax will be imposed on the value of a covered corporation's stock repurchases during the taxable year for repurchases made after December 31, 2022.

A covered corporation is any domestic corporation whose shares are traded on a recognized securities exchange. Nevertheless, the excise tax is not applicable: (1) to a repurchase that is part of a nontaxable reorganization; (2) with respect to certain contributions of stock to an employer-sponsored retirement plan or employee stock ownership plan; (3) if the total value of stock repurchased during the year is less than $1 million; (4) to a repurchase by a securities dealer in the ordinary course of business; (5) to repurchases by a regulated investment company or real estate investment trust; or (6) to the extent the repurchase is.

Increased Funding for the IRS
The IRS receives substantial additional funds to help fund operations and business systems modernization and to enhance tax law enforcement.

Added Fact:

ConocoPhillips employees considering the lump sum option on their pension payment may have an opportunity to take advantage of lower interest rates in Q3 2022. With Q4 projecting to have higher rates, retiring during Q3 may be the last opportunity to avoid a reduced lump-sum. May's segment rates were just released and they are 3.23%/4.59%/4.69%. These rates increased by about 0.3% (in the second segment) since April, which is a very large increase for a single month. 

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Many KP employees who are waiting to commence their pension lump-sums, are now seeing a significant decrease in their value. New segment rates have been released and there was a 0.3% increase in the second segment over the previous month. The second segment is the most impactful so if you have a pension of $1,000,000 you could see a reduction of about $30,000 simply by commencing your benefit in July as opposed to June. This is because when KP employees elect the month they would like to begin their pension, KP looks back two months to calculate the rates for the pension disbursement. When these interest rates move up or down, your lump sum amount will move in an inverse direction, so if interest rates increase, your lump sum amount will decrease and vice versa. Through the pandemic, interest rates dropped dramatically which greatly increased many lump sum payments. This trend culminated in record lows for individuals who commenced their benefits in December of 2020. However, since then this trend has shifted, as interest rates have been increasing rapidly, causing a large reduction in pension lump-sum values.