by Franklin J. Parker, CFA
The Summary
- The Bottom Line. All eyes will (yet again) be on the Federal Reserve this week. Inflation is still running hotter than expected, but investors are hopeful the Fed will slow down its pace of rate hikes. That said, the economic data has deteriorated significantly over the past few weeks, and many of my recessionary signals are flashing caution. While there may be some upside from here, investors might do well to be careful.
- This week we get inflation data for November, a key data point before the results of the Fed’s meeting on Wednesday. Markets expect a post of around 7.3% (which would be down from October’s 7.7%). Much higher than this and markets would see a more aggressive posture from the Federal Reserve. On Thursday, data on retail sales and industrial production post. Industrial production is a figure I watch closely, and it has slowed over the past few months. A negative posting here would add to the recessionary signals.
- As a minor note, the US Congress faces a deadline Friday to pass a spending bill to continue funding the government. According to Reuters, Democrat and Republican negotiators are about $25 billion apart—not much considering the $1.5 trillion in funding that is required. While I see a low probability for a government shutdown (brinksmanship has become part of the job these days), it is something investors should keep an eye on just in case.
The Details
As we close out the year, there are some “to-dos” that tend to pop up. On the investments side, one of them is tax-loss harvesting.
Tax-loss harvesting is a helpful tool. In short, you sell investments that have lost value before year end. This gives you a tax credit that you can use either now or in the future to offset gains when you sell an investment at a profit.
This year’s market volatility has given some investors an opportunity to capture that tax benefit. Now that my outlook has shifted to the negative, booking losses today gives us two immediate benefits in the face of potentially more losses next year. First, we get the tax benefit. Second, we get the cash to deploy at lower prices in the future. Of course, the latter reason carries some risk that markets move higher instead of lower. But, in a volatile market, cash gives us the luxury of future choices.
Considering these tax advantages is important—especially in this environment! And, it can be an incentive to go ahead and dump some of those stocks you’ve been waiting on to recover, but suspect never will.
Taxes can be boring to talk about, but incorporating taxes in your investment strategy is a must! Tax-loss harvesting is an important component in managing your investments efficiently.
Chart of the Week
Industrial Production is a figure that is on my recession dashboard. While not perfect, we do tend to see a contraction in production over the 6-months leading into a recession (sometimes more), but certainly not always. At the moment, we are not seeing a contraction in industrial production, but it is getting close. A drop of 0.5% or more in November would be a recessionary signal.
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