Windsor Brief for June 2023
Investing: The Debt Ceiling
Planning: Social Security
This month’s Windsor Brief reviews market performance for the month of May. In addition, we focus on the debt ceiling agreement, some of the components, takeaways and what it might mean for the economy.
In our Financial Planning section this month, we explore the different ages where one can claim their social security retirement benefits and how Windsor can help you make an informed decision.
If you’d like to talk to us further about these topics or about any of your financial planning or investment goals, please do not hesitate to get in touch.
Investing: The Debt Ceiling
May was a slightly positive month for the market. The market could not gain any traction with the debt ceiling overhang and some concerns over inflation that popped up in the data. This led to some volatility with the market remaining very range bound between 4,100 and 4,300 for the S&P 500. Growth has continued to outperform value, with large cap growth the strongest. For the full month, the S&P 500 delivered a total return of 0.43%. This puts the S&P 500 total return at 9.65% for the year. The fixed income markets fared worse than the equity markets as concerns about the US debt ceiling debate and the potential for further Fed tightening in June moved rates up slightly. The AGG finished the month down 1.09% and is now up 2.46% for the full year.
There is a significant amount of activity taking place with the debt ceiling as we write this month’s brief. As we try to provide timely insight and publish in the morning on the 1st of the month, there is a chance that things have changed since this was written less than 24 hours ago. Nonetheless, we will provide an update on what we know as of right now. If you have any questions on the debt ceiling today, or in coming days, please reach out as we would be happy to discuss further.
We have mentioned several times that the debt ceiling negotiations were a process that had to follow a certain pattern and cadence. A pattern that would lead to negative headlines, threats of default, and plenty of political posturing. This is just how Washington works, and the well-defined, though messy, process that is followed. However, we also stated this had to happen in order to get to a deal and that true default was never a reality, as this was more about politics. It is true that government shutdowns can happen from debt ceiling negotiations, though that looks to have been avoided this time.
A debt deal was agreed to by the White House and GOP leadership and has since passed the very important House Rules Committee. The rules committee was considered the toughest hurdle that needed to be cleared. Next is passing the House. That vote is expected to happen today or perhaps it happened last night after this note was complete. It is expected to pass with approximately 150 republicans and a very large number of democrats voting in favor to easily reach the needed 218 votes. Despite the rhetoric from some congress members on both sides, there is extreme optimism that it will easily pass in the House. (UPDATE: The legislation was passed in the House last night with 314 votes, a major positive).
Once the House passes the legislation, it will then go to the Senate for passage, where it will need 60 votes to prevent a filibuster. In the Senate it is less about how many votes it gets and more about the timing before June 5th (the X date), as it is widely expected the Senate will vote to pass the bill. Speaking with contacts in DC, it would be very difficult for democrats to go against the wishes of the White House, and there will be plenty of Republican votes as well. It is expected they will see at a minimum 70-75 yes votes and should easily pass. In addition, the more yes votes in the House, the more pressure that will be on the Senate to pass the legislation. However, there may be some attempts at amendments, specifically on work requirements and the pipeline passage. The Senate majority leader has made clear there is no time for amendments, so this may limit any amendment activity. As for timing, the Senate basically has until June 5th to pass the legislation. But due to the72-hour rule and the upcoming weekend, this puts the vote most likely on Monday the 5th, which is being touted as the X date. In reality, there are plenty of financial “tricks” that the Treasury can use to give them an extra day or two if needed.
The big question is what is in this legislation. Below are the major takeaways that were agreed to:
- The debt ceiling will be suspended through January 1, 2025 which increases the debt ceiling by about $2.5 trillion. It should be noted that this number is somewhat fluid as this was a date extension, not a dollar extension. This was an important ask for the Democrats as they did not want a debt ceiling issue to come up during the next Presidential election cycle.
- The real meat of the deal is $200 billion in spending cuts from the baseline over the next 2 years. This was something the GOP pushed hard on. Interestingly this was 2/3 of what they had passed prior in the House bill, thus a good result for the GOP. This will result in about $975 billion of savings over 10 years. The debt ceiling agreement also calls for non-binding spending caps from 2026-2029, and if those cuts are enacted, an additional $553 bn of savings would be achieved ($1.5 trillion combined). It is important to note that for two years (2024-2025) this is all enforceable with hard spending caps. The additional four years are not enforceable and should be taken with a grain of salt. Thus, the $975 bn number is the more realistic savings. It should be noted that these spending cuts are non-defense discretionary spending reductions.
- Defense spending will be up about 3.3%. This is on top of an increase of 9.5% last year.
- All in all, total spending will be down next year at approximately 23% of GDP from the current 25.6% of GDP.
- In addition, there is language that if mandatory spending rises due to government regulations, there must be an equal offset.
- Work requirements for food stamps and welfare will go into effect for those without children under the age of 18, while veterans and homeless are also excluded.
- Student loan payments will begin in September. This also closed off the loopholes in paying student loan debt. However, the President can move forward with a program to limit maximum payments to 5% of income. The timing coincides with the Supreme Court.
- Immediate approval of the Mountain Valley Pipeline. This was a carte blanche approval with no further requirements. Other permitting reform is also in place that will now put timelines on approvals. It was not full energy reform.
Overall, once approved, this will be a positive for the market as a major overhang will be removed. The economic impact will be a minor negative from this legislation. GDP will be impacted slightly as spending will be down from the government while student loan repayment will slightly impact the consumer. A rough estimate will be a negative hit of 0.25% of GDP in 2024 and a negative 0.4% of GDP in 2025. The main takeaway, once again, is this will remove a major overhang from the market if approved by both the House and Senate.
One other item to touch on is inflation and interest rates. There have been several negative inflation readings and employment readings since the last Fed interest rate hike. This data, along with some commentary from different Fed governors, has increased the odds of an additional 25 bps interest hike in June. The market is placing odds of approximately 25% on a June rate hike and additional data will ultimately dictate the Fed decision in June. We always said it was a possibility that they could raise rates one more time in June, and this will not be a complete surprise to the market, though it is putting minor pressure on the market overall. If May was not the final rate increase and they do decide to raise rates in June, we believe that most likely is when they would pause.
As always, we will be seeking out opportunities for your overall financial plan based on the current economy and our outlook. Together, we will continue to tailor your plan to suit your unique financial objectives and a risk level you are comfortable with. Thank you for your confidence in our team and in Windsor Wealth Management.
Planning: Social Security
As we continue our exploration from last month of the 2023 J.P. Morgan Guide to Retirement, we find two interesting slides regarding claiming ages to start social security. The Full Retirement Age is increasing gradually to age 67 depending upon the year of your birth. The first chart below shows how much your benefit would be permanently reduced if claiming at the earliest age of 62. Or how your benefit would grow to the maximum available amount if you delayed claiming until age 70. You can start your retirement benefit anytime during this period between age 62 and 70.
Source: Social Security Administration, J.P. Morgan Asset Management Guide to Retirement 2023 page 12
The optimum age for starting your social security retirement benefit will be affected by many factors including your health, your anticipated longevity, if you have earned income prior to your full retirement age or if you are planning as a single person or as part of a couple. Additional rules for family benefits or surviving spouses may also need to be considered.
The chart below illustrates the benefits for a worker that has earned the maximum earnings each year. The chart shows the monthly benefit amount along with the cumulative benefits amounts if claiming at age 62, age 67 (FRA) or age 70. The shaded area in between the scenarios represents the break-even ages when you are money ahead by waiting to claim. The bottom of the chart shows the probability that a man, a woman or one member of a married couple currently age 62 will live to the specified ages or beyond. For example, when evaluating claiming at age 67 (FRA) versus age 70, the break-even age is 81. And the probability that at least one member of the 62-year-old married couple will attain age 81 is 87%.
Source: Social Security Administration, J.P. Morgan Asset Management Guide to Retirement 2023 page 14
At Windsor, we can analyze your personal scenario and help evaluate your best claiming strategy. We can run an analysis to show you the anticipated cumulative benefit amounts for different scenarios along with comparing scenario break-even ages. We can also incorporate your social security claiming scenarios into your financial plan to see how the claiming options affect the success of your financial plan. Please let your Windsor team know if you have any questions regarding claiming social security retirement benefits.