This Week in Review:
The Fed’s Next Major Move
This Week:
- Cash Is King, but for How Long?
- Married Filing Separately? The Pros and Cons
- Looking Ahead
Here’s what else we’ve been watching this week:
- Federal Reserve testimony. Fed Chair Jerome Powell’s testimony on Capitol Hill this week included a warning of sorts to investors: If warranted by upbeat economic conditions, the central bank may hike interest rates more than anticipated. Prior to Powell’s appearance, a 0.25% bump was expected at the next Fed meeting, but now investors are bracing for a 0.50% hike and more increases to come later in the year. That may sound minor, but even a modest increase from the current 4.50%–4.75% range could affect businesses’ and consumers’ ability to borrow affordably, which could negatively impact economic growth.
- Bank struggles. SVB Financial Group saw its shares fall by more than 60% on Thursday, as traders got wind of the aggressive measures it was taking to shore up its balance sheet. By Friday, the Federal Deposit Insurance Corporation (FDIC) moved to take control of the bank’s assets. The collapse sparked fears for the larger banking sector. While Fed policy has put pressure on banks to offer competitive yields and stem depositor outflows, the situation at SVB is unique to how it operates and does not reflect on issues for the rest of the industry. That said, our portfolio managers are keeping a close eye on the situation
- Jobs. Today’s unemployment report for February is just the kind of data the Fed will evaluate when deciding to raise rates by 0.25% or 0.50%. While not the same eye-popping figure we saw in January (with 517,000 jobs created), U.S. hiring grew solidly in February as employers added 311,000 jobs. As we’ve seen of late, this could be another case of good news (a resilient job market) being viewed as bad news (triggering higher interest rates).
- Inflation. Our analysts are looking ahead to next week’s consumer price index (CPI) reading. Is inflation still slowing? That hasn’t been the case lately for used cars—a key barometer of inflationary trends. Used vehicle prices rose 4.3% in February from the previous month, the largest jump in the month of February since 2009 and the third consecutive monthly rise. Like the jobs report, the Fed will be basing its interest-rate decisions on the details of this CPI report.
Cash is King, but for How Long
You’ve heard the old saying “Cash is king.” Well, to the extent that’s true today, it’s been a rags-to-riches story. Thanks to the cycle of interest-rate hikes the Federal Reserve started in 2022, cash has gotten an enormous boost in yield. A year ago, it yielded all of 0.01% (meaning it was producing $1 of income per year on a $10,000 account). Now cash has ascended from serf status to produce a far more lavish yield of 4.23% this month.
That said, there’s no guarantee cash will still be king in a year’s time. That 4.23% yield is a big improvement compared to where we’ve been, but make no mistake—cash yields can move down just as rapidly as they rise. The chart below shows how transitory the interest rate on cash can be over time.
Cash serves a vital purpose for investors and savers. Our baseline advice for clients is to maintain an emergency cash fund that can cover six months of expenses. Money market funds and savings accounts are also viable short-term parking spots for larger sums of cash earmarked for a substantial purchase, like a down payment on a house or car.
But now that cash’s yield has become more competitive with short-term bond yields and stock dividend yields, some investors are understandably tempted to hold more of it than they have in the past. While it’s helpful to be earning extra interest on your emergency fund, we view that as an added benefit, not the goal of that account.
Talk to your wealth adviser if you have questions about how much cash you need and what kinds of alternatives make sense in the context of your financial plan. They will be able to provide answers and work with you on any adjustments to your strategy.
Married Filing Separately? The Pros and Cons
Of all the questions on your annual tax return, you’d think “filing status” would be the easiest to answer. Yet one of the most common filing questions our tax planners hear is: “Should my spouse and I file separately?”
Close to 2 million married couples choose to file their taxes separately each year, and they do so for a variety of reasons. For example, the IRS saw a significant uptick in married couples filing separately in the last three years as people sought to qualify for pandemic relief. And that’s the key: You need to be deliberate about the decision or it’s likely to cost you.
Your wealth adviser can help you think through the nuances of this decision. In the meantime, here are some of the pros and cons of filing separately:
Pros. For 2022, the standard deduction for married couples filing jointly is $25,900, while filing separately is $12,950 (for tax year 2023, deductions have been set at $27,700 and $13,850, respectively). If there’s a large discrepancy between the two spouses’ incomes, filing taxes separately can sometimes be advantageous depending on the circumstance.
For instance, it can help to maximize certain itemized deductions: If one spouse has incurred large medical expenses, dividing income into two separate returns could make a difference in terms of deductibles. It could also help a small business owner lower their reportable income for a qualified business income deduction. Or an individual may want to minimize reportable income to lower income-based student loan payments.
A second advantage of filing separately is that it severs joint liability for that tax year. If you are separated, going through a divorce or in a second marriage—or if you just don’t want responsibility for your spouse’s finances—filing separately may make more sense.
Cons. For most married couples, filing separate returns will result in a higher tax liability, and it can also affect your ability to maximize saving for retirement in an IRA. (Married couples filing individually typically can’t contribute directly to a Roth IRA if they have more than $10,000 of income.)
The other big downside is that filing separately blocks access to certain tax breaks—including the child and dependent care tax credit and the ability to deduct interest on student loans. In addition, for those receiving Social Security benefits, a larger percentage of the payments may be taxable.
The bottom line? Most married couples come out ahead when they file jointly. You can switch back and forth each year, but when you file separately, both spouses must use the same election (standard or itemized deduction).
The best choice depends entirely on your financial situation. Contact your wealth adviser with questions related to your personal circumstances.
Looking Ahead
Next week, we’ll be poring over fresh data on inflation, retail sales, manufacturing, homebuilding, consumer sentiment and small business owner confidence. We’ll break it all down and explain why it matters to you.
If you’d like to learn more about our tactical or fundamental strategies, please contact our team at 800-268-9046 or info@polariswealth.com.
Please note: This update was prepared on Friday, March 10, 2023, prior to the market’s close.
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