ARE WE IN A RECESSION?:  Technically, we are in a recession if we experience two consecutive quarters of negative economic growth.  The first quarter of this year was negative.  If we are in a negative quarter now, we are in a recession.  So are we, or aren’t we?  According to Bank of America, this quarter will come in at 1.5% positive annualized growth.  According to Goldman Sachs, this quarter will come in at 2.9% positive annualized growth.  According to the Atlanta Federal Reserve Bank, this quarter will come in at 0.00% annualized growth.  We will see who is right, or if any of them are right.

BARGAIN HUNTERS AND GOLDILOCKS:  The week before last, the S&P 500 went into bear market territory, notching negative performance of over 20% from its January high.  That was enough for bargain hunters to swoop in and start buying.  Generally, that phenomenon lasts no more than a day or two, but this week, investors were buoyed by tepid to negative news about the U.S. economy.  It has to slow just enough to get the Fed to back off the “aggressive” pedal, but not so slow that we go into a recession.  Evidently that “just right” Goldilocks scenario was what investors thought they saw this week because the markets roared back late in the week, recapturing all of the prior week’s losses, and then some.

LONGER-TERM PERFORMANCE:  Below are the annualized three-year and five-year numbers for these same indices.  

BANKS PASS ANNUAL STRESS TESTS, BUOYING THEIR STOCK PRICES:  Every year since the Great Recession, the Federal Reserve has performed stress tests on the largest banks in the U.S.  The Fed on Thursday released the results of its annual bank stress test of the 34 largest banks.  The results showed that banks continue to have strong capital levels, allowing them to continue lending to households and businesses during a severe recession.  The stress test assumed U.S. unemployment rising to 10% in the third quarter of next year. It assumed a 40% decline in commercial real estate prices, a 28.5% drop in home prices and a 55% decline in stock prices.

RATE OF ECONOMIC GROWTH SLOWS:   S&P Global keeps a composite index to measure the rate of growth (or retraction) of economic activity in the U.S. and the eurozone.  It announced on Thursday that its U.S. composite purchasing managers index fell to 51.2 in June from 53.6 the previous month.  That is a five-month low. In the eurozone, the index fell to 51.9 in June from 54.8 in May, a 16-month low. A reading above 50.0 points to an expansion in activity, while a figure below that threshold points to a contraction.

SALES OF NEW HOMES INCREASES IN MAY:  Sales of new single‐family houses in May 2022 were 10.7% higher than April, but 5.9% lower than one year ago.  

ROTH IRAS:  Roth IRAs were created by the Taxpayer Relief Act of 1997.  They allow you to make contributions of after-tax dollars to a Roth Account.  Growth within the account is tax deferred, and those gains can ultimately be withdrawn tax-free.  In addition, unlike traditional retirement accounts, there are no required minimum distributions once you hit age 72.  The amount you can put into a Roth IRA is limited and there are income limits.

You are allowed to “convert” money from a traditional, pre-tax retirement account (IRA, 401k, etc.) to a Roth account.  When so doing, this is considered a taxable event, so the amount converted needs to be reported as income.  But even though you pay a tax, the money moved from the traditional retirement account to the Roth now has the benefits of the Roth account, i.e., tax deferred growth and tax-free withdrawals.

Whether to engage in a Roth conversion depends a lot on your tax rate today, and your expected tax rate when you eventually pull the money out (if it remains in a traditional account).  Also, you generally want to be careful not to convert so much that you put yourself into a more expensive tax bracket.

Think about where we are now.  If your traditional IRA is invested for growth, or even in a stock and bond mix of some sort, it is down this year double digits.  This creates an opportunity.  If you were thinking of converting some of your traditional IRA money to a Roth, now you can do it and pay less tax.  You can now shift a larger percentage of your pre-tax account to a Roth making it possible to shift a larger portion of the future growth of the account into a Roth. 

There are many variables and nuances in making a Roth conversion decision, but now might be a time to consider it.

MORE LABOR SUPPLY?:  This is purely anecdotal.  But my wife and I are in Ocean City, Maryland for the weekend to attend a wedding.  We have been spending time in hotels and at restaurants.  We have observed what appears to be fully staffed establishments (or at least close).  We spent part of Saturday at a rooftop bar and restaurant being waited on by a young man named Boris.  He is a J-1 Visa holder from Turkey.  It was his third day and he was clearly a rookie, but trying hard.  He seemed very excited to be in the U.S., and he couldn’t wait to go to Delaware for some tax-free shopping!  We encountered a lot of these J-1 Visa holders over the weekend, the first time we have seen that since the summer of 2019.  One more bit of “normalcy” returning, and hopefully helping.

Have a great week!

“Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness.  Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.” Charles Dickens, David Copperfield

I know what it is to be in need, and I know what it is to have plenty. I have learned the secret of being content in any and every situation, whether well fed or hungry, whether living in plenty or in want.”  Philippians 4:12

SOURCES: 
 RATE OF ECONOMIC GROWTH SLOWS:  wsj.com/articles/europes-economy-slows-sharply-as-recession-risks-grow-11655979342?mod=article_inline
ARE WE IN A RECESSION?: calculatedriskblog.com/2022/06/q2-gdp-forecasts-fairly-wide-range.html
SALES OF NEW HOMES INCREASES IN MAY: census.gov/construction/nrs/pdf/newressales.pdf
BANKS PASS ANNUAL STRESS TESTS, BUOYING THEIR STOCK PRICES:  federalreserve.gov/publications/files/2022-dfast-results-20220623.pdf

(c) 2022 Stonecrop Wealth Advisors, LLC, All Rights Reserved

*S&P 500: This is a measure of the performance of the 500 largest companies in the United States, and it a common index to track the performance of U.S. equity markets, especially the large cap markets. 
*MSCI All Country World Index X US: This is a broad measure of the performance of worldwide equity markets excluding the United States. 
*Bloomberg Barclays U.S. Aggregate: This is a measure of the U.S. bond markets.