January 1-5, 2024

Tactical Signal 9

With the S&P 500 recording its 9th consecutive week of gains to end the year, the best since 2004, Sowell’s technical indicators have remained constructive and gained momentum to remain in full position (100%).

In a year that defied the skeptics, echoed by the US economy's resilience and the dollar's strength, we stand at the precipice of 2024, having weathered the storms of 2023 with triumph. Against the backdrop of seven interest rate hikes in 2022, an inflation rate of 6.5%, and a Fed Funds target range oscillating between 4.25% to 4.50% heading into 2023, the markets showed an indomitable spirit.

As the final curtain falls on 2023, we witness the triumph of optimism as the S&P 500 not only weathered the turbulence but soared to a remarkable YTD gain of +26.3%. Our vanguard of technological prowess, the Nasdaq, outpaced all expectations with a stellar return of +44.6%. Meanwhile, the Bloomberg US Aggregate, a testament to our diversified economic strength, closed the year with a commendable +5.5%.

This resounding success was achieved against a gamut of challenges— rate hikes, inflation, geopolitical gridlock, high fuel prices, and, last but not least, the Ukraine-Russia and Israel-Gaza wars. Yet, through prudent measures and resilient economic strategies, we have emerged stronger. Today, with the inflation rate at a more manageable 3.1%, the Fed Funds rate target range elevated to 5.25% to 5.5%, and unemployment ticking modestly upward to 3.7%, well below the full employment target, the economy stands not just as survivors but as architects of a brighter future.

One of the shining constellations of 2023 was the rise of the Magnificent-7 stocks, fueled by the relentless innovation of AI and the dynamic landscape of technology. These stocks surged, with AI stocks boasting a remarkable +59% and Communication Services stocks not far behind at +54%. Among the top 10 stocks, our Magnificent-7 emerged victorious, outpacing and carrying the S&P 500 by substantial margins:

On the bond front, where bad economic news often spells good news for the Fed, yields contracted, erasing previous YTD losses and culminating in a noteworthy return of 5.53%. Long Treasuries played a pivotal role, returning a staggering 12.7% in the last three months, with 30-year yields tightening from a high of 5.11% to a reassuring 4.03%.

As we stand on the threshold of 2024, the economic stage is set for a new act, with the spotlight on jobs and unemployment in the first short week. Let us savor the triumphs of 2023, relish the moment, and collectively anticipate the unfolding narrative of the year ahead.

In the spirit of Sowell, we extend our heartfelt wishes for a prosperous and fulfilling 2024 to all. Thank you, and onwards to new horizons!

"Our national situation has been salved, S-A-L-V-E-D, by the strength of the economy, by a lot of good things are happening underneath politics. Economic growth is phenomenal right now. Unemployment is low. Inflation is down. Income inequality is down. Wages are up. Real wages are up." – David Brooks, PBS Newshour Brooks and Capehart, December 29, 2023.

Future of Social Security – Reality Bites

Social Security Admin

On January 31, 1940, Ida May Fuller, a Vermont school teacher, became the first person to collect a monthly retirement check from the Social Security program. She made a total of $24.75 in contributions over a three-year period. Her first monthly check was for $22.54. Ida May lived to be 100 years old and collected a total of $22,888.92 in benefits. And so, it began.

The average recipient of Social Security benefits has collected more in benefits than he has contributed to the program over the course of his working career. Active workers have funded the difference between the benefits collected by retirees and their contributions until recently. The contributions of active workers exceeded the payments to retirees on an annual basis on average since the inception of Social Security in 1935 through 2021. The excess of contributions over benefits has been placed in a Trust Fund established in 1939 and invested in debt instruments issued by the Federal Government as specified by statute.

The Social Security Act required trustees for the program to report the status of the program's financial conditions to the public once per year. The Trustees Report for 2023 contains this message: "The Trustees of the Social Security and Medicare trust funds report on the current and projected financial status of the two programs each year. This document summarizes the findings of the 2023 reports. As in prior years, the Social Security and Medicare programs continue to face significant financing issues."

In 2021, the benefits paid to retirees exceeded the contributions from active workers, plus interest earned on the Trust Fund and taxes on SS benefits for the first time. The deficit was then covered by taking funds from the Trust Fund. In 2022, total income from all sources was $1,056.7 billion, and total expenses were $1,097.5 billion. The deficit was covered by spending $40.7 billion in Trust Fund assets. At the end of 2022, the Fund's assets were $2,711.9 billion, down from $2,752.6 billion at the end of 2021.

The Trustees determined the assets of the Trust Fund would be depleted by 2033, and continuing program income would be sufficient to pay 77 percent of scheduled benefits. The 2033 date is one year earlier than the estimated date in 2022.

The deteriorating financial condition of the program has been evident for decades. In 1983, the retirement age for full benefits was scheduled to rise gradually from 65 to 67 years. The Trustees estimated this change amounted to a thirteen percent reduction in benefits. The increase in the retirement age was an attempt to reduce the impact of increased costs driven by a rise in life expectancy since the inception of the Social Security program. In 1935, life expectancy at birth was just under sixty years; by 2022, life expectancy rose to 77.5 years. As plan participants live longer, their benefits increase.

While life expectancy increased, the ratio of active to retired lives decreased. In 1940, the ratio of active workers to retirees was 40 to 1; by 2022, the ratio had fallen to 3 to 1. Trustees project that by 2050, the ratio will fall further to 2 to 1. As this ratio declines, the ratio of contributions to expenses also falls, and the ability to secure scheduled benefits declines.

There are other factors contributing to the deteriorating financial condition of Social Security, but one factor that is often mentioned as a cause of the financial shortfall most definitely is not. The general belief that the trust Fund was "raided" is mistaken. When President Johnson moved Social Security from "off-budget" to "on budget," there was no change in the financial procedures of the program. No funds were diverted. The procedures established in 1935 remained in place as the program moved from on and off budget four times since its inception.

There are well-known changes available for establishing a financially viable Social Security program, but they bring with them either a reduction in benefits or an increase in tax rates. One of the most often discussed changes entails raising the age requirement for full benefits. When Social Security was established, the average life expectancy for Americans at birth was roughly five years less than the age required to earn full benefits. Currently, life expectancy is more than twelve years greater than the age required for full benefits.

Additional changes that would increase the viability of the program include an increase in the active participants paying taxes or an outright reduction in benefits, an increase in the Social Security tax rate, and an increase in the income cap when applying the tax rate or privatizing the program. These changes would likely generate strong opposition from participants and their elected representatives.

At some point, math will dominate political considerations. If the current schedule of benefits and the financing mechanism for providing them remain in place, there is no feasible solution for establishing the program's viability. Major changes in the Social Security program will be thrust upon participants.

Economic Reports Jan 1-5, 2024

Advisory services offered through Sowell Management, a Registered Investment Advisor. The views expressed represent the opinion of Sowell Management. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and non-proprietary sources that have not been independently verified for accuracy or completeness. While Sowell Management believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and Sowell Management’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements. Investing in securities involves risks, including the potential loss of principal. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles, or from economic or political instability in other nations. Past performance is not indicative of future results.


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