👍 More positive data

and how stocks perform after a cut

Good morning investors! The market yesterday remained flat as investors wait to hear from the Fed.

Today we cover:

  • More economy data

  • How the stock market reacts after a red cut

  • Saving tax money

📊 Economy and News 

Builder Confidence Sees a Modest Increase in September

US home builder confidence saw a slight rise as mortgage rates decreased, breaking a four-month streak of declining sentiment. The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index recorded an increase in builder confidence, moving up to 41 from 39 in August. This small uptick exceeded economists' expectations, as a Reuters poll predicted the index would rise to 40. Despite this improvement, overall confidence remains relatively low due to the ongoing challenges of rising construction costs.

This marks the first positive shift in builder sentiment regarding future home sales since May. The improvement comes just ahead of the Federal Reserve's anticipated decision to begin lowering interest rates at the conclusion of its policy meeting today. Previously, the Federal Reserve had raised interest rates to a range of 5.25% to 5.50% between 2022 and 2023 in an effort to curb inflation. This led to a slowdown in the housing market, though recent indications of potential rate cuts have caused mortgage rates to fall.

Impact of Lower Mortgage Rates on Housing Market

The decline in mortgage rates has been noticeable, with the average 30-year fixed mortgage rate dropping to 6.20%, down from a peak of nearly 8% last October, as reported by Freddie Mac. However, data from earlier this month revealed a significant drop in U.S. construction spending in July, with single-family homebuilding particularly affected by an increased housing supply. Rising housing inventory has also added to competition among builders, posing additional challenges for the market.

Despite these obstacles, builders are more optimistic about sales prospects for the coming six months, with the sales expectations index increasing by four points to 53 in September. The recent drop in mortgage rates has allowed builders to hold off on further home price reductions, with fewer builders cutting prices this month for the first time since April. Additionally, the average price concession fell to 5%, marking the first time it has dipped below 6% since July 2022.

Global hits:

US factory production output: Production at U.S. factories experienced a notable increase in August, primarily driven by a rebound in motor vehicle manufacturing. However, the Federal Reserve revised July's data downward, indicating that the broader manufacturing sector continues to face challenges.

  • Factory output rose by 0.9% in August, following a 0.7% decline in July (revised from the initially reported 0.3% drop). Economists had expected a more modest 0.3% rise for August. On a year-on-year basis, factory production grew by 0.2%.

Motor Vehicle Output and Other Manufacturing Gains

The motor vehicle and parts sector saw a strong recovery after a sharp drop in July. This sector's rebound contributed significantly to the overall factory output improvement.

  • Motor vehicle and parts production surged 9.8% in August, after falling 8.9% in July.

  • Durable manufacturing production increased by 2.1%, recovering from a 1.5% decrease in July.

Output of primary metals, electrical equipment, appliances, and aerospace products saw improvements. However, nondurable manufacturing production declined by 0.2%, driven by reductions in printing, petroleum, and coal products.

Mining output rose by 0.8% in August, recovering from a 0.4% decline in July, which was affected by early shutdowns due to Hurricane Beryl. Oil and gas well drilling increased by 0.3%, reversing a 0.3% drop in July.

Overall industrial production rebounded 0.8% in August, following a 0.9% decline in July.

Capacity utilization for the industrial sector rose to 78.0% from 77.4% in July.

Reminder: Musk could become the world’s first trillionaire, a milestone that some expect him to hit by 2027. 💴 

📈 Stocks

S&P 500 5,634.58 (+0.026%)
DJIA 41,606.18 (-0.038%)
NASDAQ 17,628.06 (+0.20%)
BRENT CRUDE 73.70 (+1.31%)
* Prices as of Mar 3rd, 12:20 AM UTC

Rate Cuts and Market Gains: A Look at Past Easing Cycles

As the Federal Reserve prepares for its first interest rate reduction in four years, it’s an opportune moment to examine how stocks have historically responded at the start of previous easing cycles.

There is widespread anticipation that the market's already impressive performance this year will continue following the rate cut. On Tuesday, the S&P 500 reached a record high, bringing its YTD growth to over +18%. However, future performance will largely depend on the state of the economy, according to historical data.

Across all previous easing cycles, the S&P 500 generally performed positively after the initial rate cut, although there were significant exceptions during economic downturns.

  • Data shows that the index was up 70% of the time three and six months after the first cut, and 80% of the time after one year.

  • On average, the S&P 500 gained 5.5% within three months of the initial rate cut, 10.6% after six months, and 11.3% a year later.

When excluding periods where a recession followed the first cut, the market's performance improves significantly.

In non-recessionary cases, such as those in 1984, 1989, 1995, and 1998, the S&P 500 rose 100% of the time three, six, and 12 months after the cut. On average, the index increased by 10.2% three months later, 14.7% six months after, and 18.6% one year afterward.

This might look good but let us warn you that an easing cycle is not inherently positive for the market. Also, the impact varies from sector to sector with communication services, information technology, and health care typically doing well. In contrast, materials, utilities, and consumer discretionary sectors showed the weakest performance over the same period.

Exciting: Alaska Airlines, Hawaiian can close merger deal, DOT says.

Good news: FDA clears Apple’s sleep apnea detection feature for use.

💵 Personal Finance

Tax credits worth knowing about

Nobody likes to pay taxes and while you can't (legally) evade taxes altogether, there are ways to reduce taxes on your income. The government offers a variety of programs, known as tax credits, designed to help people, especially low-earners, save money.

What is a tax credit?

A tax credit is a "sum that can be offset against a tax liability." In simple words, it’s the amount of money taxpayers can subtract from the amount they owe in taxes.

There are a variety of tax credits, we’ll discuss them below:

The Earned Income Tax Credit

The Earned Income Tax Credit allows low-income Americans to claim credits up to $7,430.

The amount of your tax credit depends on a variety of factors, including the number of children you have.

The American Opportunity Tax Credit

The American Opportunity Tax Credit is designed for students. It offers up to $2,500 per year to eligible students. A little complicated to calculate, this tax credit covers the first four years of higher education.

The Lifetime Learning Credit

Those who want more should look at the Lifetime Learning Credit, which covers qualified tuition and related expenses. You must be enrolled in an eligible institution and meet other eligibility requirements to qualify for this credit.

It covers undergraduate, graduate, and professional degree courses with no yearly limits, going up to $2,000 per tax return.

The Saver’s Credit

Retirement Savings Contributions Credit, also known as Saver's Credit, is for people making eligible contributions to IRAs or employer-sponsored retirement plans. Moreover, contributions to Achieving a Better Life Experience (ABLE) account may also be eligible in some cases.

The credit can be up to 50% of your contributions based on a number of factors, including your adjusted gross income.

The Child and Dependent Care Credit 

Last on the list is the Child and Dependent Care Credit that covers qualified expenses for the care of disabled dependents and children. Only up to $3,000 (expenses) are covered for one individual and up to $6,000 for two or more individuals. The percentage, however, depends on your adjusted gross income.

Almost all countries offer some forms of tax credits, including credits for buying EVs, continuing education, and building homes. Check this video for more:

💰 Be a Better Investor

“We must care for each other more, and tax each other less.”

Bill Archer

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Nothing in this newsletter is financial advice. Always do your own research and think for yourself.