Market Update | Optimism Springs Eternal?

The timing and extent of the widely anticipated rate cuts in 2024 have yet to materialize, but that did not stop equity markets from rallying in February, as the Dow, S&P 500 and NASDAQ all rose for the month. In fact, the S&P 500 and NASDAQ both closed February at a record high and the Dow set a new high during the month. Indeed, the Dow Jones Industrial Average, the S&P 500 Index, and the NASDAQ rose 2.5%, 5.3% and 6.1% respectively in February. Last month, the conservative projection from Federal Reserve officials indicated three rate cuts in 2024, which was far less optimistic than the view investors had at the time. This more “conservative” view on interest rate relief has proven to be relatively accurate, as pricing pressures remain elevated based on recent inflation data. Therefore, the Federal Reserve would like to see more progress made in lowering inflation closer to the 2.0% target before cutting rates.

As a result, investors pushed interest rates back up over 4%, as measured by the current yield on the 10-year Treasury Bond, which ended the month at 4.25%. However, the most recent data released by the Commerce Department suggests that price increases are moving as expected—a boost in confidence that a soft economic landing is still in sight. This was significant because January CPI (Consumer Price Index) originally came in higher than expected, causing volatility, supporting the Fed’s comments at the end of January. The Fed’s preferred measure on price trends, the personal consumption expenditures price index, increased 0.3% during January, matching economists’ expectations. More importantly, the core index, which strips out volatile food and energy prices, rose 0.4% and 2.8% annually, which were in line with the economic forecasts. In terms of a year over year comparison, core PCE increased 2.85% in January, slower than the 2.94% recorded last month and 4.9% for last year.

Markets already adjusted to this delay in interest rate relief in late January, as reflected by the steep drop across major indices the last day of January when Chairperson Powell’s announced the intention for the Fed to hold rates steady. However, lowered expectations on the immediacy of rate cuts, currently expected to begin in June, led to rising rates and thus a decline in bonds. The Bloomberg U.S. Aggregate Bond Index fell approximately 1.4% in February and fell 1.7% year-to-date.

As the market continues to digest “sticky” inflation, it is worth looking “underneath the hood” for more positive indications, especially given the Fed’s “data-driven” stance on interest rate moves and the likelihood of a “bumpy road” in getting inflation down to its 2% target. For example, corporate earnings have improved and remain strong, as approximately three quarters of S&P 500 companies reporting earnings have beaten estimates. Another example might be that consumer spending may slow (the consumer accounts for 76% of the U.S. economic growth), but is expected to remain strong, barring any unexpected shocks. With firmer, yet more realistic earnings growth, and an overall slowing economy, interest rate relief remains in sight, albeit a bit more down the road than experts had expected not too long ago.

Expected inflation is another area that deserves a closer look. Earlier in February, consumer and producer price trends signaled sticky inflation, encouraging investors to adopt expectations of rate cuts to begin later (June versus March). In contrast, as early as late last year, traders were betting on March as the starting point for the Fed's easing cycle. To reinforce the notion of delayed rate relief, Fed officials said they were not willing to entertain rate cuts at their next meeting scheduled for March 19^th through the 20^th, as they want to see more progress toward inflation moving to the 2.0% long term target.

In terms of consumer confidence, a key driver of spending and thus price inflation, there may be reason to continue believing rate relief is on the way. As measured by the Consumer Confidence Board, U.S. consumer confidence fell in February after three consecutive increases, as consumers worried about the labor market and the domestic political environment. More specifically, the Conference Board recently reported that its consumer confidence index slipped to 106.7 in February from a downwardly revised 110.9 in January.

Economists polled by Reuters had forecast the index little changed at 115.0 from the previously reported 114.8. Relatedly, the labor market recently indicated some softness too, as initial jobless claims stood at 215,000 for the week ended February 24^th, which was greater than economist expectations of 210,000. Concerns regarding employment tend to dampen consumer confidence and thus can negatively impact consumer spending, a key driver of inflation.

In many ways, the market’s positive performance and reaction to the most recent inflation data in February 2024, reflects renewed confidence in the Fed’s ability to thread “the economic needle.” That is slowing the economy just enough to tame inflation without entering a deep or even mild recession. Naturally, investors would welcome the Fed reversing course on its recent spate of historic rate increases with an eventual rate cut. So, although delayed, the market expects rate relief to materialize down the road without imperiling economic growth in the meantime. Of course, market sentiment can be fickle. Therefore, it is always prudent to re-evaluate one’s appetite for risk.

Legal Update | SECURE 2.0 Act Provides for the Addition of Pension-Linked Emergency Savings Accounts

In the evolving landscape of retirement planning, the introduction of Pension-Linked Emergency Savings Accounts ("PLESA") represents a significant stride towards enhancing financial security for American workers. Following the passage of the SECURE 2.0 Act, this legislation underscores a growing recognition of the need for integrated financial solutions that address both long-term retirement goals and short-term liquidity needs. The introduction of the PLESA feature seeks to fill a gap and allow more Americans to have access to emergency savings.

PLESAs are not retirement accounts, and instead are intended to be accounts from which some participants would have easily accessible funds for short-term emergencies. Allowing plans to add a PLESA feature is an attempt to partially fill a void of emergency savings in many American families. Many plans allow for hardship distributions, which require that a participant provide supporting documentation or certify a qualifying reason for the need of the funds. The addition of a PLESA feature allows a participant to withdraw money from the account without the needed certification or extra documentation. The PLESA feature is not meant to increase retirement savings but rather provide an avenue to make it easier for participants to set aside emergency funds. Additionally, the frequency in which distributions are permitted would serve to aid participants with obtaining a smaller amount of funds without dipping into their retirement savings and incurring the possible penalties that would otherwise occur.  

PLESAs became available with plan years beginning after December 31, 2023, giving defined contribution plan sponsors the option to add PLESA accounts as a means of encouraging employees to save for financial emergencies. Both the Internal Revenue Service (IRS) and the Department of Labor (DOL) recently issued guidance on PLESAs and this article serves to provide a broad overview of PLESAs and certain considerations plan sponsors should be aware of before electing to provide the additional contribution option to their participants.

  Eligibility to Make PLESA Contributions

  PLESA Contribution Requirements

  Administrative Considerations

  Notice Requirements

  Distributions and Withdrawals

  IRS Notice Regarding Anti-Abuse Rules

Future Implications for PLESA

Given the novelty of the PLESA feature, the administrative burden of adding this option to your retirement plan remains to be seen. While the above is a summary of the guidance currently available to us, we do expect that additional guidance will be forthcoming. In the interim, employers that wish to explore the option of adding a PLESA feature to their plan to benefit their non highly compensated employees and provide for emergency savings should reach out to their USICG representative.