January 13, 2024 | Inflation Numbers, PPI, REITs, Bitcoin ETF and Social Security Spousal Benefits

Inflation Numbers
While the headline inflation numbers were above estimates, I wouldn’t say there were really any surprises in the Consumer Price Index (CPI) report. Headline CPI rose 3.4% vs the estimate of 3.2% and core CPI rose 3.9% vs the estimate of 3.8%. Although it was slightly higher than anticipated, progress is still being made on the inflation fight and core CPI registered its lowest reading since May 2021. As it has been the case for many months, the shelter index was the major contributor as the annual increase of 6.2% accounted for about two-thirds of the rise in inflation. Other areas that remained problematic included motor vehicle insurance (+20.3%), admission to sporting events (+14.9%), and motor vehicle repair (+10.3%). One area I found interesting was food, the entire index increased just 2.7% from last year but the divide between at home and away from home has widened substantially. The at home index showed an increase of just 1.3% compared to the away from home index which grew 5.2%. I believe this divide will remain due to the demand for dining out and the wage pressure restaurants and bars are facing. Overall, I don’t think this report moves the needle one way or another for the Fed and I believe rate cuts will start in the back half of the year.

PPI
More good news on the inflation front, as the Producer Price Index (PPI) showed an increase of just 1.0% compared to last year. Core PPI, which excludes food and energy, was up just 2.5% compared to last year. This points to more good news ahead on the inflation front as the PPI is normally a leading indicator.

REITs
With what I believe was the last rate hike of the cycle in the books, one area to evaluate is real estate. I’m not talking about single family homes or private investments, but rather looking at public Real Estate Investment Trusts (REITs). These trade on the stock exchange, but instead of owning a business you will own the real estate that is bought within the trust. I believe there are many great values in the public real estate market at this time when analyzing the cash flows that an investor receives and historically REITs have outperformed the S&P 500 index by approximately 4.5 percentage points in the 12 months following the last interest-rate hike in a cycle. Looking at the last three hiking cycles, REITs have had an average total return of 19% in the 12 months following the last hike in a cycle. I believe the right real estate in the portfolio is a great area to look for value as we look down the road 2-3 years, not to mention many of these REITs have great dividend yields.

Bitcoin ETF
The hype for the bitcoin ETF is at all-time highs, as the SEC has now approved them for investments. We still don’t understand why people would want to buy an ETF that holds just one product like bitcoin. But for those who do, the fees are out and Fidelity has disclosed they will charge .39% annually for holding bitcoin. Their ETF competitors Invesco and crypto firm galaxy will charge 0.59% for holding bitcoin. I’m sure you’ve heard of the Grayscale bitcoin trust which charged an annual fee of 2% on the assets, they have now reduced that fee to 1.5% since it is now an ETF. I still believe this is hype, where the rumor will be far better than the news. I would not be surprised that for 2024 bitcoin is currently trading around its highs for the year.

 

Financial Planning: Social Security Spousal Benefits
Social Security spousal benefits come into play when one spouse has little to no earnings history. In this case their own social security benefits would be low, so they can claim a spousal benefit from the spouse that did work. There’s a common misconception that it’s ½ of the higher earning spouse’s amount, but the actual calculation is ½ of the working spouse’s full retirement age amount and the non-working spouse would need to apply at their own full retirement age. The working spouse may apply at any point between age 62 and 70 and the spousal benefit is still ½ of their age 67 amount. The non-working spouse may collect as early as age 62, but they will receive a reduced benefit for every month they collect before age 67. Upon reaching age 67, they do not receive a larger benefit by waiting any longer. The only other caveat is the working spouse must be collecting social security for the non-working spouse to collect a spousal benefit. In situations where the higher earning spouse is not collecting social security because they are still working or they are waiting until age 70, this prevents the non-working spouse from collecting. If the non-working spouse has reached age 67, benefits are being permanently lost. This is compounded by the fact that the spousal benefits will only last until the death of either spouse because only the higher social security benefit is retained by a surviving spouse. This is one of several instances where it is better to collect Social Security sooner rather than later.