What the Fed Rate Cut Means for Investors

Yesterday, the Federal Reserve lowered the federal-funds target rate for the third straight meeting by a quarter percentage point, to between 1.5 percent and 1.75 percent. The Fed also signaled it is likely to pause to see whether these cuts are enough to sustain the economic expansion.

If this is indeed the final cut for a while, it might be very good news for investors. Between 1995 and 1996 and in 1998, the Fed cut interest rates three times and then stopped. In each of these cases the S&P 500 returned 24.76 percent and 19.39, respectively, over the next year.

Historically, the danger for stocks is when the third cut is not the last and the Fed needs to jolt the economy further. In 2001 and 2007, during the dot-com bubble and the financial recession, the Fed cut interest rates three times and kept cutting in order to boost the economy. During those cutting cycles, the S&P 500 had dropped 12.64 percent and a stunning 42.37 percent one year later.

Third Quarter GDP

The Commerce Department said this morning that economic activity in the U.S. grew at an annualized rate of 1.9 percent in the third quarter, down slightly from the 2 percent pace in the second quarter.  Personal consumption spending by American households rose at a 2.9 percent annualized rate while government spending grew at a 2 percent rate.

Foreign trade, on the other hand, was a small drag on the economy. Exports rose 0.7 percent after a big drop in the second quarter, but imports rose somewhat faster than that, at 1.2 percent.

Overall, the numbers show an economy that is continuing to slow at a slight pace. GDP had increased by 3.1 percent in the first quarter of this year, and by 2.9 percent for all of 2018. It is on track to grow by 2.3 percent for all of 2019.

The New Record-Setters

Thanks to a handful of favorable earnings reports, the S&P 500 index rose 0.6 percent yesterday, to close at 3,039, finishing above its previous record of 3,028, set on July 26. The gains were widespread, with the following S&P components all setting new highs at the close yesterday:

• Allegion
• Alphabet Inc.
• Apple
• CDW Corp.
• Charter Communications 
• Dover Corp.
• First Republic Bank
• JPMorgan Chase 
• KLA Corp.
• Lam Research 
• Microsoft 
• Sherwin-Williams 
• United Technologies Corp.
• Xylem 

For Alphabet, Google's parent, the record high was short-lived. After reporting that it missed analysts' earnings estimates, the stock dropped by 2 percent in after-hours trading.

The Changing Face of Retirement

It's a true generational shift: A new Wells Fargo survey of American retirees found that 86 percent live primarily on income from Social Security or a pension. By contrast, only 25 percent of millennial workers expect their primary source of retirement income to come from Social Security or a pension.

Just 5 percent of the retirees say their main source of income is a 401(k), IRA, or other personal savings vehicle. But things are changing fast: 45 percent of millennials say their future retirement will be funded by personal savings. Among baby boomers still working, 22 percent say they'll use personal savings.

Those younger generations are beginning to save for retirement much earlier than those before them. Today's retirees started saving around age 40, on average, while baby boomers still working started around age 36, Gen Xers at age 31, and millennials at age 25.

Amazon Misses

Have we reached peak Amazon? Amazon.com's profit fell for the first time in more than two years in the third quarter, the Internet giant reported yesterday. Moreover, the company expects another earnings decline in the holiday-shopping season.

Amazon reported third-quarter profits of $4.23 a share on sales of $69.98 billion. Sales rose from $56.58 billion a year ago, but earnings declined from $5.75 a share, the first time Amazon earnings have shrunk year-over-year since June 2017.

The company had reported profit of more than $10 billion in 2018, more than triple its previous annual record, and had reported record quarterly profit totals for four consecutive quarters before breaking that streak with its new second-quarter results. Looking to the future, Amazon’s forecast for the holiday quarter came in short of analysts' estimates for both profit and sales.

Saving the Children

According to a new study out yesterday from the Pew Research Center, about six in 10 parents admit they’ve given at least some financial help to their adult children ages 18 to 29 in the past year. That jibes with a recent study by Merrill Lynch, which found that 79 percent of parents say they give some financial support to their adult children.

The Pew study found that the share of young adults who could be considered financially independent from their parents by their early 20s  has gone down in recent years. In 2018, 24 percent of young adults were financially independent by age 22 or younger, compared with 32 percent in 1980.

All in all, nearly three in four parents (72 percent) say that they have put their children’s interests ahead of their own need to save for retirement. About two in three (63 percent) say they have sacrificed their financial security for the sake of their children.

Why Do Older People Stay on the Job?

A third of older people are still hard at work, with 45 percent putting in full-time hours on the job and 55 percent working part time. A new study from Provision Living asked seniors 65 and older why they’re still laboring away in the workforce, when they could be enjoying the fruits of retirement after years of employment.

According to the respondents, 62 percent say they’re still on the job for financial reasons, while 38 percent cite personal reasons for sticking with the nine-to-five. The average retirement savings among those working seniors is a pretty clear indication why they can't afford to retire; it’s just $133,108.

Of the group that said they work for financial reasons, 37 percent say they simply can’t afford to retire. Another 23 percent say they’re supporting family, 19 percent are paying off debt, 13 percent are paying off a mortgage, 4 percent are saving up for a big expense and 3 percent have some other reason.