NerdWallet's Smart Money Podcast - Money News: Latest Stock Market News, New IRS Tax Brackets, Tipping Trends

Episode Date: November 15, 2023

Delve into recent stock market developments. Plus, tax bracket adjustments. Before taking an in-depth look at what’s going on in the stock and bond markets, hosts Sean Pyles and Anna Helhoski delve into the recent developments in personal finance news. They start by breaking down the latest inflation numbers. Then, they discuss the concerning increase in credit card delinquencies, shedding light on rising balances and the generational shift in credit card usage before offering smart tips on managing credit balances in a high-interest rate environment. They then turn their attention to the latest IRS tax bracket adjustments and break down the implications for taxpayers. Investing Nerd Sam Taube then joins Sean and Anna to talk about recent stock market developments, unraveling the connection between rising Treasury yields, bond market shifts, and their impact on stock prices. They discuss potential implications for investors, diversification strategies for the current financial climate, and key economic events to watch for in November. If you’re looking for an app to track all your money in one place, then check out the free NerdWallet app: https://nerdwallet.com/app  In their conversation, the Nerds discuss: personal finance, market swings, inflation, credit card delinquencies, inflation-adjusted tax brackets for tax year 2024, stock markets, Pew Research Center survey on tipping, investing, economic events, treasury yields, interest rates, portfolio diversification, market fluctuations, consumer price index, Federal Reserve, borrowing costs, Dow Jones, the S&P 500, active trading, and inflation data. To send the Nerds your money questions, call or text the Nerd hotline at 901-730-6373 or email [e-mail]. Like what you hear? Please leave us a review and tell a friend.

Welcome to NerdWallet's Smart Money Podcast. I'm Sean Piles. And I'm Anna Hilhoski. And this is our weekly personal finance news roundup, where we take a look at recent developments in the world of money, and then go in-depth on an issue that's important to your life and your bottom line. Today, we're taking an in-depth look at what's going on in the stock and bond markets, which have been on a bit of a roller coaster ride over the last few months. We'll find out what to pay attention to and which parts of the ride to just shut your eyes on. That's coming up, but first, a few money headlines from the last few days.

We have fresh numbers out on inflation and the Bureau of Labor Statistics says the consumer price index slowed in October to 3.2% year over year. The CPI measures the change in prices paid by consumers for all goods and services. Yeah, and that's down from 3.7% in September. Take out volatile food and energy prices and you've got a core inflation rate of 4%. We saw price declines in everything from health insurance to airfares and used cars. And as we've noted before, the Federal Reserve watches this number very closely and has a target inflation rate of 2%. This week's CPI will no doubt play into any future decisions on interest rates. So Sean, we've had indicators of this for the last year or so, but there's fresh evidence that people are putting a whole lot of purchases on credit these days.

And the Federal Reserve Bank of New York says delinquencies are up on those credit cards. Right. The Fed Center for Microeconomic Data released its third quarter report on household debt and credit. And credit card balances grew by $48 billion year over year to a new high of $1.08 trillion. And the New York Fed isn't the only one finding these results. A study out from the credit reporting company TransUnion shows the average credit card balance hit just over $6,000, the highest figure in a decade. And Sean, millennials are now the second highest users of credit cards, behind Gen X and ahead of boomers. And back to the Fed study, millennials have seen the biggest jump in delinquency rates. So let's get back to smart money advice about credit cards. It's a good idea to keep your balances low.

And if you can, pay them off before you start getting charged interest, especially because interest rates are so high right now. Speaking of things you have to pay off, it's almost tax time. Okay, not really. But if you're a super ahead planner, the IRS has announced new inflation adjusted tax brackets for tax year 2024. So that means taxes due in April of 2025. Like I said, advanced planners unite. So we're not going to go through all of the bracket changes for every income level, you can find them online. But standard deductions are going up, as are the amounts you can save in healthcare, flexible spending accounts, and tax-advantaged retirement accounts. One thing to remember when you hear about the new tax brackets is that income tax in this country is progressive.

So when you see, for example, a 22% tax bracket or 24%, that doesn't mean all of someone's income is taxed at that rate, only a portion of it. So you pay X percent taxes on the first portion of income, then X percent on anything above that. And then as you make more money, that gets taxed at progressively higher brackets. And that's why they do these inflation adjustments. So you don't have what's called bracket creep, where you're pushed into a higher bracket purely because, say, you got a raise to keep up with inflation. And that's your taxes 101 lesson for the day. And finally, Sean, are you a good tipper? I like to think so. Stingy tipping is a major pet peeve of mine, actually.

Same here. Well, I know you did a segment on tipping recently, but here's some insight from a Pew Research Center survey that came out last week. To absolutely no one's surprise, if you've been dining or shopping anywhere in the last couple of years, there are way more places you're expected to tip these days. 72% of U.S. adults say tipping is requested in more places today than five years ago. Yeah, this has been called titflation, and it's run rampant. Sometimes retail stores will ask you to tip for stuff that you just bought, and there are those digital checkout kiosks that ask you if you want to tip for basic counter service where you got exactly no help from anyone.

And a lot of it is confusing and also annoying because you feel real pressure to tip even if you think you shouldn't have to. And then you have to figure out how much to tip. The Pew survey says only a third of respondents said it was easy to figure out whether or how much to tip for various items and services. And 40% do not like the options they're given at those checkouts that you mentioned. Especially when the options are higher than you think you should tip, like they'll give you options of a 20, 25, 30% tip instead of 15, 18, 20%. Then you have that custom amount option that forces you to do math. So then you just give up, roll your eyes, and murmur something to yourself on the way out. Yeah, I've been there. So this Pew study surveyed 12,000 adults, and they also asked about those

mandatory service charges that are popping up right along with all the tipping requests. And more than two-thirds of respondents said they're not cool with those either. I don't know what the solution is to all of this dissatisfaction, but it certainly seems like the issue might be reaching a tipping point, maybe some change in the offing. Stay tuned. And that's what we saw and heard about over the past week in Money News. Let us know what we missed and send us the headlines you've seen and maybe want to hear more about. And now on to our in-depth look at what's going on in the stock and bond markets. We're joined now by fellow nerd Sam Taub, who covers all things investing for us. Welcome back to the show, Sam.

Thanks. Good to be here. And Sam, you do a monthly newsletter on investing, so we thought you'd be a great person to talk with about all of this. Yeah, we started that newsletter because we wanted to help investors keep track of the most important financial news stories of the coming month. And there was a lot to cover for the November issue. Sam, let's talk first about a couple of stock market developments over the last month, six weeks or so. First, in early October, the Dow wiped out all of its gains for 2023. What got investors so spooked since the summer?

Yeah. So one of the biggest things that happened in October was that the yield on the 10-year Treasury note hit its highest level since before the Great Recession. First, in late September, it went above 4.5% for the first time in a while. And then in early October, it broke the 4.75% mark. And then later in the month, it briefly touched 5%. These were all kind of big, psychologically important numbers. And seeing the 10-year yield cross them really freaked a lot of investors out. Now, there's a number of reasons for that. One is that bonds kind of compete with stocks for investors' money. Treasury bonds in particular are really stiff competition for stocks because their yields are basically guaranteed by the US government. So if treasury yields go up as they did throughout October...

Then now I can earn what's considered a safe 4.75% annual return by buying a 10-year note and holding it until it matures. And with that in mind, I'm going to be much more reluctant to put my money into the stock market, which is generally much riskier. And then the other thing is that a lot of borrowing costs are tied to the 10-year treasury yield. Mortgage interest rates, for instance, tend to move in sync with the 10-year yield. So this upward run in treasury yields also means that borrowing costs are higher for people and for businesses, and that can slow down the economy and hurt things like corporate profits and economic growth. Especially for big tech stocks,

your Googles and Apples and Amazons, which account for a lot of the market's return in recent years. They do a lot of borrowing. So this kind of thing is particularly bad news for them. Sam, can you walk us through this bond market issue? So the 10-year treasury, the T-note, usually moves in opposition to stocks, right? But this fall, it didn't. Why and what does that mean? Sure. So first, a quick clarification. Bond prices went down, but bond yields went up. The two move in opposite directions. But yes, as you said, usually bond prices go down when stock prices go up and vice versa. And again, that's usually because bonds are kind of competing with stocks for investor

money. But in the last month, we've seen sell-offs of both stocks and bonds, and that is kind of unusual. And to really explain what's going on, we have to kind of zoom out a bit from the last month. The Federal Reserve has been raising interest rates for the last two years now to combat inflation, and it's worked pretty well. Inflation is down considerably from where it was two summers ago, although it's not quite down to the Fed's target level yet. Now, when the Fed raises interest rates, or even just when the people think the Fed is going to raise interest rates, potential bond buyers expect a higher yield on their bond too to keep up with these new higher interest rates. So in other words, bond buyers want a

discount on bonds when rates go up, since lowering the price of a bond raises its effective yield? Exactly. So putting all that together, bond prices go down when the Fed raises rates. But as we've discussed, higher interest rates can also hurt the stock market because they increase borrowing costs and they hurt economic growth and corporate profits. So higher rates or even just the expectation of higher rates can hurt both stocks and bonds. And that's basically what we're seeing. Now, the Fed hasn't actually raised interest rates since July, but it said a number of times that we're not quite out of the woods with inflation yet, and that further interest rate increases could be necessary if economic conditions call for them. So when we see higher than expected inflation data, as we did from the September Consumer Price Index report, that makes people antsy that more interest rate increases are coming.

And that can push bond yields up and both stock and bond prices down. All right. So explain for us what this means for the average investor. There's a common rule of thumb in investing. That's the 60-40 rule. Put 60% in stocks, 40 in bonds, and you're covered on the up and down side. But maybe that doesn't work here. So what are folks supposed to make of all this? There are a couple of caveats that I'd add to what you just said. First, it's important to have a diversified portfolio, but I don't know if I'd say that there's a single rule of thumb that works for everyone. The percentage you have in stocks versus bonds should vary based on a

number of things, based on your age, your goals, your risk tolerance, and it's generally a good idea to consult an advisor about it. The other thing is I also kind of push back on the idea that dividing your money between stocks and bonds doesn't work here. You might occasionally have periods where all of your investments are down, particularly when things are happening like the last couple of months. But as long as they're not down exactly the same amount, as long as they're not moving in perfect lockstep, diversification is still going to help you. So as an example, let's say you have a really simple two fund portfolio that follows that 60-40 rule. 60% of it is in an S&P 500 ETF like SPY, and the other 40% is in the Vanguard total bond market ETF like BND. Over the last three months,

both SPY and BND are down, but SPY is down a little more than BND. That means that your portfolio is probably not quite 60-40 anymore. It's probably more like 58-42 now because the stock part is doing worse than the bond part. And as we say frequently on this show, it's a good idea to rebalance portfolio every now and then. Exactly. And that means occasionally selling and buying little bits of your funds until you've brought the portfolio back to its target ratio, which in this case is just 60-40. So if you rebalance your two-fund portfolio right now, you're probably going to sell some BND and you're going to use the money probably to buy more SPY. So you could use some of the money you invested in BND, which didn't go

down that much, and use it to buy more SPY, which is now at a discount because it went down a lot. So the end result is that you've got the same portfolio, but you've got a lower cost basis for SPY. The average price you paid for it is now cheaper. The other thing is stocks and bonds do move in the same direction sometimes, but usually not for very long. Present circumstances, if you look at the year-to-date performance of the SPY ETF and the BND ETF, bonds are still down a little bit, but the stock fund has actually recovered and is actually up for the year. Okay. Also, this is probably a good time to say that we are not investment advisors and are not telling you what to do with your investments. These are just some general things

to think about. And finally, Sam, what earnings data should investors be keeping an eye out for in November? So we've got NVIDIA on the 21st, and there are a few other big tech earning reports later in the month. Alibaba is coming up on the 16th. PDD Holdings, which owns Temu and also Pinduoduo on the 27th. And then Salesforce on the 30th. All right. Well, Sam Taub, thank you so much for joining us today. Sure thing. Happy to be here. That's it for this week's Money News. We always welcome your money questions and comments. Turn to the nerds and call or text us with your questions at 901-730-6373. That's 901-730-NERD

or send a voice memo to podcast at nerdwallet.com. And remember to follow, rate, and review us wherever you're getting this podcast. Today's episode was produced by Tess Vigeland and edited by Rick Vanderknife. Kevin Tidmarsh mixed our audio. And here's our brief disclaimer. We are not financial or investment advisors. This nerdy info is provided for general educational and entertainment purposes and may not apply to your specific circumstances. And with that said, until next time, turn to the nerds.