A recap of the past week in 3 short headlines.
1. Tough Week with Energy Booming
After a steep decline on Monday, investors had to grind and climb up a mountain to turn this week positive. Their hard work paid off as they worked hard to a modest gain of around 1% for the Dow Jones and S&P 500 while the Nasdaq just broke even. After driving your car and noticing your gas levels are low, if you notice the gas station looking significantly more expensive, it’s not just you. Due to uncertainties in Asian and European supply chains, the price of oil has skyrocketed to over $80 a barrel during the week. The last time it was above this mark was in 2014 when the Broncos were a Superbowl team and Peyton Manning was still playing.
However, oil isn’t the only energy commodity to be affected. Natural gas, coal, and other energy sources have experienced a rise due to demand returning to pre-pandemic levels, as well as shortages in overall supply. If a prolonged hike in energy prices occurs, a tax will essentially be placed on consumers, reducing consumer spending and slowing the economy.
Unfortunately for investors, yield rates on the other hand are also increasing as they hit 1.6% this week from a low of 1.3% in September. This correlates to inflation which hurts the average American, including the current Americans looking for jobs as the job market slows. Job production came in lower than 200K — well below most economists’ expectations.
2. Labor Market Cool-Off
President Biden promised that the labor market would recover under him. Unfortunately for Americans, the labor market recovery has slowed for the second straight month. The unemployment rate rose from 4.8% to 5.2% primarily due to 183,000 workers leaving their occupations. Reports show that more than 300,000 women 20 years and older dropped out of the market while men in the same age range found 182,000 jobs. The job market hasn’t been equal for all. African-American and Hispanic groups both saw their unemployment increase well above the average unemployment rate with both above 6%.
On a positive note, retail and leisure, two markets heavily impacted by the pandemic, have been recovering well and added another 56,000 jobs last month. Beyond surface-level statistics, more in-depth analysis elucidates the situation. Labor participation — the number of people actively working or seeking a job — has remained stagnant since after the original rise in workers. This suggests fewer people than expected are optimistic about the market and actively searching for a job or working in one.
One thing puzzling many investors this month was the drop in education-related jobs in September. However, this has a simple explanation: many schools preemptively hire teachers in August and June, leaving September numbers lower than anticipated.
3. A $5 Billion Roth IRA
Some of the ultra-wealthy have abused Roth IRAs for many years, and new legislation destroys these “tax havens” for the rich. Traditionally, each year, investors can add $6,000 to their Roth IRA and invest in this “special account”. The benefit is when pulling out the money after retirement, the money is tax-free, including any gains made on the original investments. However, people like Peter Thiel, one of PayPal’s founders have amassed a significant amount of money within these accounts. When PayPal was founded, Thiel bought 1.2 million shares within the Roth IRA for bottom-dollar and then profited immensely. When he decides to withdraw this money, all $5 Billion is tax-free and the government won’t profit off these gains at all.
New legislation that caps the maximum amount in a Roth IRA to $20 million aims to end this possibility for future investors. House Ways and Means Chairman Richard Neal says “incentives in our tax code that help Americans save for retirement were never intended to enable a tax shelter for the ultra-wealthy”. This new legislation will do just this and make these types of incentives fair for all investors, including the majority who don’t have access to shares pre-IPO.
After a tough week in the market, all three major indexes turned positive gains with energy becoming more and more expensive as supply uncertainties rule. The labor market disappointed investors for the second month in a row as job production significantly slowed. The ultra-wealthy who have been abusing Roth IRAs in the mind of many politicians face new legislation that hopes to reduce tax shelters.