Daily Commentary

MarketMinder’s View: This article dives into a weird trend on social media, where financial influencers (aka “finfluencers”) on TikTok and YouTube preach taking Social Security benefits early and plowing them into the stock market. Their logic: While taking benefits at age 62 (rather than the full retirement age of 66 or at 70, when benefits max out) means you get a lower monthly check, stocks’ high returns more than make up for that. This article tries to debunk this by pointing out that stocks fall as well as rise, and using straight-line math to project permanently high returns doesn’t account for volatility. That is a fine enough observation, but we think both sides miss a crucial point: Social Security is one form of retirement cash flow, and most folks will have to make up the difference with savings and investments. No one seems to be accounting for the high likelihood of needing periodic withdrawals across their entire time horizon after retirement. If you receive less in Social Security, then you may require higher cash flow from your investments than you otherwise would, which could necessitate having more fixed income exposure, which would probably dampen long-term returns. It could also mean needing to sell more in down markets to fund expenses or unexpected short-term needs, further reducing return potential. This is why it is important to base your entire financial strategy on the complete picture: your goals, cash flow needs, investment time horizon and all relevant personal circumstances. Otherwise, you could fall for gimmicks that could raise the risk of running out of money too soon.

MarketMinder’s View: Among the many rumored measures in next week’s UK Budget is a dividend tax hike, and while there are of course no policy specifics available, that hasn’t stopped one outfit from trying to estimate the hit. As discussed here, they assumed a four percentage point hike, then gauged the amount of dividend payments that goes to each tax bracket. Their conclusion: “If the Chancellor raised the lowest rate of dividend tax to 12.75pc, it would cost 3.2 million basic ratepayers £380 a year on average, according to IG analysis. A four percentage point rise would also cost the average higher rate taxpayer an extra £996 a year, while someone in the additional rate tax bracket would pay £3,280 more.” The rest of the article laments the purported downstream effects on household budgets and domestic investment, warning it is negative on all fronts. We get the logic, but we think it misses a simple point: The more you tax something, the less of it you get. Dividends aren’t companies’ only means of returning capital to shareholders. A higher dividend could very well lead to more stock buybacks. Or, it could motivate companies to reinvest profits. The potential downstream effects here aren’t all bad. On the flipside, that also makes higher dividend taxes unlikely to raise as much revenue as projected. But overall, this looks like yet another place where reality could easily beat low expectations, presuming this tax hike even goes through—a very big if, considering all the trial balloons floated and popped in recent months.

MarketMinder’s View: As the UK’s household energy price cap faces another increase in January, it is time for your regular reminder that price caps don’t cap prices. They become targets, as they have in the UK, and the cap “resets” as wholesale electricity and gas prices rise and fall. That reset used to be semiannual. But when that interval meant households were late to reap the benefits of falling wholesale prices, regulators changed it to a quarterly reset. Accordingly, with wholesale prices down over the last three months, analysts expected the cap would drop. Instead, it is rising 0.2%. That is far from huge, amounting to about £3 annually on average, but it adds insult to injury as energy tax hikes are set to take effect in April, driving bills even higher. None of this is sneaking up on markets, which are well aware of the negatives here and have long since moved on. But we think it helps explain one reason why sentiment in Britain remains so low. And we doubt the regulator’s attempt at smoothing folks over will help—saying energy prices are down in inflation-adjusted terms over the last two years probably rings hollow when energy prices were the main thing keeping inflation higher than the rest of the developed world.