While the end of summer typically sees lower volume and more muted volatility, we have obviously bypassed that the past few weeks. However, this week was relatively quiet, with markets seeing lower than average volume. Despite the holiday-shortened week, the markets did rise recover some of their earlier losses. With little news (good or bad) coming out of China and Europe, the U.S. markets stayed calm. Traders also seemed reluctant to take any major positions (long or short) due to the upcoming Federal Open Market Committee (FOMC) meeting on Wednesday. The FOMC meets roughly every six weeks to determine the near-term direction of monetary policy. The FOMC examines factors such as overall health of the economy, outlook for economic growth, inflation rates (current and expected), then determines whether or not short-term interest rates should be lowered, remain the same, or be increased. At the beginning of 2015, June was widely expected to be the first rate hike. Around March, this was changed to September, the meeting that is upcoming. However, over the last several weeks, we have seen a bit of economic uncertainty, with many questioning whether or not this changes the rate hike timeline. The market seems to be expecting a December rate hike now. We will watch this news release carefully next week, as a hike is certainly not off the table. Should the Fed raise rates, they would release this information immediately after the meeting concludes. Should interest rates remain the same, we will know that too (as we will not see a news release), but will need to wait for the meeting minutes to be released to hear the reasoning behind the non-move.
IEA Predicts Drop in Oil Supply:
The International Energy Agency (IEA) released its Oil Market Report today, which stated it expects the current low price of oil to trigger a drop in supply of 500,000 barrels of oil per day for non-OPEC countries. This would represent the largest drop in supply in 23 years. The drop from the U.S. alone is expected to be 400,000 barrels per day. This comes after multiple years of the U.S. increasing production.
The expectation is that the U.S. production would drop the most and there would be increases elsewhere. The IEA anticipates Saudi Arabia to continue its high production levels in order to keep prices lower and drive out some of the producers that cannot function in this low of an oil price environment.
Goldman Sachs also weighed in today on the oversupply of oil, stating that it is greater than previously estimated. Should this continue, Goldman sees a scenario that has oil fall to $20 a barrel. This spooked the market a bit today, with oil prices pulling back. However, Goldman’s base case in not $20 oil. In fact, a lot of “long-shot” factors would need to occur for oil to fall to that level, but Goldman was merely stating it is a possibility. It’s important to take these estimates with a grain of salt; Goldman also called for $200/barrel oil in 2013.
Roth 401(k) Information:
Many people inquire whether they should contribute to a Roth IRA account and if it makes sense in their circumstances. Often times though these individuals discover that their income level is too high to do so. One alternative is to consider the Roth 401(k) option that may be available to them. Nearly half of large employers now offer this investment vehicle in addition to the traditional (pre-tax) 401(k).
The Roth 401(k) acts similarly to the Roth IRA where contributions are made after-tax and earnings can grow tax-free. The Roth IRA however, has income limitations for making contributions and annual contributions are capped at $5,500 (plus an additional $1,000 for those over the age of 50). One of the benefits of the Roth 401(k) is that there is not an income limitation – anybody who is a participant in a retirement plan with this option can contribute. Additionally, the Roth 401(k) has the same contribution limits as the traditional 401(k), which for 2015 are $18,000 plus an additional $6,000 for those over the age of 50. If your employer makes a company match, that contribution will still be made to a pre-tax account.
The decision of whether the Roth 401(k) makes sense comes down to several factors including the timeframe until retirement, your current tax bracket, and your expected tax bracket in retirement. For younger individuals with low to moderate income levels, the Roth option is very beneficial because they contribute with after-tax dollars now when their tax rates are lower, with the belief that their income levels and tax rates will be higher later in life. As income levels and tax rates rise the traditional 401(k) starts to become more attractive as it helps defer income and lowers your current tax bill. As individuals approach retirement age and enter their distribution phase of their investments, the Roth 401(k) vehicle can still be considered but requires a review of the resources available for other income streams for the near term.
Even if one is currently in a higher tax bracket, a Roth 401(k) could still be beneficial if majority of their retirement savings are pre-tax. By doing so this adds tax diversification and flexibility once they begin to take distributions. Distributions taken from pre-tax accounts such as traditional IRAs and 401(k)s are considered ordinary income. By having after-tax accounts like a Roth you can supplement cash flow needs and help manage income levels.
Other benefits of the Roth 401(k) include the ability to rollover the account to a Roth IRA at retirement. Unlike traditional IRAs, Roth IRAs do not have required minimum distributions (RMDs) when the account owner turns age 70 ½. This allows the account to continue to grow tax-free until such time that distributions are needed, or can be a good account to pass on to beneficiaries.