June 15, 2024 | May CPI, May PPI, Private Investment Deals, Apple Stock and What should you do with your Annuity

Smart Investing with Brent & Chase Wilsey

May CPI

I would say I was very optimistic after the May Consumer Price Index (CPI) was released. Headline CPI increased 3.3% compared to last year, which was below the estimate and last month’s reading which both stood at 3.4%. Core CPI which excludes food and energy was up 3.4%, which was below the estimate of 3.5% and last month’s reading of 3.6%. This also marked the lowest reading since April 2021 when inflation concerns really began and the core CPI was at 3.0%. In March 2021 core CPI was at 1.6%. The shelter index continues to be the heavyweight moving core CPI as it was up 5.4% over last year and accounted for over two thirds of the annual increase. Many areas of the report have come back down to more normal inflation rates with areas like food at home increasing just 1% compared to last year. Food away from home was a little more challenged as that was up 4% compared to last year. I believe much of this can be attributed to the continued demand for bars and restaurants and the increased wage pressures. Although energy saw a 2% decline compared to the previous month, it was 3.7% higher than last year. This stems from the major fall in energy prices last year that I believe will make for difficult comparisons over the next few months. Two major areas that have remained problematic include admission to sporting events, which saw an increase of 21.7% compared to last year and motor vehicle insurance, which saw an increase of 20.3% compared to last year. It was positive to see a monthly decline in motor vehicle insurance of 0.1%. I believe this category will not be a problem in 2025 as much of the rate increases have now taken place. Overall, I believe this report should be supportive of a rate cut, but we will need to see more reports like this with further progress in the coming months for a cut to actually occur.

May PPI

After a positive Consumer Price Index (CPI), the Producer Price Index (PPI) delivered more welcome news on the inflation front. May headline PPI rose 2.2% compared to last year and when comparing against the month of April there was a decline of 0.2%. Estimates were looking for a 2.5% increase in the annual number and a 0.1% increase in the monthly figure. When looking at core PPI, which excludes food and energy, the report showed and increase of just 2.3% on annual basis which was below the expectation for a 2.5% increase. These numbers are right around the Fed’s 2% target and should be a positive indicator for CPI and PCE as we continue to move forward.

Private Investment Deals

Investors be aware that your local broker could start hitting you up for private investment deals to fund apartment complexes somewhere around the country. The problem is the banks are starting to clamp down on just loaning money for projects on apartments that may be losers. In 2023 almost 500,000 new apartments were opened which is the most since the 80s. That growth is expected to continue and it’s estimated to be around the same number in 2024. We have said before this will help bring down housing costs probably by 2025 as there are so many apartments on the market that the owners will give so many free incentives and reduce the rents just to get people in and provide the owners some cash flow. This will affect the housing market along with the CPI since shelter costs are a big part of that index and lower rents would help reduce the inflation numbers.

Apple Stock

I was surprised to see Apple move more than 7% higher a day after the developer conference on Monday and close at a record high. There was a lot of hype leading up to the event as the company was anticipated to detail more about its AI strategy. I’m not sure if I saw the same conference, but I was not overly impressed by the details. Apple launched Apple Intelligence which can proofread your writing, or even rewrite it in a friendly or professional tone. It can create custom emojis called “genmoji,” search through your iPhone for specific messages from someone, summarize and transcribe phone calls or show you priority notifications. It can even tap into OpenAI’s ChatGPT to provide you more detailed answers from Siri. ChatGPT is also built into systemwide writing tools. So, for example, Apple said you can create a bedtime story for a child and add images created by ChatGPT. Since the updates will only take place on the iPhone 15 Pro, Pro Max, and newly built phones, the hope is there will be a major upgrade cycle. Personally, I just don’t see how these updates will get many people to move and buy a phone that will cost at least $1,000. I know new emojis is definitely not enough for me to upgrade. I also do worry about how this will impact the relationship with Google. Alphabet currently pays Apple around $20 B per year to be the default search engine on Apple devices. If more people begin to use the AI function and do less search, why would Alphabet continue to pay such a hefty fee? For a stock trading at close to 30x this year’s projected earnings, there is now a lot riding on this next iPhone cycle.

What should you do with your Annuity?

It is very rare that I come across someone who fully understands their annuity. Annuities can be either qualified or non-qualified and their status will determine how they are taxed. A qualified annuity means it was purchased with retirement funds while a non-qualified annuity was purchased with non-retirement funds. Generally qualified annuities are more flexible because they can be surrendered and rolled into another IRA without tax. However, if non-qualified annuities are surrendered, the entire gain becomes taxable at ordinary income rates. Because of this sometimes (but not always) it can make more sense to annuitize non-qualified annuities which is the process of converting the funds into a pension-like stream of income. This is still taxable, but the gain is spread out over time rather than realized in one year. I recently spoke with someone who is close to 80 years old and owns a non-qualified annuity. It turns out their annuity has two annuitization options. They can either withdraw 5% of the account value for the rest of their life, or they can withdraw 7% of the account value until the account value has been reached, but would also stop upon death. The issue here is in both of these cases, there is a decent chance they will not live long enough to get all their money back, let alone any growth. Another option would be to surrender the annuity to guarantee they receive all their funds back, but then they would pay a decent chunk of it in taxes. This is one example of many that illustrate if you have an annuity, make sure you also know when and how to use it because waiting will limit your options.

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