April 13, 2024 | March CPI, March PPI, Investing High & Lows, Semiconductor Industry and Reinvesting Dividends

March CPI

The March Consumer Price Index (CPI) report spooked investors and sent the likelihood of a Fed rate cut in June to around 20%, which was a sharp drop from the greater than 50% chance that was priced in before the data was released. The concern came as headline CPI was 3.5% over the last 12 months, which topped the estimate of 3.4% and core CPI rose 3.8% from a year ago, compared with the estimate of 3.7%. Last month the annual rate for headline CPI was 3.2% and for core CPI it was 3.8%. Energy prices were a benefit to headline CPI over the last year or so, but with the recent increase in energy we are beginning to see them not benefit the headline number as much and I soon worry they will cause the headline number to top the core CPI reading. In the March report, energy was up 2.1%, but as we lap the easy comparisons from last year the annual increase could climb substantially which would cause the headline CPI to increase. Shelter continues to be a major weight on the numbers as the index climbed 5.7% compared to last year and accounted for over 60% of the climb in core CPI. Transportation services were also a major negative as they climbed 10.7% compared to last year. I believe this can largely be attributed to rising energy prices. Also, motor vehicle insurance continues to be a major negative as it saw an increase of 22.2% over the last year. While this report wasn’t overly positive, I would like to wait and see the PCE release on April 26th before abandoning the idea for a potential of three rate cuts this year. 

March PPI

The March Producer Price Index (PPI) report looked much more favorable than the CPI. Headline PPI rose 0.2% for the month, less than the 0.3% estimate and core PPI matched the estimate as it also rose 0.2% in the month. On a 12-month basis, PPI rose 2.1% which was the biggest gain since April 2023. While that may sound concerning, the inflation rate is near the Fed’s target so I would not say that is problematic. Core PPI rose 2.4% over the last year, which was the highest since September. Like the headline number, I don’t believe this is problematic considering the rate is still very reasonable in relation to the Fed’s 2% target. 

Investing Highs and Lows

I love to read information from smart people like Daniel Kahneman, who unfortunately passed away at age 90 on March 27. He was a pioneer in behavioral economics, although he felt he was really a psychologist. If investors would listen to his advice, their returns would probably be much higher and their psychological well-being would be far better when it came to investing. He mentions that people who lost on an investment feel at least twice as much pain as the gains feel pleasant. He also discusses how people do not incorporate all available information and people believe that short streaks in a random process enables them to predict what will come next. Interestingly, he also points out that based on research of asking people if they want to take a risk with an 80% chance of success, most people say yes. However, if you flip-flop that around and ask if they incurred the same risk with a 20% chance of failure, they say no. Obviously the risk is the same, but the psychology is different. I believe this is why many people get into bad investments. Sales people just focus on the positive side and leave the unsuspecting investor to do their own risk analysis. 

Semiconductor Industry

While the semiconductor industry is likely to continue growing, I do worry about China hurting the growth of US semiconductor companies. Shares of chip companies like Intel and Advanced Micro Devices fell after the Wall Street Journal reported that China is ordering the country’s largest telecommunications carriers to cease use of foreign chips. According to the Journal, Chinese officials issued the directive earlier this year for the telecom systems to replace non-Chinese core processors by 2027. China also recently set new guidelines to remove U.S. chips from government computers and servers. The problem here is China still remains a major market for US chip companies as the country accounted for 27% of Intel’s revenue in 2023 and AMD generated 15% of sales from China. Data from S&P Global showed that U.S. chip giants Intel, Broadcom, Qualcomm and Marvell Technology all generate more revenue from China compared with the U.S. The relationship with China is definitely worth keeping an eye on if you are investing in semiconductor companies, especially since most of them now trade at lofty valuations.

To Reinvest or Not Reinvest Dividends

From a retirement planning standpoint, it can be helpful to not reinvest dividends, especially in non-retirement accounts. In a non-retirement account, or a taxable account as they are called, dividends are taxed exactly the same way whether they are reinvested or not. In retirement, the focus shifts from accumulation to building tax-advantaged cashflow. When a dividend is automatically reinvested, it repurchases the same holding it came from. On the other hand if it is paid in cash, it will remain in the account where it can be invested or withdrawn. Therefore, when a dividend is paid in cash and incurs its normal tax, that cash can be accessed without any additional tax consequences. Alternatively, when dividends are automatically reinvested which is still taxable, if cashflow is needed, sells will also need to be made to generate that cash which can result in additional capital gain taxes. In a way, you’re getting taxed twice to create the same amount of cashflow. From a tax perspective, if a dividend is produced from a holding that is held for more than 60 days within the 121-day period surrounding the ex-dividend date, it will be considered a qualified dividend and taxed at the lower long-term capital gain rate. That criterion is a little technical but basically it means dividends from long-term holdings are taxed at the lower rate. It is popular to have dividends reinvested but this can force unnecessary taxation in retirement and can limit other planning opportunities like Roth Conversions.

Stocks Discussed: BP (BP), Redfin (RDFN) and Highwood Properties (HIW)