July 27, 2024 | Q2 GDP, June PCE, WBD vs NBA Legal Battle & IRS and Inherited IRAs

Smart Investing with Brent & Chase Wilsey

Q2 GDP not as strong as the headline numbers show

While Real Q2 GDP increased at a 2.8% annualized pace and easily topped the estimate of 2.1%, there were some likely one time impacts that lifted the numbers. The major outlier was the change in private inventories as it added 0.82% to the headline GDP number. As we discussed after Q1 GDP, private inventories negatively weighed on GDP during that quarter as it subtracted 0.42% from the headline number and led to a disappointing growth for Real GDP of 1.4%. Government also saw a nice boost as it grew 3.1% in Q2 and added 0.53% to the headline number. Even though the report may not be as strong as the headline shows, I still believe it was a good report. Personal consumption expenditures grew 2.3% in the quarter as spending on goods was up 2.5% and spending on services was up 2.2%. Spending was different when compared to Q1 considering in that report goods spending fell 2.3% and services spending rose 3.3%. Private investment was also strong in Q2 as it rose 8.4%. Although residential was down 1.4%, nonresidential investment was up 5.2%. Equipment was the strongest subcategory as it was up 11.6% and intellectual property products also saw good growth of 4.5%. Trade was the only component that subtracted from the headline number. The increase in imports of 6.9% more than offset the increase in exports of 2.0% and led to a subtraction of 0.72% from the headline number. I believe this GDP report is exactly what we needed to see for a potential soft landing. We are still seeing growth of around 2%, but it is slowing which should help reduce inflation in the coming months. June PCE Inflation continues to normalize as the June personal consumption expenditures index (PCE) increased 2.5% from a year ago. Core PCE, which is the Fed’s preferred measure showed an increase of 2.6%. Both numbers were in line with expectations and they provide more evidence that an interest rate cut should be heading our way as we exit the year. This report does put more pressure on the Fed to provide a signal for fed policy direction at next week’s meeting. I don’t think there will be a cut at that meeting, but the market appears to be hoping that they at least hint towards a cut in September. Legal battle between Warner Bros. Discovery and NBA is set to begin The NBA announced deals with Disney, Comcast and Amazon for rights to games for 11 years starting in the fall of 2025. The deals totaled around $77 B with Disney paying around $2.6 B per year, Comcast paying around $2.5 B per year, and Amazon paying around $1.9 B per year. These deals also include the rights for WNBA games. The current rights that will expire next season were for 9 years and nearly $24 B. Disney will air more than 20 games per season on ABC and up to 60 games on ESPN. NBC will air 100 NBA games each season, including about 50 that will be exclusive to Peacock. NBC is returning as a partner with the NBA after losing rights in 2002. Amazon will offer 66 regular season games. This was a major disappointment for Warner Bros. considering Turner Sports has carried live NBA games for nearly 40 years. This spells more trouble for TNT and TBS as this was a major asset for these stations. The popular “Inside the NBA” show on TNT is also in question if Warner Bros. is unable to win back the rights. Warner Bros did acquire matching rights as part of the current deal, but the NBA rebuffed the bid and said, “Warner Bros. Discovery’s most recent proposal did not match the terms of Amazon Prime Video’s offer and, therefore, we have entered into a long-term arrangement with Amazon.” It will be interesting to see how this shakes out. The NBA doesn’t believe Warner Bros. rights extend to an all-streaming package, which was carved out for Amazon. The last time these deals were made I can’t see how streaming would have been addressed. For that reason, my early inclination would be that it would be hard for the NBA to deny Warner Bros. their matching rights. The IRS and Inherited IRAs After 5 years, the IRS has finally come to a decision with inherited IRA withdrawals. The Secure Act in 2019 removed the ability for most retirement account beneficiaries to stretch distributions over their life expectancy and now requires them to fully deplete the account after 10 years. With tax-deferred accounts, this severely limits compounding growth and increases the income tax burden on these beneficiaries. The component that has been up for debate is whether those beneficiaries also have to take required distributions during each of those 10 years. So far, no distributions have been required and a few days ago the IRS confirmed that a distribution will not be required in 2024. However, beginning in 2025, beneficiaries who inherited a tax-deferred retirement account in 2020 or later from someone who was subject to RMDs (which will be most cases) must begin taking small required distributions of their own each year as well. This does not apply to beneficiaries who are spouses, minors, or disabled, and while inherited Roth IRAs are subject to the 10-year rule, they will not have annual required distributions. Keep in mind, if you inherited an IRA in 2020 and wait until 2025 to start distributions, you now only have 6 years left to deplete it because you are still bound by the 10-year rule. This means larger annual distributions and maybe higher tax brackets. So even though you don’t have to start, that doesn’t mean you should continue to wait or that you should only take the minimum amount required. Every beneficiary should have their own plan on how best to distribute the funds at the lowest tax rate which will be dependent on their own income level, retirement date, level of their own retirement assets, and the fact that tax rates could increase in 2026. This could mean accelerating or deferring inherited withdrawals so they occur when your own income is lower. Companies Discussed: Bank of America (BAC), Dominos (DPZ) and UnitedHealth Group (UNH)