Amy: Tonight we're talking an earnings decline, new cracks in the job market, the good, the bad, what it all means to you. You're listening to "Simply Money," presented by Allworth Financial. I'm Amy Wagner, along with Steve Sprovach. A lot to talk about. And, it's Monday, so that means we get to talk about it, of course, with Allworth's chief investment officer, Andy Stout, always here on Mondays to bring sense to what's going on in the markets, the economy. We're early in the earning season, Andy, and oftentimes earnings season kind of comes and goes during what I'll call normal times, and people don't pay a heck of a lot of attention, but everyone's paying attention now because earnings can tell us a lot about inflation and a lot of other things right now.

Andy: Yeah. And it's certainly telling us that companies are not able to pass along all of their increased cost to their consumers. So, when you look at what Wall Street has expected at the start of earnings season, they were looking for corporate profits to be 8.2% lower in the first quarter of 2023 compared to the first quarter of 2022. That's a sizable drop, right? And so far, it's early in the earnings season, we have about 89 large-cap companies having reported so far, which is about 17%, 18% of the S&P 500 index. And so far, the growth rate, or maybe contraction rate's a better word, is 7.3%. So, earnings are 7.3% lower than the same time last year. So, a little bit better than expected, but still negative, and it's not a good number.

Amy: Andy, I wanted to remind people, normally, year over year, you would want earnings to be going up. But we are in this weird place where actually earnings moving backwards signals that maybe the Federal Reserve, our nation's central bank, their steps to bring down inflation might be working.

Andy: Well, I mean, it's certainly tied to overall economic growth, right? Because, you know, if the economy is growing, you're gonna see earnings growing. But when we look at, you know, earnings on a few different metrics, just from a total report perspective, we have earnings down 7.3% so far. Sales, on the other hand, are actually a little bit higher. They're 2.2% higher over the past year. And what that tells us is that companies are not able to pass along all the cost, increased costs. They're not able to pass along inflation, because that would have too much of a negative impact, so you're seeing shrinking profit margins. So, if you look at where we were in about the middle part of 2022, our profit margins, which is the ratio of net income to sales, was about 13%, which is multi-decade highs, by the way. That's dropped now to about 10%.

It's still somewhat elevated, just to be honest about it, when we think about profit margins in general, however, you know, we are seeing just a harder time for companies passing along those costs. And because that really relates to weaker consumer spending, that could slow down overall demand on the economy, and that lower demand, getting back to your question, Amy, results in lower inflationary pressures. So, yes, the Fed does wanna see, you know, this start to come down because that could result in weaker inflation in the future.

Steve: Well, Andy, none of this is really a surprise, right? I mean, the first day, and that was only about a year ago that the Fed started raising interest rates, we were talking about, okay, they raise interest rates. Companies have to spend more money on interest, which is less money in profits. So, this is kind of exactly what we were, I wouldn't say hoping for, [crosstalk 00:03:41.976] but to be expected. Yeah. Is that why the market isn't, you know, going bananas and dropping precipitously, or is there something else at work here?

Andy: Well, I mean, I think that's a really good point there when you talk about, you know, companies and their interest burden, but we also wanna look at consumers and their interest burden. So, when interest rates go up, it's more expensive for them to borrow and spend as well. So it's really both sides of the coin there. And when we look at what the effect is relative to earnings and the correlation with what that means for the stocks that make up the stock market, yeah, to your point, Steve, a lot of this is expected. I mean, like I said a little bit ago, earnings were expected to be lower by 8%. So, when we see what's happened over the past year, right? We've seen some weakness in markets. There's no question about it. That, essentially pricing in the weakness we see today. So what we're seeing today is already priced into the market.

Really what will matter for the market in the future is deviations from what's expected versus what actually becomes reality, right? So that's why we're not seeing too much, you know, negative effects. I mean, it's still, different companies will have, you know, their own company-specific risks that come up from the earnings report, and you'll see some do better than others. Obviously, we're watching a lot on the banking side of things to see where deposits are, to see any sort of weakness there. But overall, you know, things have pretty much been in line with expectations. We've seen almost 80% of companies report better than expected earnings, which is about normal, by the way. Companies usually lower the bar then beat the bar on those lowered expectations. So, when we look at where we're at right now, it's not too surprising. This week though, it's gonna be really interesting because we will get a lot of big-name companies reporting profits.

Amy: You're listening to "Simply Money" tonight here on 55KRC. It's Monday, and we're joined by our chief investment officer, Andy Stout, to make sense of the economy, the markets, everything that affects you. I wanna talk about the labor market now because we talk about the fact that, hey, earnings being down year over year is kind of what we would expect in this place where we've got the Federal Reserve raising inflation rates. We're starting to see some cracks in the labor market, and the labor market, really, to this point, has been completely impervious to anything the Fed's been doing.

Andy: Yeah. And that's really what's held up the economy. So, when you think about the economy as a whole, you might have heard the term "soft landing" out there, which means the Fed would be able to, possibly, raise interest rates without pushing us into a recession. And part of the reason that some people believed that to be the case was the labor market was still so strong, and consumers were still able to keep their jobs, so they're still able to have this income to spend, which would keep the economy afloat. And when you look at the labor market, you see that the unemployment rate is near a 50-year low, right?

We see other cracks in the job market. You see job openings below 10 million. That's first time in a couple, almost two years. The number of monthly jobs being added, around 230,000 in March. That was the lowest since 2020. We've also seen jobless claims, which are people filing for unemployment benefits, that started to rise over the past few weeks here, and it's trending up. So, we're seeing things start to turn, so even though the unemployment rate's really, really low, we're seeing other areas of the labor market start to slip a little bit.

Steve: Hey, Andy, I wanna talk a little bit about what may be next. I mean, it looks like the interest rate increases, they're starting to get traction, or they're starting to have the impact on the economy that we all expected. And the lag time, I think, is what caught some people off guard. But that, again, all of this is normal. Everything coming in looks pretty normal, but now the Fed, and by their own admission, is talking about when they have to actually cut interest rates. We still expect, what? A quarter percent increase May 3rd when they meet next week? But they're talking about cutting interest rates towards the end of next year. And Wall Street seems to think it's gonna happen sooner. I guess my question is, why would they have to start cutting interest rates so soon? And when do you think you're gonna actually see that?

Andy: Well, when we talk about the timing on when they cut interest rates, it's really two different scenarios. So, under the Fed's timing, you know, next year, probably later in the year more than anything else, they would be cutting because inflation is getting more under control, and they don't want to be restricting the economy as much. They want to be able to foster more economic growth without leading to a resurgence in inflation. So that's what the Fed would be looking at.

But they also recognize that their interest rates are slowing the economy down, right? So they would want to cut rates, not just to keep the economy afloat, but also to spur it a little bit more without causing that inflation fire to flame back up. Now, the economy, or the market, I should say, based on Fed fund futures, which are securities that Wall Street traders trade, gauging where they think the Fed funds rate will be at different points in time, and they are essentially pricing in three rate cuts after the May 3rd hike between now [crosstalk 00:09:00]

Amy: Can we talk about that for a second? Because that is so funny to me, right? You have the Federal Reserve very clearly saying, hey, here is our plan for this year. Obviously, their plan can change based on data that comes in to the contrary, but they're not talking about cutting interest rates, yet the market, it's like the kid on the playground with the fingers in the ear, like, "don't wanna hear this, don't wanna hear this." The markets are saying, "Yeah, but we really think what you're going to do is to cut rates, even though you're saying you're not going to."

Andy: Well, I think what the market's pricing in is really the middle point of two scenarios. The base case scenario, or the most likely scenario, is probably the Fed hikes on May 3rd and pauses. I mean, that's the most likely scenario, pauses for the rest of the year. However, the real downside scenario is that we see a credit crunch because banks have tightened their lending standard. Seventy percent of banks have reported tighter lending standards over the past few weeks. And when you think about what that means, that means fewer loans are made out, fewer people borrow, fewer spending, and really a credit crunch brings down the economy, brings them down harder than what the Fed and what economists are looking for.

So, if we get a severe credit crunch, I think what you see is you see the Fed cut more than what's priced into the market, right? So maybe they cut by a percent and a half between now and next January, but the base case is no cuts. Worst-case scenario is a cut of, you know, a percent and a half. The middle point of that, that's what's priced into the market right now. So, I think the market's really pricing in the two ends of the possibilities when you think about different regimes.

Steve: So, okay. We're talking about, and the Fed said we're gonna drop rates at some point, sometime in '24, that Wall Street's saying, "No, we think it's gonna be this year." So we're not talking about if the Fed is gonna drop rates at some point. We're talking about when. What does that mean for the average investor if they are indeed gonna drop rates, whether it's this year, next year, and especially bond holders, people who have money invested in bonds?

Andy: Well, when you think about bond investors, they would benefit when interest rates fall, right? So that would be good for them if they see the short term rates come down. The thing to remember though is that most every other interest rate is related in one way or another to the Fed funds rate that the Fed controls, which is the overnight interest rate that banks can borrow from each other. Now, when we think about what that means, that means it can have an impact on 5-year bonds, 10-year bonds, 20-year bonds. It's all related. But when we think about longer-term interest rates, what they're more related to is future expected economic growth. So, when we see economic growth starting to slow here, what that means is you could see longer term interest rates go down because what's being priced in is those future rate cuts. And that would impact the longer-term rates a little bit more quickly than, you know, a one-month rate, as an example, because the one-month rate doesn't care, or doesn't take into consideration a rate cut two years from now. But the 10-year rate would, right?

So, bond holders, bond investors would actually benefit in the scenario where the Fed is cutting rates, where the economy is slowing down. So, I know bonds had a tough year last year, and they're up about, what, 3% or so this year on average, 2% to 3%. And when you think about what the future may hold for them, you know, we're starting at a level of higher interest rates, so new investors are getting certainly a better yield than what they had been getting. But also, for holders of bonds today, if they hold them over the next few years, you know, we think now is probably a pretty attractive moment in time, because we do expect interest rates, longer-term interest rates and intermediate-term interest rates to come down in the coming months and years.

Amy: Here's the Allworth advice. Has the Fed done its job? Has it gone too far? Is recession maybe on the way? If you are a smart, patient, long-term investor, honestly, the answer to those questions shouldn't impact you at all. Coming up, has the turmoil in the banking industry impacted local banks? We've got a couple of big ones here. We're gonna look at that next. You're listening to "Simply Money" here on 55KRC, THE Talk Station.

Amy: You're listening to "Simply Money," presented by Allworth Financial. I'm Amy Wagner, along with Steve Sprovach. If you can't catch our show every night, you do not have to miss out, because we've got a daily podcast for you. Really easy to find. Just search "Simply Money" on the iHeart app or wherever you get your podcasts. Straight ahead, it's 6:43. How to lower your taxes by investing. What you need to know there. All right. This used to be one of my favorite stores, which probably says something. Bed Bath and Beyond is now Bed Bath and well, bankrupt.

Steve: Bankrupt. Yeah. Over the weekend they filed Chapter 11 and, you know, they've been struggling for a while. I walked into one of their stores a couple months ago, and it was obvious something was going on, you know? And I didn't realize, yeah, okay, there's 360 Bed Bath and Beyond stores that are gonna be shutting down. I didn't know they also owned Buy Buy Baby stores. So, that's...

Amy: I just found that out recently. Yes. And that's actually pretty popular. My cousin had twins a year ago, and they're always talking about Buy Buy Baby, and ordering from there. The problem with Bed Bath and Beyond is when everyone started buying things online, they just didn't get there quickly enough, like everyone else did, and so...

Steve: And they admitted that.

Amy: Yeah. And then the pandemic came and it was like, well, you're not going into the store, and you can't really easily find this stuff online. And then they'd try to do these store refreshes, and the one near me at Crestview Hills looks amazing when I go in, but maybe there's two other people in there when I walk in. So, yeah, I think the writing was on the wall for this one. Yeah.

Steve: And, you know, this was one of those meme stocks. This was one of those stocks that, you know, all of these small investors hopped on board because it was being shorted by large companies. And the small investors, just like they did with some other stocks that were, you know, two, three, four bucks a share, they said, you know what, we're gonna stick it to the man. We're gonna keep buying this stock and driving it up, and drive those short sellers, the guys that sell first and make money when a stock drops, we're gonna stick it to the man. They didn't stick it to anybody. I mean, when a company goes outta business...

Amy: Stuck it to themselves a little bit.

Steve: Yeah. The stock usually goes bye-bye. And it just proves, once again to me, Amy, that, you know, the big money out there, they usually have a pretty good idea of what's really going on behind the scenes.

Amy: Yeah. I'm not a huge fan of options training, however, there are certain companies that they look at and there's a reason why they short sell them. And this one, I mean, it was just apparent to everyone who walked in the store or jumped on their website that they were behind the times. So, for Bed Bath and Beyond, a store that's been around, gosh, for years and years and years, when I think back, we're about to see the last of them. Kind of sad, but it's kind of how these things go. Speaking of industries, right, and things changing, we've had some, I don't even know, I wouldn't say banking collapse recently, because that's way too strong of a word, but we have had...

Steve: Well, you'd think so if you listen to some news outlets. They made a big deal outta what was going on.

Amy: Right. Which I think is one of those kind of, like, the sky is falling, the sky is falling, which really freaks people out. And that's why I like it that we're talking about this today. We're talking about a local bank, Fifth Third, right? And we're in earnings season. As they do, as they report how they are doing, it's really nice to kind of look under the hood and say, okay, if you're worried about other banks, well what's, how healthy is Fifth Third? And the answer is, really healthy.

Steve: Yeah. Pretty darn healthy. Yeah. Cincinnati's own Fifth Third just reported quarterly earnings. First-quarter profits, $591 million. That's up 18%. I mean, Andy just got done talking about how a lot of companies are, you know, down 7%, 8% down on profits.

Amy: Down on average 7%. Yeah.

Steve: Yeah. Here's Fifth Third up 18%, and revenues were up 18% also. You know, and I'll tell you why this is important, Amy, is when Silicon Valley Bank went bust, and, you know, First Republic and then Credit Suisse, and, you know, a lot of the doom-and-gloomers were saying, "Oh my goodness. Is this another reason that we're gonna have another 2008? The banking sector is in crisis, and, you know, the financial system is on the verge of collapse. Who knows how many other banks have the same problems these banks had?" And the bottom line is, yeah, a couple of banks failed Banking 101, and well-run banks are doing just fine, thank you. There is no systemic issue going on. Yeah, there might be another bank or two uncovered that are, you know, trying to play it fast and loose, and, you know, maybe got into some risky investments. But Fifth Third apparently is not one of them.

Amy: Not only that, but when the news of Silicon Valley Bank collapsing, there was a sort of panic among all people, a lot of people I guess, saying, "Is my bank safe?" And several, several banks reported kind of a run on deposits, people going in and saying, "I'm pulling my money out." So, during that time, right, when all of this news was breaking, Fifth Third Bank says, "Hey, we were actually stable. In fact, we got more people coming to us during that time." Reputation, great branding, right?

Steve: That's where the money was going to.

Amy: Yes. So, it wasn't that people were necessarily taking their money outta these banks and coming home and putting it under their mattresses. They were finding banks that they knew that they could trust. And really glad to see that Fifth Third Bank has been one of those.

Steve: Yeah. I am too. But, you know, what's good for the bank? You know, be careful. Is it good for you? I mean, FDIC insurance covers you for up to $250,000. So if you've got less than $250,000, your biggest concern isn't necessarily the stability of the bank. It's what kind of interest rate are you getting? If you're getting next to nothing in interest, just make sure...first of all, find out what you're getting, and then find out what alternatives are out there. I know on money market funds, you can get 2%, 2.5% in local banks, never mind going online.

Amy: Online banks, north of 4% right now. And that's the interesting thing that I wanna point out is one of the reasons why Fifth Third Bank is doing so well is because of these higher interest rates, right? It's a good time for banks to hold your money. And it's a good time for you then to be looking at those banks and saying, "Okay, how do I get more interest out of this, then?" Shop around.

Here's the Allworth advice. Big banks, like our own Fifth Third, they seem to be in very good shape, despite everything that happened to a few smaller regional banks recently. Coming up next, the jobs that could go away thanks to AI. Could it be yours? We'll take a look. You're listening to "Simply Money" here on 55KRC, THE Talk Station.

You're listening to "Simply Money." I'm Amy Wagner, along with Steve Sprovach. A couple of weeks ago, my husband and I were watching TV. I think it was on a Sunday night. I think it was 60 Minutes, and they were talking about AI, and the people who were developing it, and then all the ways that AI has started to change the world, and the thing, the predictions. And my husband and I were looking at each other, we're like, people's jobs are gonna go away. It's insane what these computers can do now. Well, there are now predictions about which kinds of jobs will be going away first. Joining us tonight with maybe a warning about your job is our tech expert, Dave Hatter from Intrust IT. You've been talking about AI for a while. And at first, I was like, "Oh, come on. Can this really do this stuff?" And it really creeps me out now what this can do.

Dave: Yeah. Well, as always, thanks for having me on. And it's come a long way very quickly. You know, the concept of artificial intelligence is not new. It's been around for a long time. But there've been a lot of advances in a relatively short period of time. Things like ChatGPT, DALL-E, Midjourney. You know, synthetic media is sort of the catchall term for content that's generated completely from whole cloth by a computer, which also gets into deep fakes, and that's one of my major concerns about all of this stuff. But now, whether it's text, like from ChatGPT, or images from Stable Diffusion or DALL-E or other...you know, you can create video, you can create audio, you can create text. Pretty much anything can be created completely by a computer at this point, and it's all increasingly realistic, and, you know, rapidly advancing. It's pretty wild, and I think surprising to people who haven't experienced it.

Steve: Hey, Dave, I think a lot of people that are hearing about artificial intelligence for the first time, maybe in the last, well, when ChatGPT started becoming newsworthy, I think everybody's first reaction is they're scared. And, you know, there's a lot of alarmist articles out there, and I know better than to ask you about are you optimistic, but I'm...

Amy: Are you alarmed?

Steve: Yeah. Does this really scare you?

Dave: I don't know that I would say I'm scared, but I'm certainly concerned about it on a number of different fronts. I mean, you know, I've worked with ChatGPT pretty extensively now, and it's got some amazing capabilities. It's got a lot of problems too. I don't wanna overlook that. You know, it can be fooled. If you read their terms of service, it'll tell you, sometimes it will "hallucinate" and create something completely from whole cloth. And I don't know if either one of you two happened to catch the story. You may be familiar with Jonathan Turley. He's a pretty high-profile attorney. And ChatGPT, or it might have been Bard, I forget which AI it was, but someone asked it to come up with a list of attorneys who had been accused of sexual harassment, and it listed him, for something he supposedly did on a field trip which never occurred.

So, yeah, it'll be interesting to see where that goes. It's gotten a lot of press, you know, for anyone that's interested in looking into it. But, you know, Steve, to your point about, you know, am I concerned, you know, Amy, you mentioned the taking of jobs. I think right now we're in a place where it can be a powerful tool to augment your job, depending on what you do. We've used it for a lot of different things at Intrust. You know, it's never perfect. You gotta understand that it will sometimes make stuff up. You're not gonna get sources. But when it works, it's a really powerful tool where it might get you, like, "I need a blog post on X written as a cybersecurity expert," you know, it might be your question for it. It'll generate something that's probably 60% to 80% complete, and then you just need to tweak it.

So, it's a great way to supplement existing jobs. But I do think, you know, over the long run, when you look at how capable it is today, you're gonna see a lot of jobs that will be negatively impacted. Because, you know, if I just, right now, needed a writer, I wouldn't hire a writer. I would just go try ChatGPT and see if it can't get me the boilerplate, again, 60% to 80% of what I want, and then I would just tweak it from there. So, yeah, I think you're gonna see some definite downsides. Now, you know, when you hear the experts talk, they'll go back to things like, you know, the old standard of the horse and carriage and the buggy whip and that sort of thing. You know, new jobs I think will be created as a result of this. Will it offset the jobs that are lost? I don't know. But, you know, right now I'm more concerned about the possibility of how these things can be used for fraud and crime, and I think it's gonna be a tidal wave.

Amy: Well, and I think it's easy to look at these jobs and, you know, among those listed, accountants, right? And you think about, okay, the programs that you run already, accountants could easily be replaced maybe by AI. Content moderators, the people that are looking at social media websites and trying to figure out, does this need to be pulled, does this not? You know, there's algorithms for those things that could easily be pulled. Legal assistants. Couple people in my family with legal assistants for years, they might be able to... So, there's a lot of, like, really well-known jobs. But I was watching this show, and the example that was on there, because when I think about artificial intelligence, I always think about, "Yeah, but it doesn't have emotions. It's not thinking and feeling, so it can't do those kinds of jobs." Except that they gave, I think it was, I don't know, ChatGPT or Bard this job to do.

They said, okay, we're gonna start with this. You know, Ernest Hemingway's the shortest story ever written. Was it, "For sale: baby shoes. Never worn," right? Those six words, you know, very famous, and said, "finish this story." That's all that it was given. It finished that story so beautifully that you would've thought Hemingway himself had written the rest of this story. And I was like, "Oh my gosh. Here goes my job. Here goes everybody else's job." I mean, it really is crazy when you think about, somehow, by just taking in everything on the internet, this artificial intelligence learns. Maybe it doesn't think emotively. But it is able to create content that is based on emotion.

Dave: Well, you know, these, like, ChatGPT is based on a large language model, where there was something like 170 billion inputs. You know, the training on it stopped in 2021. And that's another interesting angle of this. Things like copyright, and I don't know if you happened to catch any of the news. Elon Musk has been threatening to sue Microsoft now that ChatGPT is integrated with Bing, because he's saying, okay, you guys use things like the public-facing Twitter to feed into this, things like Reddit and other sources like this to get this content. Now, you know, I'm not gonna pretend like I really understand how the algorithms behind it work, but it has to do with statistics and knowing what word should come after another word and that sort of thing. But yeah, you're right, Amy. I mean, I've used it for some actual professional work-related things and I've also just tried to play around with it, for example. You know, on Valentine's Day I had it write a poem for my wife. It wasn't bad. Better than anything I would come up with, I can tell you that.

Amy: Did you tell her you wrote it, or did you give the credit to artificial intelligence?

Dave: I eventually told her, you know, it was written by ChatGPT. I've also, because, you know, part of the trick of using a tool like ChatGPT is to be as specific as possible on your question. In fact, it's called "prompt engineering." You know, that's what we nerds call it. And, you know, you can go in and say, like, "Write a song in the style of John Lennon and Paul McCartney," and it'll give you a song. You know, is it as good as something they would've come up with? Well, probably not. But the quality is surprisingly good most of the time. Now, as long as you understand that it will make things up from whole cloth, and they warn you about that, and that, you know, you're not gonna get any sources with this output, yeah, it's pretty unbelievable what it can do.

And this is the free public version. You know, ChatGPT-4 has been released. You still have to pay for that. It had 170 trillion inputs, so a power of 10 different, and it's pretty mind-blowing what it can do. It can also work with images and some other stuff that the previous version can't. But I guess the big thing in my mind is there are certain jobs, I do believe, in the relatively short period of time are just gonna be obsolete. Again, I can't imagine why I would [inaudible 00:28:18] a writer right now, when I can pop in there, and for free, in a matter of seconds, have it give me something that, you know, I can probably take across the finish line in, you know, maybe an hour. And then when you throw in all the other types of AI out there, again, the stuff that can generate videos, the stuff that can generate photos, the stuff that can generate audio, which I'm especially concerned about...

Amy: So, graphic designers, right? Graphic designers, watch your back.

Dave: Yes. Graphic designers.

Amy: Yes. A lot of creative fields that you wouldn't think about as well.

Dave: I think so. Because, you know, that's always been one of the knocks, that these tools won't be able to replace the creative aspect of this. But again, I think, especially if you have some limited graphic design capability and you can take the output from one of these things and then tweak it, you know, I think you're gonna see a big impact there. There's, again, the whole copyright angle of this is problematic too. I don't know if you guys heard the story. There was a woman who was using a lot of these different tools to create a comic book. And it ended up in court, and they basically said, "You can't copyright any of the content that came out of one of these tools." So, kind of ruined the whole comic book for her. So...

Amy: We also think about, like, our kids getting ready to go to college, and I'm like, are you really gonna write those papers yourselves, right?

Dave: I can guarantee I wouldn't.

Amy: Yeah. It's changing everything. And I think the takeaway is, I don't know, watch your back. Artificial intelligence could be coming for your job, unless you know how to code artificial intelligence, or let people use it somehow to benefit themselves. I think that's probably the jobs of the future. Thank you, as always, to our tech expert, Dave Hatter, from Intrust IT. You're listening to "Simply Money" here on 55KRC, THE Talk Station.

You're listening to "Simply Money," presented by Allworth Financial. I'm Amy Wagner, along with Steve Sprovach. If you've got a financial question, it's bothering you, maybe it's keeping you up at night, you can bring it straight to us. There's an easy way. There's a red button you click on, you're listening to the show on the iHeart app. That question is coming straight to us. We'd love to talk about it right here on the show. Straight ahead, you need to be very careful about what you say to your coworkers, and maybe if you are a manager, and we're gonna tell you why that is, and how one woman learned that lesson the hard way.

You know, nobody likes paying taxes. There's the annual conversation that I dread every year with my husband, which goes like this. All right, talk to the accountant, [inaudible 00:30:42] tax returns. Here's what we owe. Here's how much we're getting back. And by the way, here's how much we paid last year. And you literally get this, like, knot in your stomach, like, "We paid how much in taxes last year?" And, of course, the goal for everyone is to keep as much of that money in your pocket as possible. We're not talking about evading taxes. We're talking about legal ways to keep a little bit of that money.

Steve: Well, yeah. And, you know, I think people just routinely forget about the plain old taxable joint brokerage account. I mean...

Amy: Because it says "taxable" in it.

Steve: Exactly.

Amy: Not only does it not sound sexy. It sounds like downright yuck. "Taxable account?"

Steve: No. Let me explain my point on this, because some people, and, you know, God love 'em, they're incredibly efficient with savings. You know, they come to me as they're approaching retirement, and they've just got lots of money saved up in 401(k)s, and IRAs, and good for you. But when you're retired, you're gonna start drawing money out of investments. You go from being a saver to a spender, and that's where the tax efficiency kind of falls by the wayside, because when you take money out of an IRA or a 401(k) in retirement, every dime you take out is gonna be taxable, you know? You can argue, yeah, maybe a portion's after-tax money, but, you know, for all intents and purposes, it's taxable. You draw $10 grand outta your 401(k), it's $10,000 of income, just like you earned it on your job, at whatever your current income tax rate is.

The old-fashioned brokerage, taxable investment account is treated completely differently. And if you hold onto your investments... Let's say you've got a joint account with maybe some Proctor & Gamble, maybe some mutual funds, whatever the case is, and you've held those investments for at least a year and one day, which, by definition makes them long-term gains instead of short-term, there's a heck of a favorable tax treatment on those profits. So, you know, it's something, don't forget about your joint brokerage account.

Amy: I like it too, because there's so much more flexibility. And when you think about your IRA and your 401(k), and I also have these accounts too. Big fans of them. But they don't have so much flexibility if you need to get to money before the age of 59 and a half, right? Like, they're just...but a brokerage account, you can take that money out anytime you want to, for any reason that you want to. The government just says, "Hey, listen. We aren't big fans of day trading. We're not gonna incentivize people to be buying and selling constantly, but if you buy something and you hold it for at least a year, you're gonna pay capital gains tax on that instead of your regular income tax." And for most people, the difference can be huge. In fact, for some people, capital gains can end up being nothing, or it ends up being about half what you would pay in regular income tax.

Steve: Yeah. I wanna expand on that a little bit. If you didn't hear Amy, she just said your tax rate may be zero. In other words, is it possible to sell a stock or a mutual fund and pay no tax on the profit?

Amy: Yes, it is.

Steve: Yeah. If you held it longer than a year and a day, and your adjusted gross income is below $89 grand and change. Now, check with your tax advisor before you do anything. I mean, we are not tax experts [crosstalk 00:33:58]

Amy: Well, Steve Sprovach said...

Steve: Yeah, but I can tell you, the long term capital gains tax rate is 0% under $89,250. So, you know, let's say you make $50,000 when you're retired. You know, that's your adjusted gross income, and you've got $3,000 or $4,000 of profit from selling some sort of investment that you held on more than a year or so. Yeah. It's very possible that you don't owe a dime on that. Now, let's get a little more realistic, because in retirement, probably the bulk of your money's gonna be in combinations of IRAs and 401(k)s. You need $10,000 for living expenses, for, you know, a trip, whatever the case is. Well, if you're lucky enough that you're making maybe $90,000, $100,000 adjusted gross, you probably, on that $10,000 you just took out of your retirement account, probably are gonna pay somewhere around 22% on that $10,000, $2,200 in tax, in other words.

If instead, you take that $10,000 out of your joint investment account, not a 401(k), not an IRA, and let's say maybe 10% of that is profit, you only pay tax on the profit. So, the $10 grand, if only 10 percent's profit, that's 1,000 bucks that is taxable. And if it's long-term, you're probably gonna pay 15% tax on that. That's $150 in tax versus $2,200. Guess where I would rather take the $10 grand out of? It's a lot more beneficial.

Amy: These things make a difference. Yes. Understand that. Here's the Allworth advice. Investing can, many times, lower your taxable income, which can keep more money in your hands. Coming up next, a rant that was heard around the world, that might have you thinking twice about how you talk to your coworkers. You're listening to "Simply Money" here on 55KRC, THE Talk Station.

You're listening to "Simply Money," presented by Allworth Financial. I'm Amy Wagner along with Steve Sprovach. I would say at one point or another, Steve, we have all said something that we thought, "Hmm. That didn't come out the way I intended it to," or...

Steve: Every day, Amy.

Amy: "...wish I could take that back." We are on a radio show, so you'd think we would've learned by now, but there is a woman who's a CEO of a big company, and she has been all over the headlines recently, not necessarily because of the furniture company that she runs, but because of a Zoom meeting that she held with her employees where, you know, these are employees that are used to getting annual bonuses. And so, something had gone out saying no bonuses this year, and she got questions about it. So, here she is thinking she's doing everyone a favor, and she's going to directly address the issue of bonuses. Here's what the CEO, Andi Owen, said.

Andi: Don't ask about "what are we gonna do if you don't get a bonus?" Get the damn $26 million. Spend your time and your effort thinking about the $26 million we need, and not thinking about what you're gonna do if we don't get a bonus. All right? Can I get some commitment for that? I would appreciate that. I had an old boss who said to me one time, "You can visit Pity City, but you can't live there." So, people, leave Pity City. Let's get it done. Thank you.

Steve: Ouch.

Amy: Leave Pity City, people. Oh. I wonder if she's in Pity City right now, because there has been quite a backlash.

Steve: You said nobody got their bonuses. Almost nobody, because she got her $4 million bonus in 2022, you know?

Amy: Yes. She sounds insanely tone deaf. And this is the age of Zoom calls, where it's not like she was behind closed doors with five people, and those five people came out and said, "I have to tell you what the CEO said. Oh, my goodness. Listen to this."

Steve: No. It was recorded.

Amy: Someone literally recorded this, and it is all over Twitter and the Twitterverse, and the web, and all the places, and she's gotten a lot of heat. And now she's kind of apologized, and she's said, "I just wanna be transparent and apathetic. I'm trying to reflect on what I did, and I feel horrible." And this is what she says, that "my rallying cry seemed insensitive." If you put yourself in the shoes of those people listening, did that feel like a rallying cry to you? Like, it sounded like somebody was tone deaf and mean.

Steve: No. That was not exactly motivational. No. No, exactly. Yeah. And I think we're seeing a little bit of a backlash. People are getting tired of this garbage. You know, just be transparent, be a good person, be a good leader. It's okay. We'll get through it. You don't have to be like that.

Amy: Yeah. She said she was trying to energize her team to meet a challenge, and it just maybe landed in a way that she didn't intend, and for that, I am sorry. We all learn lessons, and she is certainly learning this one the hard way.

Listen. Assume anything that you put out there is gonna end up all over the world, so just don't say it. Thanks for listening tonight. We hope you're gonna tune in tomorrow. We're talking about the four life events when you should contact that financial advisor. You've been listening to "Simply Money," presented by Allworth Financial on 55KRC, THE Talk Station.