While the S&P 500 rose 26% at the headline level, it was almost entirely due to just seven “magnificent” tech stocks. The remaining 493 names contributed very little – on average up just 4%. This concentrated market condition continued through October when we finally enjoyed broadening market participation. Small cap stocks began a long-awaited turn-around with a two-month advance of 16%. The broad International Index rose 18%. Both are areas we overweighted in 2023 due to their relative valuations. While we think these sectors will continue to waffle back and forth for several months (as January has already shown), we expect a further broadening of market performance once we get some assurance on timing of Federal Reserve rate cuts.
Interest rates have been the story since early 2022 and October showed what happens when our uncontrolled fiscal deficit intersects with decreasing foreign demand for Treasuries. The 10-year Bond went from a yield of 3.3% in May to 5% in October as auctions witnessed a pullback in foreign investors. This will become a larger theme in the future should our deficit growth continue unabated. Nevertheless, as inflation readings continued to decrease during the Fall and the market began anticipating rate cuts, the yield on the 10-year treasury ended 2023 at 3.9%.
We wrote last quarter that we were cautiously optimistic.
But the year ended better than, even we, anticipated. Surprising employment strength and increasing home prices have remained dominant forces keeping the U.S. from entering recession. As consumers spend down COVID savings, they remain heartened by job stability, so overall spending has remained quite strong. Strong home values have also buoyed consumer confidence. This is very different from the historical pattern (although welcome and needed). In a normal economic contraction, people lose jobs and must sell homes, increasing housing inventories which bring prices down. In this rate cycle over 90% of existing homes carried mortgages under 4%. People were not forced to sell and have no desire to trade a 3% mortgage for a 7% mortgage. Inventory remains tight while demand stays solid, so prices have risen. The banking system remains resilient, financial conditions have eased, and financial market performance followed.
Heading into 2024, we see light at the end of the tunnel, while recognizing the risks that are still present.
So, enjoy today and tomorrow, and let us do the worrying!
If you are already charitably inclined there are two gifting strategies that you should be aware of, Qualified Charitable Distributions (QCDs) and gifting appreciated stock.
In Strategies for Charitable Giving – Part 1 we discussed the tax benefits of QCDs which can be done by IRA owners who are at least 70.5 years old. But what if you are younger and giving to charities? Are there any tax benefits available? Most people take the standard deduction since the Tax Cuts and Jobs Act increased it, and if you’re not itemizing you lose the ability to deduct charitable contributions.
If you have appreciated stock (owned for more than a year) in a taxable investment account, donating stock instead of cash could provide a tax benefit to you and result in a greater gift to the charity.
Let’s look at an example.
Jim plans to donate to his favorite charity. He owns $30,000 of Microsoft stock that he purchased several years ago for $5,000. Jim is subject to 15% capital gains tax. If he were to sell the stock, he would pay $3,750 in taxes, leaving him with $26,250 to donate. If Jim is able to itemize his tax deductions, he would be able to deduct $26,250.1
If, instead, Jim donated the stock directly to the charity, he would avoid paying the capital gains tax. The charity receives the full $30,000 value, rather than $26,250. And if Jim itemizes, he may be able to deduct the full $30,000.1
To be eligible for a charitable deduction for this tax year, donations of stock need to be received by the end of the year.
Determining charitable giving strategies is one way that we partner with clients. We can help you determine if donating appreciated stock is right for your situation.
Call us to review your investment approach (404) 941-2800.
If you are already charitably inclined there are two gifting strategies that you should be aware of, Qualified Charitable Distributions (QCDs) and gifting appreciated stock. To realize tax benefits for 2023, both need to be done before the end of the year.
Qualified Charitable Distributions:
If you are an IRA owner and are age 70.5 or older, you are eligible to make QCDs. Most people take the standard deduction since the Tax Cuts and Jobs Act increased it, and if you’re not itemizing you lose the ability to deduct charitable contributions. QCDs are gifts to charities made directly from your IRA. Normally, money that you take out of an IRA is taxable income, but QCDs are excluded. So, you are getting money out of your IRA tax-free to give to charity.
Once you’re subject to RMDs (currently at age 73), QCDs are even more beneficial because they count towards satisfying your RMD. If you’re between 70.5 and 73 there is still an extra advantage in that the QCD decreases your IRA balance, which may reduce required minimum distributions in future years.
Let’s say that you are 71 years old, are already gifting to charities every year, and have an IRA. You have social security income which you supplement with money from your investment accounts, all of which is taxed before it hits your checking account. You’re writing checks to charities throughout the year – giving away money that you have already been taxed on. Making QCDs allows you to fulfill your charitable goals with money that you are not taxed on. And because you are reducing the balance of your IRA with these gifts, your RMDs will be lower than they otherwise would have (all else equal) when you turn 73.
There are a few things to note about QCDs, such as annual limits and which charities can accept QCDs. Determining charitable giving strategies is one way that we partner with clients. We can help you determine if QCDs are right for your situation.
In Strategies for Charitable Giving – Part 2, we discuss the strategy of gifting appreciated stock.
Call us to review your investment approach (404) 941-2800.
Bullish sentiment ran out of steam during Q3 2023. In a previous blog we discussed the primary culprit for that. All that said, we are now in the final quarter of the year. Investors entered October in a pessimistic mood and with lots of cash riding out the storm in money market accounts (earning close to 5%). Historically, the last quarter usually sees the strongest market performance. On the back of some pessimism, we think the stage could be set for a significant catch-up.
We recently increased client stock exposure in anticipation of a rebound. We focused on small and mid-cap companies that have not followed the market-moving “Magnificent 7” (the new FAANG stocks). We are much more comfortable with the potential downside when buying at 14-15 times earnings vs. 35-40 times for the largest tech companies.
We have also recently increased safety within our shortest time horizon “Liquid Assets Strategy” by selling our high-yield bond fund position. We think a credit crunch has begun and choose to hold risk-free cash earning 5% rather than accept the risk of BBB-rated bonds earning 6%.
Economic growth is slowing. Businesses are faced with refinancing debt at much higher interest rates, and rates may remain high for many months. Corporate earnings should stay positive but are still vulnerable. The Consumer is still strong, as are home prices and employment. But leading economic indicators continue to weaken. Investors are having a difficult time forecasting the future. It’s a toss-up as to whether the Fed can engineer the magical “soft landing” markets were certain of just a few short months ago. Market sentiment is terrible, and we view this as an opportunity.
The war in the Middle East is heartbreaking, and we keep the civilians at the forefront of our prayers. The cold calculus of markets and economics is that unless the conflict broadens into a regional affair there should be little impact on financial markets. Should it widen to include Iran in particular, that calculus will change.
There have always been geopolitical events and market uncertainties. Our time horizon strategies coupled with detailed financial planning reduces the impact of market risks on our clients’ ability to live the lives they choose. When investment risk is pushed to long time horizons, growth strategies are allowed to perform their best. Over more than a decade, Integras Partners has successfully navigated tumultuous periods without having to give up exposure to the long-term growth needed in almost every portfolio.
Our structural portfolio design provides the comfort to enjoy life today, recognizing that while markets are inconsistent, freedom to live life isn’t.
Call us to review your investment approach (404) 941-2800.
August, September, and October are historically the worst three months for market performance and 2023 was no different. Everything but cash, oil and short-term treasuries had negative 3rd quarter returns. The S&P 500 lost 3.25%, small caps fell 5%, international markets dropped 3.5%, and long-term treasuries lost an astounding 8%.
The culprit was interest rates. Not just the shortest-term rate that the Federal Reserve controls but also long-term rates, which are determined by bond traders. There were two main reasons that long-term rates went up sharply. First, the Fed made it clear that it intends to hold interest rates high far longer than the bond market expected. Second, with the US fiscal deficit climbing, the Treasury must issue and sell more bonds. Simple supply/demand dynamics resulted in lower bond prices, which pushes interest rates higher. The 10-year US Treasury note began the quarter with a rate of 3.85%. At the end of September, it had risen to 4.8%. Rising rates are bad enough but when they rise at such a fast pace, long-term assets with a yield – dividend stocks, bonds, real estate, etc. – lose value quickly. For example, defensive stocks such as utilities lost almost 10% during the quarter. And since the beginning of 2021, the 20-year US Treasury bond has lost a staggering 50% of its value. All due to interest rates.
Today we are at an interesting crossroads. The Fed may be done (or close to being done) raising short-term rates as inflation is cooling off. But we are not out of the woods yet. We have outlined the signs of potential recession in several past commentaries, and they continue to become more apparent. What’s sustaining our economy is the robust consumer and very low unemployment. Consumers are showing some signs of slowing down, and employers are less eager to hire than just a few months ago. It’s natural that the economy will continue slowing as rate increases keep working through the economy. It will be a close call as to whether inflation can slow to the Fed’s stated goal of 2% before economic growth becomes economic slowdown. It may be several more months before the answers play out.
However, we see some opportunities today. Entering the 4th quarter we updated our positioning into areas where we see that opportunity. Read More . . .
Call us to review your investment approach (404) 941-2800.
