2024 started with concern over stock prices, focused on the widening gulf between the price moves of the “Magnificent Seven” tech stocks and the rest of the market. Expectations for this gulf to close were rooted in the Fed’s actions – when they would begin cutting interest rates and how many cuts would occur in 2024.
At the end of 2023, the bond market had priced in nearly a 100% chance that rate cuts would begin in March.
Our expectation has been that cuts were not likely to begin until this summer. Given the most recent inflation data, and conceivably similar readings to come, it would now not be surprising to see no cuts until even deeper into the year, if at all.
The 1st quarter saw the S&P 500 rally 10% while almost totally discounting Fed rate cuts this year. This could be the market seeing lower rates and slowing inflation ahead, however, inflation is proving to be more difficult to tame towards the Fed’s 2% target. Sticky inflation may prove to be the Achilles heel of the current advance.
We also wrote in our Q4 2023 commentary that the focus of the market would soon turn from interest rates to the market fundamentals of earnings and valuation. This has started coming to fruition, but complicating this calculus is the momentum of any company involved with artificial intelligence, and market expectations for revenues and earnings of all companies due to AI’s influence. While in early days, “AI” has overtaken the narrative of the Fed needing to lower interest rates, and the speculative nature of investors has re-emerged. Today we are in a momentum-led rally with the market assuming rate cuts later this year and a renaissance of capital spending on AI over the next many years.
While the advance has its roots firmly embedded in the AI excitement, other green shoots are becoming visible as well.
Valuations are very attractive in small caps and international stocks, and mutual fund flows are reflecting an increased appetite for value vs. momentum. These are signs of a healthy market – ones that should be embraced, although they will likely be tested.
While not our base case, there is a chance that with financial conditions having eased so much already, a renewed upswing in inflationary forces are taking root. Should the economy remain strong, coupled with government stimulus funds (JOBS Act, Infrastructure, Inflation Reduction Act, etc.) flowing into the economy and consumers continuing to spend, inflation may not recede to the Fed’s 2% goal. Perhaps worse, the Fed may start easing only to have to pivot and raise rates again. These are risks we are mindful of and recognize that regardless of how rosy a set of projections may look now, there are several catalysts that could change investor sentiment in a meaningful way.
We continue monitoring all these factors, watching developments, and adjusting our strategies and client portfolios as necessary. Where there is disruption and change, there is often opportunity.
An IRA (Individual Retirement Account) is a great opportunity for younger investors to save for retirement. IRAs come in two flavors, Traditional and Roth, the main difference being when taxes apply.
While traditional IRA contributions may provide a current year tax deduction, Roth IRAs contributions are not deductible, but the investments grow tax free forever. Traditional IRA distributions will always be taxed as ordinary income.
You must have earned income to contribute to any IRA (compensation received from working), and there is a maximum contribution amount set by the IRS each year ($7,000 for 2024).
Considerations when choosing between IRA types:
Age: The younger you are, the more sense it makes to contribute to a Roth IRA. The compounding tax-free growth is likely to outweigh the value of the up-front tax deduction.
Income: At higher income levels the ability to contribute to any IRAs phase out. However, your employer 401(k) plan may include a Roth option.
Deductibility: If you are covered by an employer retirement plan, you’re likely not eligible to make deductible IRA contributions. However, you may still be able to contribute to a Roth IRA.
Flexibility: With limited exceptions, withdrawals from an IRA before age 59 ½ are subject to a 10% penalty. Roth IRAs offer more flexibility, allowing for penalty-free withdrawals of contributions (but not earnings) after the account is at least 5 years old.
Laser-focus on inflation was the key driver of both interest rates and market performance over the past two years.
Inflation continues retreating towards the targeted 2% range, which should largely be achieved around mid-year. We expect the Fed will begin lowering rates during the summer. While the bond market has priced-in 6 rate cuts for the year, beginning as early as March, we believe it will be a more modest and later cutting cycle. From there, the narrative should shift from inflation and interest rates back to the fundamentals of economic growth and earnings. There is still a risk that the economy could pick up steam and inflation return to haunt us once again, a la 1980. Nor are we out of the woods of potential economic weakness. But we see light at the end of the tunnel.
We remain optimistic about the long-awaited resurgence of small-cap, value, and international stocks closing the performance gap versus U.S. large-cap growth over the ensuing economic cycle.
The old maxim of ‘no tree grows to the sky’ will ultimately prevail. We find it unlikely that valuations of the “Magnificent 7” can continue to rise unabated. Valuation is a fundamental driver of long-term performance, and small caps and international markets remain undervalued relative to history.
As we expect a return to economic fundamentals over 2024, much depends on the economic growth and labor productivity needed for earnings to meet or exceed expectations. Should the economy slow, stock markets will have a hard time producing meaningful gains. While not our base case, we will remain mindful of the many economic indicators still flashing red.
We understand it is an election year. As November approaches, we typically see markets stagnate or slightly decline as the uncertainty and anticipation mounts. However, history tells us that regardless of who wins, there is negligible impact on financial markets in aggregate. In the end, regardless of whether your favored party wins or loses, there is no advantage in changing investment policy.
The normalization of interest rates is an uncertain path and forecasting economic growth is even more difficult. As investment themes change throughout the year, we will be looking for areas where valuation and earnings potential appear strongest – a disciplined approach that has served us well long-term.
What remains paramount is our desire to always take care of our clients’ current investment needs, while working towards achieving long-term investment goals.
With our time horizon investment process, we have successfully sheltered near-term spending needs from market disruptions, giving the longer-term assets the time needed to allow these disruptions to play out. Our long-held mantra of “go live life, we’ve got your back” has worked throughout this period of upheaval and we will be making sure that continues.
So, enjoy today and tomorrow, and let us do the worrying!
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!
19% of women report feeling confident selecting investments that align with their goals
This is a discouraging statistic from a recent survey conducted on women and investing. We know that a gender gap exists when it comes to investing – on average, data shows that women’s investment account balances are less than men’s. There are a few often-cited reasons for this. The gender pay gap still exists, and women statistically spend more time outside of the workforce, meaning that women may simply have less money to invest.
But there is another reason. Women tend to feel less confident taking investment risk and therefore hold more cash on the sidelines, hampering their money’s growth potential.
But there is a difference between taking risk, and taking inappropriate risk for your goals. Women tend to benchmark successful investing not by the return numbers themselves, but by progress towards goals – buying a house, funding an education, or retiring comfortably.
Defining your goals and their timeframes is the first step toward building the confidence to invest. Money that you don’t need for 10 or 15 years can afford to be invested for growth. The farther along the timeline your goal is, the more certainty you can have of capturing greater returns by investing.
When women do invest, they see results. On average, women outperformed their male counterparts by 40 basis points or 0.4% over a 10-year analysis
On the flip side, studies show that over time, women’s investment returns tend to outperform men’s, with women exhibiting less impulsive investment decisions and staying the course when there is market volatility.
Starting early is the most powerful thing you can do to put yourself on track. If you didn’t start early, start now. Women already have the proclivity to stay invested to meet their goals, we just need the confidence to invest in the first place!
I joined Integras Partners in 2022 wanting to broaden my impact on people’s lives, particularly groups that have been underserved by the financial advice community – groups like women and single earners, which I am also a part of. Integras Partners was already well suited to women investors – focusing on the partnership and the “why” behind financial goals.
I’ll be writing more about these areas in coming newsletters, as well as general financial wellness and investing topics that I hope you will find interesting.
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.
