2024 Off to a Great Start; Are you Diversified?

 2024 Financial Markets Update                                                                               3/1/2024

The powerful rally in stock prices that started last November, continues into 2024. Seems that the stubborn inflation and tight money (interest rates) are not hampering the optimism on Wall Street.

Just one day into March’s market action, stocks gained about 1% Friday (on the S&P 500 and Nasdaq indexes) closing at all-time highs. The Dow sits just 44 points from its all-time high achieved in late February.  Our favored commodity – Gold, added $40 an ounce Friday, good enough for a 2% gain on the day, registering a new ALL-time high near $2,080. So it’s darn hard to find a displeased investor now-a-days.

Adding January and February together, stocks are ahead +7% on the S&P 500 index, quite a run.

Similar to the last half of 2023, the main drivers of higher stock prices remain the large technology stocks: Apple, Google, Microsoft, Amazon, Nvidea, Meta (formerly Facebook), and Tesla. Their moniker is “The Magnificent 7”*. They are widely owned by money managers and no doubt you own them too if you have a retirement plan or 401(k) plan or own a large stock mutual fund. It’s virtually impossible to NOT own these stocks unless you intentionally want to.

Back in the 1970’s the name “Nifty 50” was given to a list (of 50), stocks that were very important and also exhibited fast growing sales and earnings. If you managed money** or your own portfolio back then, you no doubt owned shares of IBM, Proctor & Gamble, Coca-Cola, Avon Products (remember Avon-calling), General Electric, Xerox, Sears Roebuck & Co., and Eastman Kodak. Some of these you no doubt recognize as they are still operating today. Some merged or went out of business. The oil embargo induced high inflation and recession of 1973-1975 sent stock prices down about 35% combined in 1973-74. The Nifty 50 fell 50% !

I see investing this way as a self-fulfilling advantage or a curse. As these companies do well and their prices rise, they represent more of the index that they’re in. Then they ‘crowd out’ other market sectors that you under-own. It becomes top-heavy – good or bad – with your performance and your dollars invested. Here’s the sector breakdown today for the S&P 500 Index.

I realize that most of us recognize the value and safety of NOT putting all your money into the stock market. But the money in stocks should be diversified also. Would you invest over 40% of your stock market money in just 2 areas of our economy, Technology and Financial Services? You can't escape this technology bias with the Dow Industrials (30 stocks) either; it's also about 40% technology; think names like IBM, Intel, and Cisco Systems; also Amazon, Apple and Microsoft.

In my mind, a more prudent idea is to own some other sectors too; health-care and energy for instance. You’ll most likely experience a smoother ride with your stock market holdings than just blindly owning the S&P 500 Index or a look-a-like. Beware: often your retirement plan will offer a mutual fund(s) named something like “Large Cap Growth Fund” or “Capital Appreciation Fund”. Look on-line to see what they own. Use Yahoo Finance to find out also. https://finance.yahoo.com, input your fund symbol, then select ‘holdings’ from the tabs, then ‘Sector Weightings’. If no luck, call your retirement plan, or the investment company who offers the fund choices. 

Let's see if the early March gains can continue with stocks and Gold. Bonds are sitting this rally out; as market-based interest rates are backing up again after the steep fall in the fourth quarter. Shorter term Treasury Bills are paying 5.1% to 5.2% a year for 3 and 6 month maturities; a safe place for your cash. Read my prior post on the 2023 recap which explains the markets in more detail.

Keep safe out there!

~Barry

 * Apple, Google and Tesla are down in price thru 2/29/24, but the Magnificent 7 are up +14% collectively year-to-date.

** My father started managing pension fund money on 3/31/73, right near the start of the bear market. He did quite well avoiding most of the losses.

 

 

 

 

 

 

2023 Financial Market Results; Ahead into 2024

The financial markets turned in a good year, about a reversal of the 2022 performance. Most of the price action up came in the last 3 months, as investors concluded in aggregate that the high interest rates were coming to an end, and that the economy could weather the storm to avert a recession. The Federal Reserve sets monetary policy, mainly through borrowing costs (interest rates). After the July interest rate hike, the Fed left interest rates unchanged in the last 3 meetings of 2023. This excited investors - thinking that rate cuts could be in-store for this year. Often forward-looking expectations carry more weight and are more motivating than the actual results.

The December inflation report showed prices up 3.4% last year. The Fed is predicting that inflation will end 2024 at 2.4%, declining to 2% in 2026. That’s a long-time to await their 2% target. A lot can happen to change their forecasts, I say with prices, employment, etc. January inflation will be released on Feb. 13^th, so that’ll tell us the first report on prices this year.

The stock and bond markets responded very favorably in the fourth quarter, much of the full-year gains were logged in the last 3 months! Stocks rose a combined +13% during November and December. Likewise, bond prices rose also as interest rates fell precipitously. The 10-year U.S. Treasury Note, which is the poster child for all types of borrowing, briefly rose to 5% in late October. It sits near 4% today, heading in the right direction. Your money not invested is earning 5% now-a-days in short term Treasury bills or money market mutual funds.

Bonds in 2023 were not the party-poopers like they were in 2022. When interest rates FALL, bond prices RISE. Bonds of all stripes rallied a lot after the Fed kept interest rates unchanged at their Nov. 1^st meeting. Similar to the price action of stocks, roughly 2/3 to ¾ of the total yearly gain in stocks and bonds occurred in the last three months. The bond price rally turned losses into final 2023 gains of between 3-5% in Treasury debt, and upwards to +10% in riskier debt like high yield (junk) bonds. I chose to not hold bonds last year, and just use idle cash to buy Treasury bills near 5% interest payments.

My favored commodity – to offset some of the risks of owning stocks and bonds - is Gold. Gold prices were down 3% in 2022, while stocks and bonds got clobbered. Last year Gold rallied $235 per ounce or +13% to close the year at $2,062, its first year-end close above $2,000 ever. It often does not follow any pattern of pricing, but the higher inflation and recent wars can be catalysts for price rises. I advocate to store Gold bullion in safekeeping, or own Gold Exchange Traded funds like GLD and SGOL that directly track the Gold price and have very low expenses in your brokerage account.

In 2024, January delivered decent returns as stocks gained about 1.5% on the Dow Jones and S&P 500 Indexes, Gold lost that much, and bonds were a small loss after interest rates rose into the New Year.

It looks like market's could in store for choppiness after the big run into year end. Besides political news, the corporate earnings and the Fed's decision-making could result in some 'backing-and-filling' on prices this Spring.

Stay Tuned!

 

 

 

 

 

 

 

 

 

 

 

 

 

 

                                 

 

 

 

 

 

 

Year-End Tax Planning Ideas With Your Investments

With just a couple of weeks left in 2023, tax planning is probably not front-and-center on your Holiday to-do list. Nonetheless, the calendar waits for no one, and once New Year Day arrives, the planning part ends.

Tax planning with your retirement and taxable accounts should be tended to throughout the year, but the loose ends maybe can be tied up in a few easy steps if you act quickly and follow the rules.

Here's my short list of four planning tips to hopefully save you some coin come next April with uncle Sam. The first two are for non-retirement accounts, the last two for Qualified Retirement accounts like IRA’s and workplace 401k plans.

MUTUAL FUND DISTRIBUTIONS from non-retirement accounts.

By law, mutual funds must distribute most all of the gains that they have accumulated by investing your money. They need to do this at least once per year. The distributions are then considered taxable to their shareholders. If you own a mutual fund, you should know when they distribute income and capital gains.

You’ll register a gain or loss when you sell your shares on your own, but the mutual fund company doesn’t care when you bought their fund. If you own it on the ‘record date’, they will pay out the gain to you. If you reinvest that in more shares, you still are taxed on that also. If the gain is particularly large, it could affect your taxable income and/or other ‘benefits’ that may be taxed such as social security or you pay more for health services like O’bamacare. Payouts could also nudge your income into the next tax bracket. Not a good place to be.

  Call your advisor if you own mutual funds in a taxable (non-retirement) account, or go to the mutual funds website to find out. Or call the mutual fund company and ask what their 2023 distribution schedule is. When is the record date of the fund? When are the payment date(s)? They usually schedule these dates the last week of December, but other mid-year payouts may be scheduled also. Consider selling the mutual fund if the distribution payout will significantly affect you tax-wise. Be cognizant of your own capital gain or loss when you sell your shares.

TAX LOSS HARVESTING from non-retirement accounts.

You probably know that you can offset a gain with a loss if you sell stocks and bonds during the year. Look at your securities that you own today. Then look at what you sold so far this year. Are there any losses that you can use from existing positions that you can offset against gains taken? Are there any gains that you can realize to offset the losses already realized?

It may save you tax to sell a losing position against a gaining position. You can buy back the stock sold later if you still like it. Beware of the wash-sale rule on this, however. Ask your advisor or broker before selling at a loss as you can get tripped up if not executed properly.

REQUIRED MINIMUM DISTRIBUTIONS, RMD’s

The IRS requires you to take yearly minimum withdrawals from your retirement accounts (think IRA’s, 401(k), 457 plans and the like.

They set a schedule for each age as to how much you need to take in order to avoid a tax penalty. Depending on your birthdate, the requirement can kick in around age 72-73. The schedule is very liberal. A 75 year-old needs to empty the account within 24.6 years, and an 80-year old in 20.2 years.

Use the value of your account on 12/31 of the prior year. Check with your investment company if they have not notified you of your 2023 RMD’s. It's often posted on the website for brokerage accounts or an alert in your in-box. Note: your annuity at your life insurance company also requires RMD’s if it’s an IRA or qualified annuity. To process all the RMD’s timely, some firms require 2-3 weeks notice by you, so look into that ASAP to meet the year-end deadline. One nice rule: you can take your annual RMD's from any retirement account; just add up the RMD's for each account, then decide which account would be best to take it from. This saves time and paperwork for sure.

ROTH IRA’s – Open one TODAY.

Seems like ROTH IRA’s are not in the headlines as much as traditional IRA’s, but they should be. They offer a way to defer the gains on your investments once you move them to the ROTH from your other retirement account(s). You can then NEVER pay tax on the ROTH distributions in later years. You still pay the tax funding the ROTH IRA initially, just like a traditional IRA distribution.

Key point: Your ROTH IRA must be open for 5 years before you can enjoy the tax free gains (or earnings). You can take back your initial investment without a tax.

SO, here’s what to do. OPEN a ROTH IRA now, and fund it with $10.00 in cash. Leave it sit in case you need it after 5 years, or after you are 59-1/2 years old. Then it will qualify. You only need to fund ONE ROTH IRA, any ROTH IRA to set the clock ticking 5 years. And you have until the tax filing deadine, 4/15/2024 to declare 2023 as your first year opened.

Open the account; you may never use it, but you also may need it badly to avoid taxes in your later retirement years.

This is especially important if you have qualified accounts like IRA’s and workplace 401k plans that you may want to use to fund the ROTH IRA. If you are in your 50’s, fund it so the 5 year rule will align with the 59-1/2 rule to avoid the early withdrawal penalty for IRA distributions. The very latest that you SHOULD OPEN a ROTH IRA would be age 54-1/2, five years before age 59-1/2.

So hopefully some of my tips have resonated with you today, and gets you to thinking about your personal taxes as we end 2023.

Do have a joyous upcoming holiday, be it Christmas or other that you observe.

~Barry

The advice above should not be construed as tax advice on an individual basis. Your tax situation should be carefully reviewed by a tax professional, C.P.A., Enrolled Agent, or other trusted source. Barry Unterbrink and Stetson Wealth Management are not licensed tax preparers.