Our two-night client appreciation event at the Pulaski River Turtles games in 2023 saw an overwhelmingly positive response and huge turnout and we’re planning more client events for 2024. The best way to stay up to date on future client events, activities, or anything going on is by following us on Facebook. If you’re not already following us, just scan the QR code at the bottom of this page with your phone or tablet to start.
For the past several years we have been invited by Virginia Tech’s Lifelong Learning Institute to teach a class on financial literacy and retirement strategies. For the 2024 Spring session we will teach Financial Strategies for Retirees, a four-part course that we have designed. It is geared towards individuals in or near retirement looking to establish a basic understanding of investments and financial planning concepts. If you’re trying to gain a better understanding of investing and increase your financial acumen, it is a great place to start!
In our upcoming Spring newsletter, we will discuss 2024 market trends and performance and provide some tips on how to protect yourself from identity theft and financial scams.
As always, if you have questions, concerns, or just want to chat, please don’t wait until your next scheduled appointment; call or email your advisor.
Same as it Ever Was
Investors started off 2023 feeling pretty gloomy. International and domestic stocks had taken a beating in the prior year, and the bond market -normally the safe haven during volatile equity markets- had experienced its worst year in the past 50 years as high inflation drove a relentless rate-hiking cycle by the Federal Reserve, pushing bond yields up and prices down. Our message to investors then was to keep calm and carry on; this too, shall pass. Patient investors who followed that advice were rewarded with a substantial recovery across asset markets during the past twelve months.
Our outlook for 2023 examined potential good or bad scenarios for the markets that were contingent on the resolution and severity of several potential factors. Some of the most significant and influential factors included the extent to which inflation affected the economy, the possible emergence of a new, more dangerous Covid variant, the unfolding of the war in Ukraine, and the degree that China would adjust their Covid lockdown protocols and the effect of those restriction on the global supply chain.
In our best-case, goldilocks scenario, we needed to see a return to pre-Covid normality (we got that), inflation dropping back down towards 2% (we got that too), China opening back up (yes and no), and a peaceful resolution of the war in Ukraine (tragically no).
Inside this newsletter, we’ll take a look at how everything turned out, what we expect in 2024, and a couple suggestions on steps you can take to be a better informed investor and good steward of your family’s wealth.
A Story of Two Years
The two years in this story are not 2022 and 2023, but January to October 2023 and everything after, because things changed significantly. For the first ten months of the year, the story was a continuation of the 2022 story: higher prices everywhere and the Fed pushing interest rates higher and higher to try and control it.
By late summer, it was clear that inflation was on track to return to the 2% Fed target rate. Talk amongst investors shifted to a discussion on if the Fed was done increasing interest rates and if they might even start cutting rates to avoid the economic slowdown that consensus suggested would result from elevated rates. It was widely agreed that such cuts would be beneficial to asset prices, but significant uncertainty remained on the timing of when that switch from rate increases to rate cuts.
That uncertainty ended with a bang at the start of November, as Chairman Powell made comments which strongly indicated that they felt cautiously optimistic that the beast of inflation had been tamed. If this was the case, he argued, interest rate hikes were likely done, and the Fed was not necessarily pivoting towards lowering rates right away, but felt like they could adopt a wait-and-see approach with a plan that if inflation continues to come down, rates would also be moving lower in 2024. Chairman Powell should have worn his Santa hat for that press conference, because those comments triggered a strong Santa rally, with the stock market up 14% in the US, 15% outside the US, and bond markets increasing 8.5% in those final two months of the year.
Your Online Client Portals
If you have visited our new website in the past year, you will have noticed that the old client login menu has been replaced with a sub-menu giving three different options. This change has caused a little confusion for some clients, and wanted to go over each of the three different sites and the different functions they all serve in capturing your overall financial picture. If you ever have a question on the different websites or where to find any information, please reach out to your advisor, who will be happy to walk you through any or all of the sites in the office.
Albridge
Albridge is our original platform that we have used for years. Your Albridge dashboard provides high level information on your accounts, including current values, asset allocation, recent transactions, and performance and investment returns. This is the easiest and fastest way to get basic information on your accounts with Plott and French.
eMoney
If you have worked with your advisor on any advanced wealth planning topics, you’ve likely spent some time on the eMoney platform, either on your own or in the office with your advisor. eMoney allows you to view all your financial accounts in one place, including assets like bank accounts and real estate, and liabilities, like mortgages and other loans. It is also where the bulk of financial planning takes place. In eMoney we examine how well you are positioned to achieve your financial goals and what adjustments could be made in your overall financial plan to better attain them. eMoney is better at developing a comprehensive picture of your overall financial picture and projecting your future circumstances, while Albridge allows for more narrowly focused information about investment transactions and historical performance.
NetXInvestor
NetXInvestor is the site you will likely visit the least often, but is the only place you can access official electronic statements, tax forms such as 1099s, trade confirmations, and shareholder communications from your Pershing accounts. If you are signed up for eDelivery and receive emails letting you know a new message or statement is available, this is where you login to view or download them. While you can find information on account values and investments here, most users will find it easier and more convenient to view this information on Albridge or eMoney.
Your New Year Financial Checklist
As always, the new year brings in changes to contribution limits and other tax considerations. For 2024, some numbers to keep in mind include:
- Max Contribution for 401(k), 403(b), and 457 Plans: $23,000 (plus $7,500 if age 50 or older)
- Maximum Pre-Tax Contribution to DB Retirement Plans: $275,000.
- IRA and Roth IRA Contribution Limits: Increased from $6,500 to $7,000 (plus $1,000 if Age 50 or older)
- Income Limit for full Roth contributions increases to $230,000 (married filing jointly) and $141,000 (single)
- The annual gift tax exclusion increases from $17,000 to $18,000.
- Estate Tax Exclusion Amount: $13.61M (dropping to $5.49M after 2025, adjusted for inflation)
In addition to a review of investment allocations and cash flow planning, the start of the year is perhaps the best time to check up on big picture items and strategies to see if any adjustments are necessary as you head into tax season. Some things to consider include:
Estate Planning
Has it been more than five years since you last visited your estate plan? Any new children, grandchildren, or other changes that might necessitate an update to your will or to your investment account beneficiary designations? If you are potentially at risk of exceeding the estate tax exclusion amount during your lifetime, are you taking steps to move assets out of the estate prior to the end of 2025 when the threshold will be significantly reduced?
Tax Planning
Have you spoken with your accountant and financial advisor to look for ways to reduce the taxes you are paying? One of the most commonly overlooked opportunities for those over age 70 ½ is the ability to make qualified charitable distributions from your IRA. If you take the standard deduction, are over age 70 ½, and donate to charity from an bank account or an investment account other than an IRA, you are probably missing tax savings. If you donate over $10,000 per year to charity, have you investigated creating a Foundation or contributing to a Donor Advised Fund?
Roth Conversions
With the pending increase in tax rates after 2025, the next two years provide an attractive window to convert Traditional IRA assets into Roth IRA assets for many investors approaching or already in retirement. Have you had a discussion with your advisor to see if you could benefit from potential future tax savings from conversions? We’ll have a separate article on this in a future newsletter this year.
Idle Cash
We have mentioned elsewhere in this newsletter, but it is worth repeating: If you have excess savings sitting in a checking or saving account earning less than 1%, you should investigate options for earning a better rate. Competitive banks offer at least 4% in high yield savings accounts and 5% on CDs. Money market funds with next day availability currently also pay more than 5% interest. Take advantage of the current high rates and put your excess savings to work for you. Remember, if you’re earning 1% on your money while inflation persists at 2% or higher, your return as a measure of buying power or you real return is actually a negative number.
Advanced Planning
If you are meeting with your advisor regularly, they are already likely addressing any big planning items that might be coming up, such as retirement, the sale of a business, or streamlining estate and gifting plans. If there are things on your mind that you want to discuss, never feel like you need to wait until the next scheduled appointment to talk.
As we’ve discussed before, bond prices move inversely to interest rates. As interest rates climbed in 2022 and early 2023, bond prices fell, causing losses for bond investments. There is a silver lining to the pain that was endured, though, and that is (higher interest yields on bond/interest paid on bonds.) And since the Fed indicated that they were done with their interest rate increases, bond values have been on a tear, gaining over 8% in the last two months of 2023.
Even though this recent rally in bond prices has moved yields a bit lower, we still feel that yields on bonds are very attractive going into the new year, with nearly all parts of the fixed income market currently yielding above 5%, a threshold not previously seen in the past decade. For the most conservative investors, this manifested by transferring otherwise idle money from savings and checking accounts into CDs and Money Markets. For those purchasing CDs near the peak, they were able to lock in rates over 5.50% while the most competitive money markets are still paying over 5% interest.
Turning away from domestic markets, international stocks also had a good year. While growth, particularly in Europe, was lower than in the US, the significantly lower equity valuations allowed non-US stock markets to have a good year. During 2022, as interest rates increased, foreign money flowed into the US to take advantage of high yields offered on low-risk investments like short term government bills. This inflow caused a strengthening in the US Dollar versus other currencies – usually a headwind for foreign exporting companies, and particularly a risk for emerging market companies and governments who often prefer to borrow in US dollars instead of their local currencies. That trend softened and reversed into 2023, as other countries raised their own interest rates and it appeared that rates in the US were approaching their peak, resulting in a weakening dollar since early November: good for US companies that export their products, like auto manufacturers, but also bad for US consumers buying foreign products.
If this weakening dollar continues in 2024, which is expected if the Fed does, in fact, begin cutting interest rates, that would benefit international stocks, whose return is a combination of the return of the underlying foreign stocks and also any change in the currency exchange rate. This means if you own a European stock which increases by 5% in value, while the Euro also increases 5% versus the US Dollar, your return, in US dollars, is 10%. This, combined with attractive valuations in international markets near the bottom of their 25-year ranges, makes us continue to like including a portion of international stocks in diversified portfolios.
2024: Threading the Needle
The Federal Reserve had a tough task in 2023. They have limited tools to achieve their mandated goal of 2% inflation, with the primary one used during recent decades being the ability to increase interest rates, causing the economy to cool down, thus lowering aggregate demand and inflation in the process. The concern is that when they increase rates, they often overshoot, and in trying to control inflation and mildly slow down untampered economic growth they end up causing a full blown recession which runs opposite of their other mandated goal of maximum employment in the economy. To the surprise of many, it seems that the Fed has managed to get it right and avoid that hard landing recession. The question then becomes, where does that leave us now?
Following a strong 2023, US equity valuations sit at high, but not absurd, levels. That puts US equity markets in a good position of being able to continue to grow -provided that no unexpected challenges manifest themselves- but also vulnerable to quickly give up their recent gains in the face of any threats to the optimistic soft-landing scenario we currently find ourselves in. This risk is heightened because the past few years have demonstrated that the world seems really good at throwing unexpected challenges at us. Between pandemics, wars, and government shutdowns, as one person told me at a recent holiday party, paraphrasing a popular Netflix show, “In the past few years, I’ve lived through a whole dark age and three supposed ‘End of Days’, so I’m going into 2024 with my eyes wide open.”
When I think about potential black swan events that could derail the stock market in 2024, there are four that come to mind. First, a major escalation in global conflicts. The most obvious sources of an escalation would be in the Middle East, namely Iran directly joining the conflict, or a further deterioration of events in Ukraine, and if the Russian conflict should expand and threaten or engage NATO members. Far less likely, but far more potentially destabilizing would be if China, judging the US sufficiently distracted on other fronts, decides to move to materially compromise the sovereignty of Taiwan.
Second, bond defaults. Corporate issuers of debt, having loaded up when rates were low, have so far not felt the pain of higher rates in the same way that new homebuyers looking at 8% mortgage rates have. Their assumption is that by the time that their debt matures, interest rates will have come back down, and companies will be able to refinance the debt at lower rates. According to Moodys, there is $1.87 trillion of non-investment-grade high yield debt due to mature between 2024 and 2028. Most of those companies were able to borrow below 5% when their current debt was issued and would be looking at paying above 10% if they had to refinance today. If rates do not come down, expect investors to start becoming increasingly concerned about this looming maturity cliff of debt. This is one of the reasons we have adjusted our allocations away from high yield bonds, and instead focusing on investment grade companies, who are better positioned to absorb any increased interest costs and, in general, have lower levels of debt relative to their cash flow.
Third, it is an election year. All signs point to the likelihood that the 2024 election will be even more ugly than 2020. Sidestepping discussions on any individual candidates, as polling throughout the year suggests winners and losers, the policy positions of the leading candidates could drive markets higher or lower. While the headlines will follow the Presidential campaigns, I believe Congressional candidates and their policies are likely to have a bigger impact on markets. While few people are talking about it yet, most of the tax provisions passed in 2017 expire at the end of 2025, meaning any new tax laws or extensions will be debated by the incoming Congress.
Fourth, a return of inflation. While all signs point to inflation being on the retreat, with job growth and wage increases still elevated, inflation could tick back up, jeopardizing the Fed’s plan to cut rates.
While valuations overall for the US stock market may be high, drilling down deeper shows a familiar divergence: very high valuations in some parts of the market, specifically growth companies, and other parts of the market looking closer to historical average valuations. While the full year returns look great for large cap growth, when we scrutinize the “two years” of before and after the end of October, we see that while Growth beat Value and Large Cap beat Small Cap through the first ten months of the year, this was reversed in the last two months, with Small Cap beating Large Cap and Value beating Growth.
In a base case of smooth sailing and no expected bumps, Growth is likely to have another good 2024. Despite this, we think it makes sense to lean more towards Value. While the upside return of Growth stocks is higher than Value, given the already lofty valuations, there is also significantly more downside should we hit any rough patches and we do not feel that the increased potential for upside justifies the greater downside risk.
We find international stocks continue to be attractively valued, and their high dividend yields combined with an expectation of a weakening dollar, make it particularly attractive to be invested in International Value. While geopolitical tensions remain elevated, we feel this is mostly priced in, other than the aforementioned major escalation events. On the other hand, if there were miraculously and unexpectedly, the advent of a peace in Ukraine and the Middle East, we would anticipate significant upside in International Stocks, particularly in Germany.
The asset class we feel the most confidence in for 2024 is fixed income. Being able to earn above 5% in a “risk-free” investment, such as CDs or Treasury Bills, is a luxury that conservative investors have not had since before the 2008 financial crisis, with other conservative sectors of the fixed income market offering higher yields than that. While these rates may be short lived if rates do come down as expected, taking advantage of them while they last is a straightforward and prudent decision. We have met with countless clients over the past year with high allocations of cash in checking or savings accounts earning less than 1% and moving from a guaranteed rate of 0.01% to a guaranteed rate of 5.25% is the lowest hanging fruit you can find. We anticipate these rates will drop over the next 12 months, meaning CD investors can expect lower renewal rates as their current CDs mature. For income investors who have been enjoying these rates, it is worth considering moving into longer duration parts of the fixed income market, such as investment grade 2-5 year maturing bonds.
Markets have priced in three interest rate cuts during 2024. We think that is overly optimistic and higher rates might hang around longer than that.
