Mark on the Markets
April 2024
Market Moves: Q1 2024
The broader stock market logged solid gains in the first quarter of this year as enthusiasm about artificial intelligence, signs of a soft landing, and dovish talk from the Fed gave investors reason to be more optimistic.
For the quarter, the Dow Jones Industrial Average rose 5.6%, the Standard & Poor’s 500 Index gained 10.2%, and the Nasdaq Composite picked up 9.1%.
January Quandary
Gains were modest in January as better-than-expected economic data (retail sales, gross domestic product report) and upbeat 4th quarter corporate earnings reports helped offset mixed inflation data. Rates were left unchanged in the January meeting of the Federal Reserve. Concerns about inflation were seen in more neutral language used by the Fed. This led to many market participants believing that the Fed was still concerned about inflation and might be slow to adjust rates. That news came after the Fed said to expect three rate changes in 2024. The report took the wind out of stocks’ sails, curtailing gains for January.
February Momentum
In February, stocks momentum began to gather a firmer footing, and excitement surrounding new technologies, including generative artificial intelligence (AI), overshadowed any possible change in Fed policy. By mid-month, many companies were touting AI as a driver for future gains in company profits.
March Onward in March
The news turned positive, for the most part, with economic data. Strong but moderating GDP growth, steady unemployment, and decelerating inflation all propelled stocks higher. All three major market averages set record highs during the month.
Adding more fuel to the optimism, although the Federal Reserve left rates unchanged at the March open committee meeting, they again signaled an inclination to cut interest rates three times this year, each time by a quarter of a percentage point. Markets rallied to new highs following the news, which led to the S&P having its best first-quarter performance in five years.
Sector Stats
You've probably heard of stock market sectors. Stock sectors are categories of companies that operate certain types of businesses, for example, the financial sector, which includes banks, or the technology sector, which includes things like semiconductors companies. We use them to monitor certain areas of the market and to compare one sector with the other. Eleven sectors make up the stock market.
All but one sector posted gains in the first quarter. And the rally was mostly broad-based, a sign of a healthy rising market. The top gainer was the energy sector, up 12.6%, followed by the Communications Services up 12.4%, Financials up 12.0%, and Industrials up 10.5%. The laggard was Real Estate, down 1.3% and the only sector in the red. Given that most sectors showed positive performance for the quarter, it demonstrates how market leadership broadened beyond only tech-related names.
What We’re Watching in April
The Federal Reserve: The Fed will meet again on April 30th for a two-day meeting. Given that the Fed is inflation-data-driven, it will be looking carefully at the Consumer Price Index (CPI), a measure of the price of consumer goods and services that covers over 200 categories. The CPI is a lagging indicator, and the last reading was for data recorded in January. The January number was a 3.1% increase, and more than two-thirds of that number came from a category called “shelter”, which includes rent prices. The Fed will also be looking at other areas to see what is, or is not, driving inflation. From there, it will evaluate whether to adjust short-term interest rates at some point this year.
In Summary
Investors went into the first quarter optimistic that a soft landing was in store for the economy, recession would be avoided, inflation would continue to improve, and the Fed would start cutting interest rates in March. The economy has avoided recession and it’s been stronger than expected. However, inflation has again turned sticky. That likely means Fed rate cuts will be pushed out until later this year.
Month-to-Date & Year-to-Date Market Returns
| Key Index Returns | |
|---|---|
Index |
YTD % |
Dow Jones Industrial Average |
5.6 |
NASDAQ Composite |
9.1 |
S&P 500 Index |
10.1 |
Russell 2000 Index |
1.4 |
MSCI World ex-USA* |
3.2 |
MSCI Emerging Markets* |
5.6 |
Bloomberg Barclays U.S. Aggregate Bond TR USD |
-1.3 |
YTD returns: December 29, 2023–March 29, 2024
**in U.S. dollars
Mark on the Charts
The S&P 500 continues to move higher, and that’s positive. The strength of this move is impressive and has surprised some economists. I’m hearing a lot of chatter on the sidelines with naysayers opining that this move up is not sustainable. Well friends, no one can predict the future, but pullbacks can be expected in an uptrend. The bottom line – it’s a bull market, so don’t short a bull market.
The Value Line Geometric Index has finally broken above the long-term resistance (horizontal red line) going back to mid-2022. Now the question is whether this is a confirmed breakout. Given the market strength shown in broad market indexes such as this, the setup is looking positive going forward. Again, market pullbacks should be expected when markets show strong moves. The Geometric Index represents a broad segment of the market. This move is exactly what we want to see - strengthening in the entire market. (The Value Line Geometric Index is a broad index of around 1,700 stocks, where each stock is given an equal weight of the index.)
Timely Tax Tidbits
Taxpayers should be alert to what is possibly coming down the road. The Biden Administration is generating many tax proposals; however, they will likely be DOA in Congress for this election year. Expect a fight over the fate of President Donald Trump’s 2017 tax reform laws going forward. Many of the reforms in place will expire at the end of 2025. These issues will get even hotter depending on which administration is in charge in 2025.
In 2017 President Donald Trump ushered in the Tax Cuts and Jobs Act (TCJA). It was one of the largest tax cuts in American history, cutting over $5.5 trillion in projected taxes over ten years, and the largest overhaul since 1986 when President Ronald Regan gave Americans tax relief with the Tax Reform Act. Changes in the TCJA were made to deductions, depreciation, expenses, credits, and many other tax items. Great for the economy, but unfortunately, overspending in Congress has caused our national debt to balloon to now over $34 trillion, and rapidly approaching $35 trillion.
New Tax Proposals - Thorny Ideas
While we don’t want (or have time) to focus on the legions of thorny proposals, one that has caught our attention is a change to a decedent’s unrealized gains.
Currently, heirs get a step-up on the basis of inherited assets equal to the fair market value. President Biden wants to end the step-up in basis for wealthy individuals. It would essentially treat death as a sale of the decedent’s capital assets at fair market value. Capital gains would be reported on the decedent’s final income tax return. No step-up in basis, and therefore, an immediate tax to the family.
But It's Really a Spending Problem
Can you expect big changes in 2026? Likely. Most of the tax provisions in the TCJA were temporary – they expire at the end of 2025. Only Congress can extend the tax cuts. What can you do? Certainly, pray for leadership that focuses on prudent fiscal management, and let your vote dictate electing men and women with high moral values. As a Boy Scout in my youth, I still adopt the motto, “Be Prepared”.
Tax Planning
In the past year, we began offering tax planning for our clients. Now that tax filings are mostly completed, we will be requesting a copy of your 2024 1040 tax return. We review these filings to see if we can find tax savings or efficiencies in your distribution or financial strategies.
It’s a value offering that we provide to you!
Will Social Security Be There for You?
One recent study showed that 44% of Americans think Social Security will run out of money before they retire. That’s likely one reason why almost that same percentage of people between the ages of 62 and 65 file early with reduced benefits, before their full benefit at age 67. And only 10% wait until age 70, when they can receive 124% of their benefits.
Will Social Security go bankrupt? The simple answer, likely not. However, the system does have serious challenges. This has led to a lot of misunderstandings and irrational fears about the solvency of the Social Security system. Let's look now at what the Social Security trustees say. Every year, they publish a comprehensive report showing the long-range outlook for Social Security.
A Pay-As-You-Go System
Social Security was designed as a pay-as-you-go system. Payroll taxes from current workers go into a trust fund and are immediately paid out to current retirees. Because the baby boom generation was in their peak earning years, the trust fund accumulated more than needed for current benefits. As of now, the trust fund holds about $2.8 trillion, which is invested in special-issue Treasury securities. As more of the workforce starts retiring, these trust fund assets will gradually be drawn down.
Over the next 75 years, costs will begin to exceed income. There are enough reserves that the system will be able to pay 100% of promised benefits by 2034. After that, if nothing is done to reform the system, income will be sufficient to cover just 80% of promised benefits.
Reform is Needed
Although the Social Security system is not in imminent danger, most people agree that the earlier reforms are instituted, the less painful they will be for everyone. Here are just a few of the ideas that have been proposed:
- Increase the maximum earnings subject to Social Security tax. Currently, only $168,600 in earnings is subject to the 6.2% tax paid by you and your employer.
- Raise the normal retirement age as life expectancies increase. Currently, the full retirement age is 67 for people born in 1960 or later.
- Change the benefit formula so that future increases would happen at a slower pace. This would affect the benefits of future retirees.
- Changing the formula for cost-of-living adjustments. This could give retirees smaller benefit increases going forward, although the changes are expected to be minimal.
When to Claim Your Social Security Benefit
Clients who retire early often want to know whether they should start Social Security early. Should they draw Social Security now and meet spending needs from IRAs or other personal sources? Or delay Social Security and meet all their spending needs from personal sources until Social Security kicks in at age 70?
If you apply for Social Security after full retirement age (67), you will earn credits of 8% for each year you delay. If your full retirement age is 66 and you apply at 67, your benefit will be 108% of your Primary Insurance Amount (PIA). At 68 it will be 116%, and so on. After age 70 you can't earn any more delayed credits, so it doesn't pay to wait until after age 70 to apply for Social Security.
It may seem counterintuitive, but by delaying the start of Social Security, at some point, the benefit will be high enough that you will end up drawing less from personal resources than if you started benefits early. Through many calculations, we have found that the breakeven age is around 78.
Another question we’re asked by clients is, “What if I invest my benefits rather than spend them? Doesn't it make sense to take early benefits and get those checks invested?”
When looking at a Reinvest Breakeven Calculator that analyzes this question, we can generate an approximate breakeven age. Using a modest 4% return, the number is usually around 83. If we were to raise the return assumption the breakeven age would go up. But then you always must consider the investment risk profile compared to the relatively risk-free Social Security formula
Social Security Planning
When do I begin my benefits? It’s one of the common questions clients ask us.
Once clients learn a little bit about Social Security and retirement income planning, the floodgates open with more questions. When should I apply? What if I want to keep working? What if I've already applied and now regret the decision? How much will my benefit be? How can I coordinate spousal benefits? What's the best long-term strategy for my situation? What do I do next?
In the past year, we began offering social security planning for our clients - a suite of Social Security calculators that can help you decide when to claim your Security benefits.
It’s another value offering that we provide to you!
A Cornerstone of Our Investment Strategy:
Why We Are Committed to Biblically Responsible Investing
Biblically Responsible Investing (BRI) is an investment approach that integrates faith-based values with financial decision-making. Rooted in biblical principles, BRI seeks to align investments with moral and ethical standards while pursuing financial returns. BRI is a cornerstone that offers our clients the potential to generate a positive impact beyond financial gains.
Let’s explore the reasons…
Ethical Alignment
One of the primary advantages of BRI is its alignment with personal or organizational values derived from biblical teachings. By adhering to principles of honesty, integrity, and justice, BRI ensures that investments support companies and industries that operate in accordance with these values. Investors can avoid involvement in activities deemed unethical, such as promoting abortion, pornography, anti-family values, or the exploitation of labor, thus maintaining a clear conscience regarding their financial decisions.
Positive Impact
BRI enables investors to contribute to positive social and environmental outcomes. By directing capital towards companies that prioritize sustainability, corporate responsibility, and community welfare, investors can promote practices that benefit society at large. This approach encourages companies to support a healthy nuclear family, adopt environmentally friendly policies, support fair labor practices, and contribute to philanthropic causes, thereby fostering a more sustainable and equitable world.
Risk Management
BRI incorporates a risk management aspect by avoiding investments in companies with questionable ethical practices or those involved in controversial industries. By excluding such companies from the investment portfolio, BRI reduces exposure to reputational, regulatory, and litigation risks. This approach may lead to more stable and resilient investment portfolios, as companies adhering to ethical standards are less likely to face public backlash or legal challenges that could adversely affect their financial performance.
Long-Term Performance
Contrary to the misconception that ethical investing compromises financial returns, studies have shown that BRI can deliver competitive or even superior long-term performance. Companies committed to ethical business practices often exhibit qualities such as strong governance, innovation, and resilience, which are conducive to sustainable growth and profitability. Additionally, BRI may attract a growing segment of investors who prioritize ethical considerations, thereby increasing demand for investments aligned with biblical values and potentially enhancing their value over time.
Spiritual Fulfillment
For many investors, BRI provides a means to integrate their faith with their financial stewardship. By investing in accordance with biblical principles, individuals can experience a sense of spiritual fulfillment, knowing that their financial resources are being utilized in ways that honor God and contribute to His purposes on earth. This alignment between faith and finance fosters a deeper sense of purpose and meaning in investment decisions, transcending mere monetary considerations.
In Summary
At Financial Cornerstones, we understand that Biblically Responsible Investing offers a holistic approach to wealth management, integrating financial objectives with moral and ethical values derived from biblical teachings. By aligning investments with principles of integrity, compassion, and stewardship, BRI enables investors to make a positive impact on society while pursuing competitive financial returns. Beyond financial gains, BRI provides spiritual fulfillment and a sense of purpose, empowering individuals to use their resources in ways that honor God and advance His kingdom. As awareness of faith-based investing continues to grow, BRI stands poised to play an increasingly significant role in shaping the future of finance, promoting sustainability, social responsibility, and ethical integrity in the global economy.
We’re committed to helping you experience financial contentment and peace through a plan that’s right for you, and by aligning your investment with your Christian values. It’s about understanding how you want to live and what you want to do. Whether you want to spend time with family or volunteer to make the world a better place, we help you prepare to spend your time, talents, and resources on what matters most to you.
It’s one more value offering that we provide to you!
Implementing Biblically-Responsible Investing begins just like any other investment management process – We’re looking for great investments.
“Moreover, God is able to make every grace abundant for you, so that in all things, always having all you need, you may have an abundance for every good work." 2 Corinthians 9:8
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