Mark on the Markets
December 2023

Santa’s Cash – The Santa Rally

"If the Santa Claus should fail to call, bears may come to Broad & Wall.” Yale Kirsch

There’s a secret! It’s where Santa gets money from to buy gifts every Christmas. This is not a joke (well, sort of…). The cash is out there. Where? It’s in the stock market.

The Santa Clause Rally is an occurrence where US markets sometimes climb higher in the last week of December, and the rally lasts till the first two trading sessions of the new year. Market analyst and author, Yale Hirsh, first mentioned the notion of a Santa Claus rally in his book, "The Stock Trader's Almanac", back in 1972.

According to Facet, the US markets have seen a Santa Clause rally 34 times in the last 45 years. While we are not predicting that the markets will go higher (no one can predict the future), we do think this is an interesting phenomenon.

What Causes the Santa Clause Rally

Actually, no clear causes exist; the reasons are unknown. The reasons have been debated for many years, and several possible rationales have been proposed as to why the market has a positive bias during these trading days around Christmas. Here are a few:

• Holiday Cheer – People are typically upbeat during the Christmas season, and this adds to market optimism.
• Bonus Money – Workers with end of the year bonuses place some of this money in their investment accounts – IRA, 401k’s, and personal investment accounts.
• Institutional Investors are Out – Sophisticated investors and those that handle institutional money typically take time off around Christmas, leading to a lower-volume market driven by retail investors who can drive the market higher.

While the Santa Clause Rally is a fun and interesting concept to talk about, we don’t get carried away with this and other short-term trends. As history has proven, anything can happen. Our investment strategy is one that considers your entire financial situation for the long term, looking to help you avoid costly investment mistakes, and implementing a plan that helps you achieve optimal investment outcomes.

A Dose of Humility for Wall Street

Wall Street firms strive to hire the best and brightest. But the best and brightest don’t have a clear read on the future.

Consistently pinpointing where the stock market will land in 12 months is almost impossible. Look no further than the 2023 consensus forecast among analysts. According to Bloomberg, forecasters, on average, expected the S&P 500 Index would register a decline of about 2% this year, the first projected decline of the 21st century.

It’s unusual for analysts to project a market decline. For starters, markets tend to rise over time. Moreover, analysts rarely predict market declines due to an inherent bias since they work for firms that sell stocks.

A Wide Margin of Error

According to Bloomberg and Macrotrends, strategists, when trying to forecast the S&P 500, have missed their target by a wide margin in 12 of the last 13 years. The median Wall Street forecast between 2000-2020 missed the mark by an average of 12.9 percentage points a year (CNBC/NYT).

Over the longer term, stocks have a strong track record, but the long-term upward march isn’t a straight line. We expect downturns. Since 1999, the S&P 500 Index (excluding re-invested dividends) has finished lower seven times, according to data from Macrotrends.

Weakness is Usually Short-lived

“Usually, recessions sneak up on us. CEOs never talk about recessions,” economist Mark Zandi of Moody’s Analytics said in late 2022. “Now it seems CEOs are falling over themselves to say we’re falling into a recession.… Every person on T.V. says recession. Every economist says recession. I’ve never seen anything like it,” he added.

Market weakness was predicated on a 2023 recession. Without a recession, a stiff headwind to stocks never materialized. The sharpest rise in interest rates in decades has yet to put the brakes on the consumer.

Many people were able to secure low-interest rates before the Federal Reserve started taking measures to curb inflation. While estimates vary, some still have funds from the stimulus payments they received in 2020 and 2021. Even soaring prices for fun, or “funflation” as The Wall Street Journal calls it, didn’t dampen cash outlays for many.

Put another way, changing consumer behavior and government cash made a mockery of forecasting models.

If models aren’t updated to account for new variables and shifts in behavior, forecasters, who are already at a disadvantage, come under even greater pressure. In other words, complex data in, garbage out.

Barring an unforeseen collapse in the final three weeks of the year, the absence of a recession, fewer rate hikes this year, the general belief the Fed’s rate-hike cycle may be over, and an AI-related surge in big tech stocks fueled an impressive gain in the S&P 500 Index.

Investor’s Corner

Strategists should not be completely ignored. They bring unique insights and observations to our attention. We are better informed because of their hard work. They really are brilliant individuals. But they grapple with the unknown, which can wreak havoc with a forecast.

However, the unknown encourages us to get comfortable with risk. It allows us to become better and more disciplined investors. And disciplined investing means avoiding shortcuts, such as market timing.

Month to Date & Year to Date Market Returns 

Performance of Asset Classes Through November - A look at how stocks, bonds, and more have fared year-to-date through November.

The S&P 500 broke the uptrend line in mid-October, and I was watching to see if this would lead to a further breakdown. My concerns, as stated above, were abated as the market seemed to be primarily reacting to geopolitical events, and not responding to deeper systemic issues. What appeared to be, and has now been confirmed, is a market whipsaw. Whipsaws are when the market, or a security's price, changes trend and moves quickly in one direction (in this case down) but then quickly pivots with a sharp reversal (in this case back up). As of this past Friday, November 3, the S&P 500 was again above the trend line closing at 4,358. 

Source: The Capital Spectator

Mark on the Charts

Last month the S&P 500 quickly raced back up to the levels we hit earlier this year in July. Now we’re approaching that area - 4,600. This may be, for at least a short while, a resistance level. A resistance level is where the probabilities favor a pause in the prevailing trend of the market. I show this in the chart below with the horizontal red line right around 4,600. The higher and longer horizontal red line is the mark where the market hit a high at the end of 2021 (just over 4,800).

The Value Line Geometric Index is also showing a rebound from last month. The move has not been as strong as the move in the S&P 500 and is still trading in a range-bound zone. However, the potential for an upside move to the earlier levels is beginning to look more promising. (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 Planning Tidbits

Christmas is a time of great joy and celebration. With holiday parties, shopping, and family events filling up the calendar, it may also be a busy time for many. Whether you’ve already finished your Christmas shopping or are just getting started, we encourage you to set aside some time for year-end financial planning.

It will help put an exclamation point on 2023 and prepare you for the new year.

Here’s where it gets a little bit tricky for a few folks. Last year, Congress passed legislation that raised the age you must take an RMD from 72 to 73 years old starting in 2023. Therefore, if you turned 72 in 2022, you fall under the old rules described above. If you turn 72 in 2023, you won’t have to take an RMD until the 2024 tax year (when you turn 73), which will be due by April 1, 2025.

If you hold multiple IRAs, you must calculate the RMD separately for each IRA you own but can withdraw the total amount from one or more of the IRAs. Similarly, a 403b owner must calculate the RMD separately for each 403b contract that you own but can take the total amount from one or more of the 403b contracts.

However, RMDs required from other types of retirement plans, such as 401k and 457b plans, must be taken separately from each account.

Most 401k plans allow you to postpone RMDs from your current employer’s plan until no later than April 1 of the year after you stop working. If you have a 401(k) from your prior employer, you may be subject to an RMD. Check with your plan administrator in both instances.

According to the IRS, penalties for failing to take an RMD “may be waived if the account owner establishes that the shortfall in distributions was due to reasonable error and that reasonable steps are being taken to remedy the shortfall.” However, it’s best to avoid the hassle and stick with the deadlines.

2. Cut your tax bill

Most likely, you have gains and losses in taxable accounts, and now might be a good time to match any losses against gains. This is what is called “harvesting losses.” This is something we actively look at and manage in all accounts.

For example. You have a $30,000 short-term loss (a stock held less than one year), and a $25,000 gain in another stock held less than a year. If you sell both positions and net the gain against the loss, you will have a short-term loss of $5,000.

You may apply the $5,000 loss to reduce your ordinary income up to $3,000 in tax year 2023 and carry over the remaining loss of $2,000 in tax year 2024. While we caution against using tax policy to drive a buy/sell decision, in this example, we booked a profit in one security and used the loss on another security to avoid paying any taxes on the capital gain.

Just be aware of the wash-sale rule that will typically disallow the loss for tax purposes if you sell a security at a loss and buy the same or a "substantially identical" security within 30 days before or after the sale.

3. Harvest your gains

Again, this is something we do during the year with all the accounts that we manage. As with tax loss harvesting, you wouldn’t do this in an IRA account (because they are not subject to taxes as long as assets remain in the account), but you may be able to harvest a long-term gain and avoid any federal income tax in a taxable account.

For 2023, individuals with taxable income below $44,625 ($89,250 for married couples) pay no federal tax on a long-term capital gain. So, if you are single with a taxable income of $34,625, you could strategically sell a stock with a long-term gain of up to $10,000 and pay no federal income tax.

If you repurchased that investment, you have reset the cost basis to a higher level, which potentially reduces your future tax burden. Just be careful! If you must sell at a profit in less than one year, you’ll have taxable short-term gain. In some states, you have raised your taxable income and you may owe state income tax on the profit from the sale. You may also boost your modified adjusted gross income, which can impact certain tax deductions or credits.

And don’t forget to consider any mutual fund distributions, which could significantly affect your taxable income.

4. Invest in your retirement

The employee 401k contribution limit for 2023 is $22,500, and $66,000 for combined employee and employer contributions.  If you’re age 50 or older, you’re eligible for an additional $7,500 in catch-up contributions, raising your employee contribution limit to $30,000. The IRA contribution limit for 2023 is $6,500 for those under age 50 and $7,500 for those age 50 or older.

You can contribute to your IRA for the year 2023 until the tax filing deadline in April.

5. Benefiting others through charitable giving

The deadline is December 31st to give a gift and itemize on your 2023 tax return.

Consider a donor-advised fund or DAF. It is a charitable investment account for the purpose of supporting charities. Your donation to the fund grows tax-free and is eligible for a tax deduction. At the time you choose, you may donate to your favorite charity.

Should you convert your traditional IRA into a Roth IRA?

If you’re like many Americans, you’ve saved the majority of your retirement assets in tax-deferred vehicles like 401(k)s and IRAs. But what happens if tax rates go up? How much of your hard-earned money will you really get to keep? Unless you can accurately predict what your tax rate will be when you retire and begin taking those dollars out, you have no idea how much of that money will go to taxes.

Does it ever make sense to pay taxes on retirement savings sooner rather than later? When it comes to a Roth individual retirement account (IRA), the answer could be yes. A Roth IRA is funded with after-tax dollars, and qualified withdrawals are entirely tax-free after the five-year rule. Additionally, Roth IRAs aren't subject to required minimum distributions (RMDs), which may give you greater control over your taxable income in retirement.

It may be a great idea if you don’t believe you will need the converted Roth funds for at least five years (if withdrawals are taken within five years of the conversion or before age 59½ you’ll be penalized), you live in a state that doesn’t have an income tax but may retire to a state that has a state income tax, and you believe you will be in the same or a higher tax bracket during retirement. However, you will owe federal and state income taxes on the dollar amount you convert.

Is It Right for You?

We look at Roth IRA Conversions in a person-by-person review. While a Roth IRA Conversion may be a great option for some investors, others may not see a tax or investment benefit from the conversion.

Here are a few of the changes:

2024 Federal Income Tax Brackets and Rates for Single Filers, Married Couples Filing Jointly, and Heads of Households

Source: Internal Revenue Service, "Revenue Procedure 2023-34."

Standard Deduction

The standard deduction is a specific dollar amount that reduces the amount of income on which you're taxed. In 2024 the standard deduction will increase by $750 for single filers and by $1,500 for joint filers. Seniors over age 65 may claim an additional standard deduction of $1,950 for single filers and $1,550 for joint filers.

The personal exemption for 2024 remains at $0 (recall, the personal exemption was eliminated as part of the Tax Cuts and Jobs Act of 2017).

2024 Standard Deduction

Source: Internal Revenue Service, "Revenue Procedure 2023-34."

Alternative Minimum Tax

The alternative minimum tax (AMT) recalculates income tax after adding certain tax-exempt items (like municipal bond interest) back into adjusted gross income. AMT is a separate tax system that requires some taxpayers, especially higher earners, to calculate their tax liability twice, and pay whichever amount is highest. This is a separate set of rules to calculate taxable income after allowed deductions.

2024 Alternative Minimum Tax (AMT) Exemptions

Source: Internal Revenue Service, "Revenue Procedure 2023-34."

2024 Alternative Minimum Tax (AMT) Exemption Phaseout Thresholds

Source: Internal Revenue Service, "Revenue Procedure 2023-34."

Child Tax Credit

The Child Tax Credit is a benefit claimed by filing Form 1040 and attaching Schedule 8812 to the return. To qualify for the credit, the taxpayer's dependent must generally be under the age of 17 and must have a Social Security number.

The maximum child tax credit is $2,000 per qualifying child and is not adjusted for inflation. The refundable portion of the child tax credit is adjusted for inflation and will increase from $1,600 to $1,700 for 2024.

Long-Term Capital Gains Rates and Brackets

A capital gains tax is levied on the profit made from selling an asset. Capital gains are classified as either long- or short-term and are taxed accordingly. Long-term capital gains are derived from assets that are held for more than one year before they are sold. Short-term capital gains are taxed as ordinary income.

2024 Long-Term Capital Gains Tax Brackets

Source: Internal Revenue Service, "Revenue Procedure 2023-34."

Annual Exclusion for Gifts

In 2024, the first $18,000 of gifts to any person are excluded from tax, up from $17,000 in 2023. The exclusion is increased to $185,000 from $175,000 for gifts to spouses who are US citizens.

Tax Code Complexity

We all believe that taxes should be simple, promote economic prosperity, and be equitable to all citizens. But, as we know, this is not always the case. People who agree on some portions of the tax code sometimes disagree on other areas. As a result, tax policy usually represents a balance among competing goals, and simplicity often loses out to other priorities. Conflicting objectives appear to be especially relevant in the current tax code, where the aspirations to reduce tax encumbrances for certain groups have added significant complexity to others.

Tax policy can be complex. Thankfully our resources for understanding them aren’t.

How We Help You…

Each year we publish our Key Financial Data. This offers fingertip access to all of the numbers affecting taxes, health savings, Medicare, retirement, college planning, and more. It's an easy, convenient resource that you can post to your bulletin board and refer to whenever you want to check an assumption or marshal your facts.

We will be sending our “2024 Key Financial Data” to all clients next month.

A Christ-Centered Christmas

Christmas is looked on in our culture as the season of giving. And that’s’ true. And as we give, it’s hard not to think about everything we have and all the stuff we have accumulated over the years. We’ve been blessed beyond measure. But Christmas isn’t about stuff; it’s about celebrating the birth of our Savior – and that needs to be the message we focus on this holiday season.

So, I’ve made a list, checked it twice, and noted few things we can do to make this Christmas an intentional, Christ-focused, celebration.

5 Ideas to Keep Christ in Christmas:

#1 - The Advent Wreath

Our church starts each Sunday service in December with the lighting of the advent wreath. For years we have taken this tradition home with us. Each night before dinner, we light the advent wreath and say a few words of blessings over our meal and in thanksgiving for what we have. While we always pray before each meal, our Advent meal prayer is a beautiful and simple way to come together and begin our family meal with a focus on preparing for Christmas and remembering the birth of Jesus.

#2 – The Nativity Set

When my wife and I married many years ago, she had a small plastic nativity set that was part of her family. Each year we would place it in a prominent place in our home. Our children would play with the pieces, and we would talk with them about what we were preparing for. Years later, my wife found a larger (and more beautiful) nativity set that we now place in our home. It’s a reminder of our roll in the world and how we are part of the Christ’s birth.

#3 – Keep Gift-Giving Simple

Gift-giving was a big deal in our home. I felt the pressure to give generous gifts, often spending way too much money. Now that our children are older, we have changed how we give gifts. We draw names for a gift exchange with our children and limit what we buy for friends. We have been intentional about trying to pull the focus of back onto Christ and celebrating who He is.

#4 - Clearing the Calendar

We have always believed that Christmas should be a time to slow down and prepare for the coming of Christ. This year, and in years past, we choose just a few things to attend, things that are intentional and bring friends and family together. And our focus is spending quality time with each other as a family.

#5 - Reading the Story of Christ’s Birth on Christmas Eve

On Christmas eve, my wife and I would sit our children down, open our Bibles to Luke 1 & 2, and read the story of the birth of Jesus. Our children’s eyes would be open wide with wonder. While we have older children now, our intention is to continue reading this amazing story on Christmas Eve. It keeps us thinking about how truly amazing it is that God came into the world as a helpless baby.

“For today in the city of David a savior has been born for you who is Messiah and Lord. And this will be a sign for you: you will find an infant wrapped in swaddling clothes and lying in a manger.” And suddenly there was a multitude of the heavenly host with the angel, praising God and saying: “Glory to God in the highest and on earth peace to those on whom his favor rests." Luke 2:11

Wishing you a Merry Christmas and a blessed New Year!