Mark on the Markets
December 2024

Our Heartfelt Thanks to You!

As this year comes to a close, and the holiday season approaches, we find ourselves reflecting on the joyous moments we have shared throughout the year. Christmas is a time of love, generosity, and faith, and we want to take this opportunity to extend our warmest wishes to you and your loved ones.

The spirit of Christmas is a celebration of the birth of Jesus Christ, a symbol of hope, peace, and the everlasting love of God. It is a season that encourages us to embrace the values of compassion, kindness, and goodwill toward all. In this spirit, we want to express our sincere appreciation for the trust and confidence you have placed in us.

As we look forward to the new year, let us carry the message of Christmas in our hearts – a message of peace, joy, and hope. May the coming year bring you success, prosperity, and continued happiness. We are grateful for the opportunities we have had to work with you and look forward to the continued growth of our partnership.

Thank you for allowing us to be an integral part of your life!

“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!

Market Melt-Up

Elections and politics are difficult topics. Give 10 people one political topic, and you will likely get at least 15 opinions…or more.

There were many reasons you chose one candidate over the other. In our space together, our goal is simply to review the result through the very narrow prism of the market, i.e., the collective view of investors.

Last month, the Dow and the S&P 500 Index recorded their best gains of the year. The Dow and S&P 500 ended the month at a new high, while the small-cap Russell 2000 Index eclipsed its prior November 2021 high late last month. Why the market melt-up?

Trump Returns to Power: Economic and Policy Shifts

Post-Election Rally

The market surge following the election echoes the early days of Trump’s first administration, marked by deregulation, tax cuts, and a pro-business environment. However, by 2018, the focus shifted toward trade policies and tariffs, introducing volatility to the economic landscape.

Investors are optimistic about the preservation of the 21% corporate tax rate under a second Trump administration, a rate that has significantly benefited them. Trump’s campaign promises to reduce the corporate rate further to 15% for companies producing domestically could spur intense lobbying and legislative debates over the definition of “Made in the USA.”

The proposals by the previous administration of tax hikes and taxes on unrealized capital gains is now a bad afterthought. The fate of the Tax Cuts and Jobs Act (TCJA) is now central. Many corporate provisions are permanent, but key individual benefits are set to expire in 2025. Republicans, armed with a narrow congressional majority, are expected to push for extensions and additional tax cuts, including eliminating taxes on tips, overtime, and Social Security benefits. However, such changes could lead to a more intricate tax code, potentially adding inflationary pressures.

Deregulation and Energy Policies

Trump’s pledge to eliminate 10 regulations for every new one could provide a boost to equities. In energy, expect efforts to expand oil and natural gas drilling, alongside new pipeline projects.

Tariff Proposals and Trade Policy

Trump has proposed steep tariffs, including 60% on Chinese imports, 25–100% on Mexican goods, and 10–20% on other imports. Given the scale of trade with China ($536 billion in 2022) and Mexico ($455 billion), such measures could significantly impact supply chains and consumer prices. While a rising dollar might soften some pricing pressures, the magnitude of these tariffs would likely outpace currency adjustments.

Tariff Authority and Challenges

The Constitution grants Congress authority over taxes and tariffs, though presidents have historically leveraged delegated powers to impose targeted levies. Sweeping tariffs, as proposed by Trump, may face legal and legislative hurdles. Experts like Alan Wolff, former WTO deputy director-general, question whether such measures could be enacted without broader congressional approval.

Outlook

President-elect Donald Trump’s return will likely bring a mix of investor-friendly tax cuts, deregulation, and debatable trade policies. These prospects have stirred both optimism and apprehension in global financial markets. As Trump’s administration embarks on a policy agenda, investors and analysts will continue to evaluate the implications for the economy and equity markets. While equity markets celebrated Trump’s re-election, other indicators suggest a more nuanced picture. Some initiatives may bolster certain sectors, others could introduce inflationary pressures and legal disputes, leaving the broader economic outlook uncertain.

How Does a 21% Corporate Rate Benefit Investors?

To paraphrase Warren Buffett: Prior to 2018, a corporate tax rate of 35% meant that 65 cents of every dollar of profit accrued to investors, while the remaining 35 cents went to the federal government. With the tax rate reduction to 21%, 79 cents now accrues to investors. In other words, the lower tax rate has increased earnings, which is a significant factor for stock prices.

Yet might negotiations alter the TCJA? Will Republican deficit hawks force more incremental changes to the tax code? It’s unclear at this early stage.

While his tax proposals are viewed favorably by most investors, proposed tariffs are being met with skepticism.

Tariffs create uncertainty, as his promise to enact sweeping levies runs the risk of raising prices at home and inviting offended nations to retaliate against U.S. exporters.

As December begins, investors are focusing on the pro-business agenda, while potential tariffs are currently taking a back seat amid bullish sentiment that has pushed the major indexes to dizzying heights.

Today, stocks are seemingly priced for perfection. Investors who have maintained a diversified exposure to equities have benefited. Still, any unexpected disappointment could create conditions for a market pullback.

Bond Yields Up, Fed Fund Rate Down

The Federal Reserve has reduced interest rates by 75 basis points (0.75%), resulting in a drop in short-term Treasury bill rates, while yields on longer-term bonds have increased. Typically, longer-term bonds yield more than shorter-term bonds because investors expect to be compensated for the additional risk of locking their money away for longer. That has not been the case for some time now. However, things have recently changed.

Market Sentiment on Rates

As Table 1 below illustrates, declining short-term rates alongside rising yields on longer-term bonds suggest some normalization may be underway. This adjustment reflects a balancing act between immediate Fed actions and market expectations for sustained economic strength.

Mark on the Charts

Boom! The S&P 500 chart shows a choppy but steady trend higher. While the election has certainly been a boost for November, the direction of governmental policy, inflation, and the job market will matter more over time.

The Value Line Geometric Index has finally and decisively broken 600 and looks to continue migrating higher. We always look to the broader market to see participation in all sectors as a positive sign for further advancements. (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.)

How the $36 Trillion National Debt
Impacts Investors

The national debt is quickly approaching $36 trillion, according to the U.S. Treasury, a fact that has fueled concerns among investors and economists. This means that the federal debt has nearly quadrupled since before the 2008 global financial crisis and has grown every year since 2001. This adds to the recurring fiscal debates over budget deficits, the debt ceiling, government shutdowns, stimulus bills, and more.

With the election now behind us, attention has shifted to the next administration’s cabinet nominations and policy proposals. The large and ever-growing national debt, and the complex ways it impacts the economy and markets, will only grow in importance. How can investors put government spending in perspective and stay focused on what drives markets in the long run?

The national debt has grown rapidly since 2008:

When it comes to challenging issues like the national debt, it's important to distinguish between what matters as citizens, voters and taxpayers, and what should matter as investors. As individuals, many rightly have strong personal and political views on government spending and taxation, and what it may mean for the country over the coming generations. This will likely hit headlines again when the debt ceiling, which is the maximum amount of debt the federal government is allowed to borrow, becomes a key issue when it’s reinstated in January 2025.

These concerns should be distinguished from whether the federal debt directly or indirectly impacts the economy and markets. Without diminishing the importance of the national debt, we need to keep in mind that markets have generated strong returns over the past two economic cycles. Investors should avoid overreacting with their portfolios at the expense of their long-term financial plans.

The size of the national debt relative to the size of the economy provides a clearer picture than the dollar amount of debt alone. There is no getting around the fact that the national debt has grown significantly, but the economy has also doubled since 2008. Specifically, the national debt now represents 120% of GDP. However, this includes debt the government owes to itself, i.e., Treasuries held by government agencies. Excluding these, the government debt is 95% of GDP.

Large budget deficits each year have driven up the national debt:

How Has the Federal Debt Increased So Quickly? 

In two words, budget deficits. Budget deficits occur when the government spends more than it collects in taxes, which adds to the total debt. Taxes here include individual and corporate taxes, as well as social insurance taxes, such as those that fund Social Security, excise taxes, and others. The government also generates revenue from sources such as tariffs, but these are small by comparison, making up 2% or less of total government revenue each year.

Even though tax revenues tend to increase as the economy grows (even without raising tax rates), they have been outpaced by government spending over time. These expenditures have grown across what are known as "mandatory" programs such as Social Security and Medicare as well as so-called "discretionary" items such as defense and education.

The shortfall is funded by government borrowing, i.e., by issuing Treasury securities. Investors, institutions, and other countries buy these Treasuries and, in effect, fund the federal government.

The current deficit of around 6% of GDP is by no means small, but there have been many periods across history - primarily during economic downturns and wars - when the government has been forced to spend at these levels. History shows that, over time, deficits improve as the economy stabilizes, even if they don't turn into surpluses.

The debt burden will only grow as interest payments rise:

The Unfortunate Reality

Deficit spending does not seem to be going away, with neither major party focusing on the issue. The last balanced budgets occurred during the Clinton years and the Nixon administration before that. The accompanying chart shows that left unchecked, government projections suggest that interest payments on the debt alone could rise to $1.71 trillion in ten years.

About two-thirds of the national debt is held either by the government itself or by U.S. citizens. Other countries hold the rest with China owning about 2.2% of the U.S. government debt, although this proportion has declined. Many investors worry that growing debt levels means that Treasuries could be less attractive in the future. In the extreme, this could hamper the government’s ability to roll its debt, possibly leading to skyrocketing interest rates, or weakening the dollar’s standing as the world’s reserve currency. Ultimately, many worry that the U.S. could lose its position in the global economy.

While this is possible, it does not seem likely just yet, even with increased enthusiasm for dollar alternatives such as cryptocurrencies and gold. In fact, this has been a concern among economists for many decades. And yet, when the global economy faces distress, investors and governments turn to the U.S. as a safe haven. In 2011, for instance, when Standard & Poor's downgraded the U.S. debt during the fiscal cliff standoff, investors didn't sell their Treasuries - they rushed to buy more. Counterintuitively, this is because U.S. debt securities are still the standard for stable, risk-free assets in the world, despite these challenges.

Finally, and perhaps most importantly, markets have done well regardless of the exact level of government debt and taxes over the past century. Ironically, the best time to invest over the past two decades has been when the deficit has been the worst. These periods represent times of economic crisis when the government is engaging in emergency spending, which tends to coincide with the worst points of the market. And while this isn't exactly a robust investment strategy, it does underscore the importance of not overreacting to fiscal policy in one's portfolio.

The Bottom Line? 

The federal debt is a complex and controversial topic. As with many heated issues, it's important for investors to separate their personal concerns and not react with their hard-earned savings or investments.

Timely Tax Tidbits

The end of the year is upon us. With a little bit of planning, strategies are available to reduce your income taxes, maximize your charitable giving, and position yourself favorably as the new year begins.

An 8-Step Year-End Checklist

1. Harvesting Losses

Even in the best of times, not every investment may perform as expected. Tax-loss harvesting refers to selling a security in a taxable brokerage account that is worth less than its purchase price.

The loss can be used to offset a gain in a taxable account or reduce your income by up to $3,000. If greater than $3,000, losses can be carried forward in future years to offset ordinary income or capital gains. It’s important, however, to be aware of a couple of things.

First, a stock or security held for one year or less is taxed as ordinary income, i.e. your marginal tax rate. The tax on a long-term capital gain (held longer than one year) receives favorable tax treatment and is taxed at the long-term capital gains rate, from 0% to 23.8% (including the 3.8% net investment income tax).

Segregate long-term and short-term gains/losses separately and apply the appropriate tax rate. If you have taken or will take gains this year, you may consider netting gains out with securities being held at a loss.

Second, be aware of the wash sale rule. If you sell a security at a loss and buy the same or a “substantially identical” security within 30 calendar days before or after the sale, you won't be able to take a loss for that security on your current-year tax return.

2. Harvesting Gains

In 2024, single filers with a taxable income of $47,025 or less, joint filers with a taxable income of $94,050 or less, and heads of households with a taxable income of $63,000 or less pay no federal tax on qualified long-term capital gains, i.e., a rate of 0%.

In this case, taxable income is defined as the income subject to federal income tax. It is income after all deductions, whether itemized or taken via the standard deduction.

Here lies a lesser known but profitable strategy. If you choose to realize a long-term capital gain for an asset that has appreciated, you sell the asset that you have held for more than a year, record the gain, and immediately repurchase it without incurring federal income taxes.

By entering into such a transaction, you raise the cost basis of that investment without paying federal income taxes.

Just be careful. A higher adjusted gross income could be subject to state taxes and may raise your premium if you obtain health insurance through the marketplace.

Combining this strategy with a Roth conversion could also push you into a higher tax bracket, defeating any strategy to harvest capital gains without paying taxes.

3. If Required, Take Your RMD

What is an RMD? An RMD is the minimum required distribution you must withdraw from select retirement accounts (such as traditional IRAs) each year. There is no such requirement for a Roth IRA. Miss an RMD and you’ll be penalized by the IRS.

When are withdrawals required? If you were born between 1951 and 1959, you must take your RMD starting at age 73. If you were born after 1959, your first RMD begins at age 75.

Why the discrepancy? Congress enacted changes to our retirement laws in 2019 (The Secure Act) and again in 2022 (Secure 2.0). If you have already begun your RMD, you must continue, even if you are under the prescribed ages.

You may delay your first RMD until April, but you must take two RMDs the following year. The first must be taken by April 1, and the second must be taken by December 31.

Please be aware that the delay may push you into a higher tax bracket or trigger the additional Income-Related Monthly Adjustment Amount (IRMAA), which is a surcharge you pay on top of your Medicare Part B and Part D premiums if you exceed the annual income threshold.

The surcharge on Medicare Part B and Medicare Part D applies only to Medicare beneficiaries with a modified adjusted gross income above $103,000 ($106,000 in 2025) for an individual return or $206,000 ($212,000 in 2025) for a joint return.

If you are enrolled in your current employer's qualified retirement plan and don’t own more than 5% of the business, you may be able to postpone an RMD from that account until April 1 of the year following your retirement. Be sure to check with your plan administrator to confirm.

4. Lower Your RMD with a QCD

A QCD is a Qualified Charitable Distribution that allows you to support your favorite qualified charity while helping you to reduce taxes from an RMD.

If you are 70½ or older, you can make a tax-free donation directly to a qualified charity from your traditional IRA, which allows you to fulfill your RMD by a direct transfer of up to $105,000 to charity.

In the past, a QCD was limited to $100,000 per year. Under Secure 2.0, the amount is now indexed to inflation, with a limit of $105,000 in 2024.

5. Does a Roth Conversion Make Sense?

You are allowed to convert a traditional IRA into a Roth IRA. A Roth conversion will raise your taxes this year. However, once in a Roth IRA, qualified withdrawals will not be subject to federal income taxes.

Should I convert?

Broadly speaking, what will the tax rate be on the conversion, and what will your tax rate be when you withdraw?

For example, if the tax rate on the conversion is 25%, while the expected tax rate on withdrawals is higher, it may be best to bite the tax bullet today and convert. If the withdrawal rate is lower, a Roth conversion could disadvantage you.

Additionally, moving to a different state may result in a higher or lower state tax rate.

It is best to pay taxes on the conversion from money outside your IRA to maximize the conversion and future growth potential. The process may create complexities, but we’re available to help you evaluate your options.

6. An HSA Triple Play

Maximize your Health Savings Account (HSA) contribution. These accounts offer you a triple advantage: no federal taxes on your contributions, no federal taxes on earnings, and no taxes on withdrawals if the money is used for qualified medical expenses.

After age 65, withdrawals can be used for any expense but may be subject to income tax.

In 2024, you may contribute up to $4,150 if you are covered by a high-deductible health plan for yourself or $8,300 if you have coverage for your family. At age 55, individuals can contribute an additional $1,000.

7. Consider Funding a 529 Education Savings Account

For tax purposes, a 529 plan works much like a Roth IRA. Contributions are made with after-tax dollars, but growth and withdrawals are tax-free so long as withdrawals are used to pay for qualified education expenses.

8. Donate Assets that have Appreciated

Selling an asset and donating the proceeds to a qualified charity can trigger capital gains taxes.

Instead, if you itemize deductions and donate an asset held longer than one year to a qualified charity, you may be able to deduct the fair market value of the asset without paying capital gains on the sale, subject to a 30% adjusted gross income limitation.

Why Faith-Based Investing

Seven out of ten Americans say their personal values influence their investment decisions.1 In recent years, values-based investing has grown in popularity as more individuals seek strategies and products that align with their beliefs. As Christians, we are no exception. Our faith shapes every aspect of our lives, including how we manage our finances.

That’s why Financial Cornerstones offers faith-based investing strategies designed to help you align your investments with your Christian values.

What is faith-based investing?

Faith-based investing involves using God-given resources in the capital markets in a way that honors Him and supports His Kingdom. For our clients, this means directing investment dollars toward products, services, and industries that uphold biblical principles while aiming for competitive financial returns.

At Financial Cornerstones, we are guided by faith-based values that form the foundation of all our investment strategies.

Our Distinctive Approach to Investing is Built Upon Four Cornerstones:

  Stewardship

Recognizing that all resources belong to God, Christians are called to manage wealth responsibly and in alignment with His purposes. This principle emphasizes intentionality in investments, ensuring they honor God and contribute to societal good.

  Ethical Integrity

Investments should align with Christian morals and values. This often means avoiding industries or practices that contradict biblical principles, such as those involving the destruction of life, human trafficking, or immorality (e.g., abortion, pornography, or promotion of anti-family values)

  Generosity

A focus on using financial resources to serve others and support Kingdom-focused causes, such as missions, charitable organizations, and community development. This cornerstone emphasizes sharing blessings and fostering economic empowerment.

  Long-term Perspective

Viewing investments with eternity in mind, prioritizing sustainability and the broader impact on people and the planet. This perspective encourages patience, avoiding greed, and trusting in God's provision over time.

By incorporating these Cornerstones, Christians can invest in ways that reflect their faith and commitment to serving God's purposes.

Go, Make a Difference - With Your Investments!

So, now that we’ve defined faith-based investing, it’s important for investors to know how they can participate and align their own faith and finances.

Since our inception, we have offered a suite of portfolios across most major asset classes. Financial Cornerstones helps Christians intentionally connect their faith with their investment decisions to make a lasting impact in the world for the Kingdom of God. We seek to multiply Kingdom impact through Christian investment solutions by which investors can remain true to their Christian values, leverage investment returns for greater ministry work and benefit from and support Kingdom impact investments.

Interested in learning more about aligning your faith with your finances through faith-based investing? Explore our advisory services through Financial Cornerstones to see how we can help you steward your resources and make an impact on the Kingdom.

¹Charles Schwab & Co., Inc., Modern Wealth Survey conducted by Logica Research, February 2022. Survey consisted of 1,000 Americans, ages 21-75

Faith-Focused Investing

We’re committed to helping you experience financial contentment and peace through a plan that’s right for you. Part of planning, however, is 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.

Implementing faith-based investing begins just like any other investment management process – we’re looking for great investments!

Contact Us for a Free Consultation