Mark on the Markets
November 2024

Two Years & Still Running…
Keep the Safety Helmets On!

Last month, the bull market turned two years old. Since bottoming on October 12, 2022, the S&P 500 Index has advanced 60% through the last day of October, according to S&P 500 data from the St. Louis Federal Reserve.

The S&P 500 Index is a market-capitalization-weighted index. Simply put, the larger companies in the index have a greater influence than the smaller ones.

Why is this important? On average, the larger companies have outperformed the smaller ones. According to S&P Global, the top ten largest firms in the S&P 500 have nearly doubled since the S&P 500’s Oct 2022 low.

If each stock in the S&P 500 was equally weighted, this measure would have risen a solid 37% from its bottom on October 12, 2022, through October 31, 2024.

What accounts for the discrepancy? In part, the AI revolution has helped several large tech firms significantly outperform the broader market.

Let’s review one more index. The granddaddy of market averages, the Dow Jones Industrial Average, which is comprised of 30 companies, touched its most recent bottom on September 30, 2022. It’s up an impressive 45% through the end of October, per St. Louis Federal Reserve data.

But market strength extends beyond technology. The surprisingly resilient U.S. economy has helped fuel profit growth, which has helped drive equities higher.

While AI and a resilient U.S. economy have been significant factors, let’s consider one more. The rate of inflation has slowed, taking pressure off the Federal Reserve, which hiked interest rates sharply in 2022.

The Fed has begun to slowly take its foot off the monetary brakes, with a much-anticipated rate cut near the end of September. It was the first reduction in interest rates by the Fed since early 2020.

Most investors believe the Fed will reduce interest rates through the remainder of the year, once in November and once in December.

But the pace next year turns murky.

Will the inflation rate continue to slow and gradually return to the Fed’s target of 2%? Will Fed policy help guide the economy to what’s called an economic soft landing? A soft landing is loosely defined as a slowdown in economic growth that leads to lower inflation without a recession.

Or, will economic growth remain strong, boosting corporate profits while slowing or ending rate cuts?

Or—let’s consider one more scenario—will the economy fall into a recession?

Economic forecasters have traditionally struggled to pinpoint the onset of a profit-killing recession. Recessions tend to sneak up on economists. That said, you may recall in 2022, recession forecasts were widespread. Nonetheless, many of the brightest economic minds fell flat with their predictions.

Given today’s bull market, paraphrasing what we said last month bears repeating.

Robust market performance sometimes leads to a euphoria that can encourage too much risk-taking. We caution against that.

Leaning heavily into stocks may underpin returns, but unexpected volatility from any number of sources can spark shorter-term declines that extend beyond one's comfort level.

A balanced approach based on your individual financial goals and tolerance for risk helps tap into the long-term potential stocks have historically offered while helping to diminish some of the downside risks that can materialize when markets unexpectedly decline.

Mark on the Charts

As we anticipated, The S&P 500 experienced volatility at the end of October with the approach of the U.S. presidential election. This election matters for many reasons, however, the long-term impact on the stock market is often overestimated. Politics often has a small impact on the economy. Policy out of Washington, along with technological advancements, falling inflation, and a strong job market will matter more over time.

The Value Line Geometric Index is still hovering above the 600 area, however like the S&P 500, volatility has returned at the end of October. For now, it’s a wait and see to determine if strength will remain. (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.)

Why Interest Rates Are Defying Expectations Amid Fed Cuts, the Election, and More

An important yet counterintuitive issue for investors is that long-term interest rates have risen in recent weeks despite the Fed’s latest cuts. The 10-year U.S. Treasury yield, for instance, has jumped from a low of 3.62% to as high as 4.38%. This is due to strong economic data and inflation expectations around the election, both of which push longer-term rates higher. At the same time, rates have swung in either direction for much of the past few years, often without notice. Looking ahead, how might uncertainty around interest rates impact investors?

Interest rates affect many parts of our lives, both directly and indirectly. Households are directly impacted when the cost of borrowing increases, which affects mortgages, credit cards, auto loans, and more. Many consumers experienced whiplash when borrowing costs jumped suddenly in 2022, after growing accustomed to ultra-low rates over the prior decade. On the flip side, rising interest rates can result in higher yields on bonds, savings accounts, certificates of deposit, money market funds, and more.

When it comes to the broader economy and financial markets, the effects can be more subtle. Higher rates increase the “cost of capital” for businesses, which can slow hiring, impede expansion plans, and reduce profitability. For the stock market, rising rates can theoretically reduce the value of future cash flows, reducing stock prices today. Higher rates can also make existing bonds less valuable, since newly issued bonds will offer higher yields. Thus, for investors, interest rates can have wide-ranging effects on portfolios.

What’s driving rates today? Unlike short-term rates which are influenced primarily by Federal Reserve policy, long-term interest rates are sensitive to economic trends. Fortunately, recent economic figures suggest the economy continues to grow at a steady pace. The latest GDP report showed that the economy grew 2.8% in the third quarter. While this was slightly below expectations, consumer spending remained exceptionally strong. Some economists worry this could reverse as consumers spend their excess savings and debt levels rise.

Recent jobs data have been more mixed. The jobs report immediately following the Fed’s September rate cut showed that 254,000 jobs were created that month, a blowout figure. This is one reason rates began to rise since a strong job market means the Fed may not need to cut rates as quickly to support the economy. In other words, the Fed could be achieving a so-called “soft landing” even with higher rates.

However, the latest jobs numbers for October show that only 12,000 jobs were added last month – the lowest monthly figure since 2020. There were also significant downward revisions to prior months, lowering the September figure to 223,000. The Bureau of Labor Statistics cited strikes among manufacturing workers and the recent hurricanes in Florida as likely dampeners in the report, although the exact impact is difficult to determine from the survey data. For this reason, the market’s initial reaction was to look beyond this single data point.

The jobs numbers matter because they are of growing importance for Fed decision making. As inflation rates continue to fall back to more normal levels, hiring activity is what will affect households and everyday individuals.

Despite the recent poor data, the reality is that the job market has been exceptionally strong. Not only has the economy added 2.2 million new jobs over the past year, but the unemployment rate is only 4.1%. So, even if the economy does slow from here, it would be from an unusually healthy level.

Thus, rising long-term rates are not unusual if they are due to a stronger economy. In fact, it can be normal for short-term rates to fall as the Fed cuts rates even as long-term rates climb higher. In technical terms, this results in a "steepening yield curve," which typically occurs in the early stages of economic cycles. While it's unclear if this will continue this time, investors should not overreact to these patterns.

Interest rate uncertainty has affected bond prices with the Bloomberg U.S. Aggregate index gaining only 1.4% year-to-date. Returns across sectors this year range from 7.5% for high yield bonds to only 0.8% for municipal bonds. This is because the prices of existing bonds fall as yields rise since newly issued bonds with higher yields become more attractive to investors.

However, these swings have taken place multiple times this year as markets have adjusted to different economic trends. Additionally, many of these bond sectors are offering yields well above their long-term averages. The yields on Treasury bonds are 4.3%, well above the 2.0% average since 2009, and investment grade corporate bonds are yielding 5.2%.

For all investors, bonds still play an important role in not only diversifying portfolios during periods of uncertainty, but in providing income. Returns by different types of bonds can vary greatly from year to year. While it’s not clear exactly where rates may go next, investors should maintain a longer-term perspective. It’s important to diversify properly across a variety of fixed income sectors to help weather market volatility.

The bottom Line

Recent economic data, including a disappointing jobs report, may influence the Fed’s rate cut decisions. We recommend that investors should avoid overreacting to a single data point and should instead stay diversified and maintain a longer-term perspective.

Timely Tax Tidbits

Want to Live Abroad?

Deciding to leave the US and live abroad requires much planning. One consideration is what the tax implications will be for anyone leaving the United States, regardless of the motivation.

If you decide to leave, and you retain U.S. citizenship, you’ll still be subject to U.S. taxes, as the U.S. taxes citizens on worldwide income, regardless of residency. Expats can mitigate some of the impact of double taxation with foreign tax credits and other benefits, like the foreign earned income and housing exclusions.

Trump has suggested he would end double taxation for Americans abroad, though details remain unclear. A lobbying group for U.S. expats has long advocated for a tax system that taxes only U.S. income for those living abroad, aligning with Trump’s proposal. However, expats must still follow rules for reporting foreign accounts. Those who renounce U.S. citizenship might face an exit tax if their average annual tax exceeds $201,000 over the past five years or if their net worth is $2 million or more. This exit tax treats their assets as sold at fair market value before renunciation, with gains above an $866,000 exemption subject to tax.

Tax Terms: What is Modified Adjusted Gross Income (MAGI) and Why is It Important

Modified Adjusted Gross Income (MAGI) is your Adjusted Gross Income (AGI) with certain deductions or exclusions added back. It's used by the IRS to determine eligibility for various tax benefits, credits, and deductions, as well as for income limits on tax-advantaged accounts like IRAs.

Here's how it generally works:

1. Start with Adjusted Gross Income (AGI): Your AGI is your total income (wages, investment income, etc.) minus specific deductions, such as student loan interest and retirement contributions.
   
   
2. Add Back Certain Deductions or Exclusions: The IRS requires certain items to be added back to your AGI to calculate MAGI. These can include:
   
   
• Deductions for student loan interest, IRA contributions, and tuition fees.
• Foreign earned income exclusion.
• Half of self-employment tax.
• Rental losses or passive income/losses (in certain cases).

The exact additions vary depending on the specific purpose for which MAGI is being calculated. For instance, the MAGI calculation for determining Roth IRA eligibility is slightly different from that used for determining eligibility for the Premium Tax Credit for health insurance.

MAGI is important because many tax-related limits, such as income thresholds for Roth IRAs or eligibility for tax credits, are based on MAGI rather than AGI.

Other Timely Tax Tidbits…

Social Security

Social Security beneficiaries will receive a 2.5% increase in their benefits for 2025, along with higher earnings test limits. For those reaching full retirement age in 2025, benefits will not be affected if they earn $62,160 or less before reaching that milestone. Individuals below full retirement age can earn up to $23,400 before experiencing any reduction in benefits. Once full retirement age is reached, there is no cap on earnings.

Payroll Taxes

The Social Security wage base will increase to $176,100 in 2025, up by $7,500. The Social Security tax rate remains at 6.2% for both employers and employees. Additionally, both will continue to pay the 1.45% Medicare tax on all earnings, with no cap. Self-employed individuals will pay a 12.4% Social Security tax on self-employment income up to the wage base limit and a 2.9% Medicare tax on all self-employment income, also with no cap. Individuals will also face a 0.9% Medicare surtax on wages and self-employment income exceeding $250,000 for joint filers and $200,000 for others. This is called the “Widow’s Penalty”. As women live longer and couples accumulate more wealth, this issue becomes increasingly costly.

Tax Advantage When Giving to a Qualified Charity

If you have a traditional IRA and are 70½ or older, you may want to consider a Qualified Charitable Distribution (QCD). Tax rules permit you to transfer up to $105,000 from your IRA directly to a charity each year. These QCDs can fulfill part or all your required minimum distribution. Unlike other IRA withdrawals, QCDs are not taxable and do not count toward your adjusted gross income.

Natural Disaster Relief Aid

Looking to support victims of hurricanes (like Helene and Milton) or other natural disasters while earning a tax deduction? Donate only to IRS-approved Section 501(c)(3) tax-exempt organizations. Be cautious of fraudulent charities and solicitations as scammers aim to steal your money and access your personal and financial information.

Be sure to keep documentation for your deductions and follow proper recordkeeping guidelines. Save canceled checks, credit card receipts, and acknowledgment letters from recipients. For donations of $250 or more, obtain a contemporaneous written acknowledgment from the recipient. Attach Form 8283 for noncash charitable contributions valued over $500.

Taking Action to Make a Difference

A letter was recently sent to Fortune 1,000 companies by 49 members of Congress, urging these businesses to continue supporting politically driven DEI programs. A similar letter was also sent by various activist groups to the same companies. We believe these 49 members of Congress and activist groups are pushing an ideology that is counterproductive to the rights and freedoms of others.

In response, we partnered with one of our preferred vendors, Inspire Funds, in signing a letter advocating for companies to respect the fundamental freedoms of their customers, vendors, and employees. Working alongside Alliance Defending Freedom, this letter calls on companies to resist pressure from lawmakers and activists pushing for these legally questionable initiatives, which can penalize employees based on factors like race, gender, or the exercise of their First Amendment rights.

1. DEI Programs Criticism: The letter argues that DEI (Diversity, Equity, and Inclusion) programs are counterproductive, labeling employees based on group identities and dividing them rather than uniting them.
   
   
2. Academic Findings: Recent academic studies, including those from Econ Journal Watch and Harvard Law School Forum, question the financial benefits of DEI programs, suggesting that they do not significantly improve company performance.
   
   
3. Employee and Public Opinion: Surveys and polls, such as those from Alliance Defending Freedom and Gallup, indicate that a significant portion of employees believe DEI divides colleagues, and race relations in America are at a low point.
   
   
4. Legal Risks: Companies face legal risks due to recent Supreme Court decisions and lawsuits related to DEI initiatives, as highlighted by EEOC Commissioner Andrea Lucas. Some companies are moving away from DEI initiatives, emphasizing inclusivity without political bias, and others are removing DEI goals from their reports due to public and customer dissatisfaction.

Why We Believe Signing This Letter was Important

A letter can make a difference. Writing has served as a driving force for societal change, fueling peaceful movements and touching the hearts and minds of people to respect the First Amendment rights of our citizens. We pray that this letter, and our participation in the letter, will be an inspiration for change, empowering these business leaders to reject initiatives that divide workers and undermine the fabric of a healthy workplace.

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!

I hope you’ve found this review to be educational and helpful. Our goal is to be a guide to you as you run the race and keep the faith. 

"Let your light so shine before men, that they may see your good works and give glory to your Father who is in heaven." Matthew 5:16

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