Mark on the Markets
October 2024

Fed Cuts 0.50% !

Last month, the Federal Reserve announced its first rate cut since early 2020, lopping one half of one percent (0.50%) off the fed funds rate, bringing the key rate down to 4.75 – 5.00%.

The decision officially ends the most aggressive rate hike cycle in more than 40 years.

Some investors were concerned that a cut this aggressive might signal Fed officials are worried about the economy.

As we prepare for landing, key questions remain for market participants: how long and how fast will the descent be (pace of rate cuts), and how smooth will the landing be (recession or mild slowdown)?

The unemployment rate is up from its cyclical low, and job growth has slowed; however, most economic indicators suggest the economy continues to expand, and remarks by Fed Chief Powell soothed investors’ concerns.

For now, investors are taking Powell at his word that an economic soft landing is still in play.

So, why did the Fed decide on a more aggressive reduction rather than a more modest quarter of a percent? Typically, the Fed prefers more measured approaches when it enacts policy changes unless policymakers are reacting to unwanted shifts in economic activity, such as soaring inflation.

During his press conference, Powell emphasized that the “economy is in good shape.”

But he implied the larger rate cut is a pre-emptive move. It’s insurance against an economic slowdown.

“We're not waiting for (rising layoffs) because there is thinking that the time to support the labor market is when it's strong and not when we begin to see layoffs,” he said. In other words, it’s a balancing act. That’s how he and the Federal Reserve Board of Governors sees things. That’s their story, and there sticking to it!

If the Fed were to delay rate cuts or reduce rates too slowly, it risks throwing the economy into a recession. But if it reduces rates too quickly, it may re-heat the economy and stoke inflation.

Investor Reaction

Profit growth, moderating inflation, stable/falling interest rates, and modest economic growth have traditionally been strong tailwinds for equities.

During September, the Dow and the S&P 500 Index reached record highs. Although the Fed initially misjudged the emergence of inflation, it has regained some credibility as inflation has slowed without a recession.

What We’re Watching

While many of the market metrics look rosy now, we’re keeping our eye on the long ball. Measures of volatility are historically low, and Fed funds futures suggest steady cuts through 2025, ending between 3.00% and 3.25%. Should the Fed pursue an aggressive rate cutting cycle, we could be looking at lower equity prices later next year. We are also monitoring increases in consumer auto loan and credit card delinquencies, slowing retail sales, and price cuts from major retailers. These can be early indicators of the economy’s momentum. Higher financing costs slows consumption and investments, reducing demand for goods and services, and triggering rising unemployment. This can become a negative self-reinforcing dynamic, where weakened consumption leads to lower demand for labor, drives up unemployment further, leading to an eventual recession.

I am also very aware that the upcoming U.S. election could introduce volatility not fully reflected in market expectations.

Election Turbulence

We now enter the final quarter of 2024. We expect that the market will closely monitor the typical economic data and speeches from Federal Reserve governors, and especially, for any signs of a change in their thinking. There are two more Federal Reserve meetings scheduled for this year: November 6-7 and December 17-18, both happening after the election. These sessions could be pivotal in shaping future Fed guidance. What we’ll be looking for - the Fed’s approach to rate cuts. In addition, any comments from the Fed on inflation and economic growth. Fed jawboning will likely drive market sentiment.

This October, all eyes will also be on the U.S. presidential election. In an unprecedented twist to the election, on July 21, President Joe Biden announced that he would not seek a second term. This was a surprise for many, especially as it was less than four months before the election. History shows us, with few exceptions, that sitting presidents are almost always their party’s nominee for re-election. Since World War II, only Harry Truman and Lyndon Johnson have been exceptions.

A second surprise came when the Democratic Party quickly united behind Vice President Kamala Harris as the nominee. Despite serious doubts about her ability to win the presidency, perform the job well, or policy positions, fundraising surged. From Pop stars to Planned Parenthood, her support rolled in, and polls shifted significantly. This has now created an election too close to call.

Politics make for interesting, and often heated, conversation, especially when we are caught up in the emotions of the U.S. presidential race. We believe the moral direction of the United States should be the preeminent concern for all citizens. A recent PBS poll would agree with us – about 3 in 4 U.S. adults say the 2024 election will determine the fate of the U.S. democracy. Will the United States remain the nation where “In God We Trust” is our motto? Or will we decay into a nation of depravity? We should all be highly concerned by the weakening cultural and foundational morals of our country. The actual effect of a change in administration can impact the market in the short-term, and longer term, too.

But we are also highly focused on the macroeconomic outlook, with particular focus on economic data releases and Fed communications. Our long-term positioning will be dictated by this. The U.S. labor market is continuing to show signs of slowing. When we look at the three-month moving average of job growth, all indicators point to a weakening labor market. The Job Openings and Labor Turnover Survey (JOLTS), the quarterly Employment Cost Index, and a gloomy survey from the National Federation of Independent Business (NFIB) on small firms’ hiring intentions all point to this. Most concerning to us is the U.S. unemployment rate, which has not risen 0.80% from its lows.

Mark on the Charts

The S&P 500 continued to move higher in last month. Expect to see volatility return in October as we near the U.S. presidential election. We will reiterate what we said before: Investors across the globe will attempt to discern what the next leader of the free world will do. Will the U.S. embrace a policy of free-market economics, or will it drift into domestic socialism and international intervention? Voters will decide, and markets will respond.

The Value Line Geometric Index has now pushed and is above the 600 area. This is showing strength in the broader market and a good sign for the overall health in the market. With the upcoming presidential election, October may be volatile. (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

VS

U.S. Presidential Election Tuesday, November 5, 2024

Donald Trump vs. Kamala Harris 

Election Day is about a month away. And many of us still have questions on Donald Trump’s and Kamala Harris’s tax plans. 

Donald Trump’s Tax Plan vs. Kamala Harris’s Tax Plan

Kamala Harris’s tax plan has been vague, but recently a few details have been sketched out. Therefore, it would be best to looking at her record of favoring steeper tax hikes. In her 2020 campaign and as a senator from California, Harris proposed multiple changes to hiking the tax code. For this election, Harris copies much of Bidens 2025 budget, including higher taxes aimed at businesses and higher earners. She also looks to further expand the child tax credit and various other tax credits and incentives while exempting tips from income tax. Again, many of Harris’s tax policies remain unspecified, including how Harris might deal with next year’s expiration of the Tax Cuts and Jobs Act (TCJA).

Donald Trump has floated several tax policy ideas, some conflicting. One of the main plans if for seeking to extend expiring 2017 Tax Cuts and Jobs Act, commonly referred to in media as the Trump Tax Cuts, which were passed during Trumps term as president. Trump has also proposed further reducing the corporate income tax in some form, exempt tips and Social Security benefits from tax, impose a 10 percent or higher universal baseline tariff on all imports, and raise current tariffs on China to at least 60 percent. He has also discussed replacing the individual income tax with tariffs, and recently proposed uncapping the state and local tax (SALT) and exempting overtime pay from tax.

Let’s Talk About the SALT Deduction Cap

Currently, the SALT deduction allows taxpayers to subtract a portion of their state and local property taxes, income taxes, and/or sales taxes from their federal taxable income.  It’s been around for years, since 1913, almost as long as federal income taxes have been constitutional.

A taxpayer who itemizes on Schedule A can deduct state and local taxes that they pay, up to a $10,000 cap. After 2025, unless Congress acts, the 2017 Tax Cuts and Jobs Act (TCJA) will expire at the endo of 2025 and itemizers would again be able to fully write off state and local taxes, as they generally could prior to 2018.

Trump has said that he wants to eliminate the cap and recently declared on social media and at a rally to restore the SALT write-off, saying people in New York, New Jersey, Pennsylvania, and other high-tax states would save lots in taxes.

Harris… silent so far. However, we can expect massive pressure form Democrat legislators in states like New York and California to either let the SALT tax cap expire or repeal the SALT limit.

Like-Kind Exchanges of Real Estate – The 1031 Exchange

A 1031 exchange is a swap of one real estate investment property for another that allows the capital gains taxes to be deferred. The term gets its name from Section 1031 of the internal Revenue Code. A 1031 exchange can benefit the economy by allowing investors to defer capital gains taxes, which can lead to increased investment activity, having a compounding effect over time.

Donald Trump, as a former real estate developer, has historically been supportive of the provision. During his first term, Trump’s administration successfully defended 1031 exchanges from elimination.

Kamala Harris…position unknown. However, the Democrats see the 1031 exchange as a tax loophole for businesses and the wealthy. The deferral for like-kind real estate swaps could very well be on a cut list. Curbing the 1031 Exchange was included in the 2025 budget proposals for President Biden’s administration. The proposal would cap the amount of deferred gain each year at $500,000 for each taxpayer…$1 million for joint filers. Gains over the $500,000 and $1 million caps would then be fully and immediately taxed. Given that Harris has copied much of Bidens tax agenda, a similar position could be expected.

Capital Gains and Dividend Taxes

Kamala Harris: Increase the top tax rate on long-term capital gains to 28 percent for taxable income above $1 million. Increase the net investment income tax (NIIT) to reach 5 percent on income above $400,000

Donald Trump: No policies proposed.

Estate Taxes

Donald Trump: Make the expiring estate tax cuts from the 2017 Tax Cuts and Jobs Act permanent.

Kamala Harris: To be determined.

October is Cybersecurity
Awareness Month 

October is Cybersecurity Awareness Month. We want you to stay safe online.

Much of what we’ve discussed may sound like common sense, and it is. But in the moment that we least expect it, mistakes can occur.

It’s Saturday afternoon, and you are watching a movie at home or running errands, and your phone vibrates.

You take a peek and see a text from a phone number and area code you don’t recognize. “Hey Jackson, when are you coming to my house to fix my a/c? It’s hot in this place.”

Or the message may read, “Let’s get together tomorrow for a cup of coffee.”

There are no typos. It seems friendly, but you don’t know the person or simply assume the sender mistakenly entered your phone number.

The temptation may be to kindly inform the person that he/she has the wrong number. Or you sheepishly reply and ask if this is someone you know. Both responses seem harmless, right?

Wrong!

Losses Rise

Every day, the FBI’s Internet Crime Complaint Center (IC3) receives thousands of complaints reporting a wide array of scams, many of them targeting the elderly.

In 2023, the FBI’s Elder Fraud report stated that losses reported to the IC3 by those over the age of 60 topped $3.4 billion, an 11% increase in reported losses from 2022. The average dollar loss was $33,915.

There was also a 14% rise in complaints filed with the IC3 by elderly victims. But this is only the tip of the iceberg, as many simply are too embarrassed to report or don’t believe they will ever see their money again.

A Real-Life Example

According to consumer advice from the Federal Trade Commission (FTC), it’s not rude to ignore “Hi, how are you?” text messages from strangers.

Let me explain. In the past, it wasn’t uncommon to occasionally receive a call from someone who misdialed. A quick “You must have the wrong number,” followed by, “Oh, I’m sorry,” ended the call. The exchange lasted less than 30 seconds.

Today, a scammer is sending the message, hoping you’ll answer and take the bait.

According to the FTC, scammers will probably apologize and then engage you in friendly and playful banter to keep the conversation going because they want to gain your trust.

Once they have your trust, they’ll offer advice on investing in cryptocurrency or some other investment…for a fee. But it’s a scam. If you take the bait, it will turn into a costly lesson.

In other instances, scammers may send a photo of “themselves” from a unique location. Be careful. The photo contains malware.

Download the picture, and hackers can gain access to your phone, keystrokes (including passwords), financial information, and more.

Even if you quickly break off the conversation, scammers now know they have a live number and are likely to ramp up fraudulent and annoying attacks.

If you see such a message, it’s best not to open it. Just hit “block and report SPAM.”

Never call an unknown number back, even if it looks like a local or U.S. phone number. In what’s called the one-ring phone scam, fraudsters use international numbers that look like American numbers to trick you into returning the call. They’ll do their best to keep you on the line, leaving you with huge charges.

Nowadays, it may be best not to answer calls from numbers you don’t recognize. If it’s important, they will leave a voicemail.

Impersonation

Have you ever received a text that claims to be from Netflix or PayPal? Most of us have.

The message alleges something is wrong with the account, and you must click on a link to re-establish service. But do you notice the link is simply a long string of nonsensical characters? It’s a message designed to defraud you.

Messages claiming to be from FedEx or UPS inform you that a package is being held at a warehouse because they don’t have your address. Again, scammers want you to click on a nefarious link that will only lead to heartache.

Meanwhile, the grandparent scam tugs at your heartstrings, which is the scammer's goal. You may receive a phone call from a scammer posing as the victim’s grandchild, purportedly in jail. Money is needed immediately.

Even if scammers insist you keep it a secret, the FBI recommends that you first verify the story with a family member.

The Romance Scam

Scammers prey on those of any age, including the elderly. According to the FBI, a criminal uses a fake online identity to gain a victim’s affection and trust. The scammer then uses the illusion of a romantic relationship to manipulate and steal from the victim.

Scammers may discuss meeting in person, but that won’t happen. Eventually, when you are most vulnerable, they will ask for money. At its worst, victims have willingly given hundreds of thousands of dollars to these criminals.

The bottom line: Never send money to anyone you’ve communicated with online or by phone.

How to Recognize Phishing

According to the FTC, scammers use emails or text messages to steal your passwords, account numbers, and Social Security number. Scammers launch billions of phishing attacks every day—and they’re successful more often than you think.

Otherwise, they wouldn’t take the time if such activities weren’t profitable.

Despite the official appearance, here are signs that can help you spot fraudulent messages.

• The email has a generic greeting. It doesn’t address you by name.
• It’s from an unknown email address that doesn’t reflect the company’s name.
• The email says your account is on hold due to a billing problem.
• The email requires that you click on a link to update your payment details.

Be careful! With the advent of AI (artificial intelligence), emails may appear legit and devoid of typos and misspelled words, which are obvious signs of a scam.

If in doubt, call the company. But don’t use a number provided in the email. Be sure to find a statement or obtain the phone number directly from the company’s website.

Again, don’t use a number provided in the email!

Play Defense

Let’s explore several FTC recommendations that will help you avoid being victimized.

1. Protect your computer and phone using security software that automatically updates.
2. Protect your accounts using multi-factor authentication, which requires additional credentials to access your account. These can fall into three categories:
   • A passcode, a PIN, or the answer to a security question.
   • A one-time verification passcode you get by text, email, or from an authenticator app.
   • A scan of your fingerprint, your retina, or your face.
     
     
   • Multi-factor authentication makes it harder for scammers to log in to your accounts if they obtain your username and password.
   • If you receive a phone call from someone asking for the PIN or passcode, HANG UP! No one from your bank, financial institution, or legitimate company will EVER call you and ask for this information.
   • After hanging up, immediately change your password and user ID and speak to someone at that company so you may report your encounter.

3. Protect the data on your phone and computer by saving data to an external hard drive or in the cloud.
4. Limit the amount of personal information on social media. It’s best not to share family and personal information. Major platforms, including Facebook, have hundreds of millions of users. Any one of them in the U.S. or overseas can follow and target you.
5. Don’t let your guard down and use common sense.

What if…

We’re human. We make mistakes. What if you slip up and provide the requested information?

1. Change your password and always use strong passwords. Better yet, use a unique password for each account.
2. Check your financial statements and call your financial institution.
3. If you have not frozen your credit report with the three credit bureaus, do so now. What is a credit freeze? A credit freeze prevents creditors from accessing your credit report, preventing a scammer from taking out a loan or credit card in your name.

Equifax: https://www.equifax.com/personal/credit-report-services/credit-freeze

Experian: https://www.experian.com/freeze/center.html

TransUnion: https://www.transunion.com/credit-freeze

It’s easy to do, and you may temporarily lift a credit freeze when applying for credit.

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. 

"Justice exalts a nation, but sin is a people’s disgrace." Proverbs 16:3

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