Posted: 10-3-24 | Heidi Meeuwenberg
As we move into the fourth quarter of 2024, we wanted to remind everyone about a few items that may require action before year-end. Please contact us if you have any questions or needs related to these four planning items:
- Required Minimum Distribution (RMD) – If you were over the age of seventy-three by December 31, 2023, you are required to make a distribution from your IRA before December 31, 2024. A direct gift to a charity from your IRA, known as a Qualified Charitable Distribution (QCD), can be made in lieu of a traditional RMD. By making the charitable gift directly from your IRA, you avoid paying income tax on the distribution.
- Annual Exclusion Giving – You may give up to $18,000 to any individual without needing to file a gift tax return in 2024. This means that if you are married, you and your spouse can give up to $36,000 to each of your children and grandchildren. This is a fantastic way to pass assets to the next generation without incurring large tax events. Gifts of cash or stock and contributions to 529 plans are just a few of the ways to complete these gifts.
- Charitable Giving – If you have not completed your charitable gifts for the year, this is just a reminder that these must be made by year-end to offset your taxable income in 2024.
- Flexible Spending Accounts (FSA) – Money set aside in an FSA must be used prior to year-end or it will be lost. FSAs are different from a Health Savings Account (HSA), which can be carried over from year to year.
September—volatile but positive.
September started with a weak performance from equities as investors worried that technology stocks might see slowing growth. Such concerns disappeared into the rear-view mirror, however, as it became clear the Federal Reserve would finally cut interest rates after an extended period of restrictive rates. Most economists became more worried about job market dynamics than inflation, justifying that it was time to lower rates to keep the economy growing at a healthy pace. Labor concerns can be seen both in fewer job openings (see chart below) and unemployment bottoming at 3.4% in 2023 and increasing to 4.3% last month. In contrast, jobless claims are tame and the level of job openings, although declining, is higher than it was at its prior peak in 2019.
Job openings are down from since 2022, but still at an elevated level, historically.
Fewer openings and higher unemployment were enough to cause the Federal Reserve to cut interest rates by 0.5%, larger than the more measured 0.25% typically expected at most meetings. Lower interest rates are good for borrowers like consumers with credit card balances and small businesses with variable rate loans. It tends to increase the value of financial assets, too, from stocks and bonds to gold and real estate. If credit creation happens too quickly, the money supply increases beyond what the economy can absorb, translating into higher inflation. For now, though, lower rates are a good news story.
October—earnings, elections, inflation, and employment
October brings another round of quarterly earnings reports from corporations. Investors will be most interested in tech company spending on artificial intelligence and whether that dynamic will continue. The election season will kick into high gear with candidates making promises and investors judging the odds of those proposals becoming reality. In terms of the economy, markets will focus on whether inflation continues to decline and whether jobless claims start rising (see chart below). Monthly labor reports and wage growth will also be monitored for signs that the Federal Reserve can continue cutting rates. Market participants expect another 0.75% in interest rate cuts before year end and then another 1.25% by the end of 2025. Such reductions should stimulate the economy, arresting labor market weakness if there is any or bolstering higher growth.
Jobless claims are at a very low level and signal continued employment health.
The good news is that the Federal Reserve is less concerned about inflation and has lowered interest rates. Economic growth is 2.5-3% without a recession or labor market weakness. This is a good background for both equity and fixed income returns.
If there is any unwelcome news, it would be geopolitical, economic, or stock sector specific. Russia and Ukraine are desperately fighting for an upper hand, and this could lead to escalation. China’s economy is hitting new lows at the same time its President wants to bring Taiwan back into its orbit. Israel has initiated a new war with its enemy to the north, Hezbollah, which could be even more difficult than its conflict with Hamas. On the economic front, there is a slight risk of recession, which would most likely manifest in weakening in labor markets. It is also possible that inflation rebounds on increasing wages and looser credit flowing through the economy. Finally, equity markets are overweight technology companies trading at very high prices in concentrated areas, so any signs of weakening growth or lower returns on investment could spook investors.
The risks highlighted above have a low probability of occurring, and while not trivial, we believe the balance lies toward the upside. We have structured your investment portfolio to ride through these difficulties, making certain we deploy into protective investments where needed and putting effort into portfolio growth over time. We own assets that will do well with slower or faster growth and more or less inflation. This does not mean smooth progress all the time or maximized returns every quarter, but it does mean we expect to produce growth and income over the long-term
Private Markets Pulse: Vintage Diversification – Enduring your Private Equity Portfolio Ages like Fine Wine
Investing in private equity is a bit like choosing wine—you do not want all your bottles from the same year, just in case that year was a bit of a dud! The moment the grape is picked from the vine is the moment it is assigned a vintage year. The same is true of the private markets, the moment the first investment capital is deployed, a fund is assigned a vintage year. Vintage diversification in private equity is essential for the same reason we do not buy wine in bulk; it helps smooth out the risks of market timing.
Private equity investments have long, illiquid holding periods and are sensitive to economic cycles, so spreading investments across different vintage years, each marking the start of a fund’s investment phase, reduces the risk of poor timing. This way, if one vintage underperforms due to economic downturns, others may perform better in different conditions, stabilizing overall returns.
Beyond managing risk, vintage diversification also enhances long-term returns by capturing opportunities from various economic cycles. Just like some wine vintages thrive in certain climates, private equity funds from different years benefit from unique market conditions—whether it is low valuations during downturns or strong exit opportunities in booming economies. Diversifying across multiple vintages helps investors tap into distinct phases of the market, optimizing returns and ensuring that their portfolio ages as gracefully as a well-curated wine cellar.