The Economy Continues to Surprise to the Upside
In March 2024, the Dow Jones Industrial Average, the S&P 500, and the Nasdaq 100 indices reached all-time highs. These milestones may appear somewhat perplexing, given the economic and market forecasts at the same time last year. According to a Bloomberg poll in December 2022, 70% of surveyed economists called for a recession in 2023. The recession calls were mostly in response to the surge in inflation and the sharp rise in interest rates that followed.
The calls for recession continued into 2023, especially in the wake of a “mini” regional banking crisis. Last March saw the beginning of a series of several significant banking failures – including Silicon Valley Bank, Signature Bank and First Republic – in which many investors feared a reprise of the Great Financial Crisis (2008-2009). But that turmoil did not have a contagion effect as the government quickly intervened.
The scope of risks expanded into the geopolitical realm as the Israel-Hamas conflict added to concerns beyond the ongoing Ukraine-Russia war. Additionally, major economic weakness in key economies (e.g., China) and a weakening of the U.S. commercial real estate market continue to challenge different areas of the economy.
Yet despite the plethora of worries and headwinds, a U.S. recession never materialized. Inflation declined significantly throughout the year and equity markets registered strong gains. By the end of 2023, Federal Reserve Chairman Jerome Powell shifted his rhetoric to a more dovish tone, leading market prognosticators to predict numerous interest rate cuts for 2024.
Reaching New Highs
In the first quarter of 2024, the U.S. economy continued to show resilience with surprisingly strong GDP growth, a continued robust labor market and a rebounding housing market. But progress on lowering inflation further seems to have stalled. Consequently, the Federal Reserve’s recent communique has quashed the hopes of meaningful monetary loosening anytime soon. Yet despite this, the prices of risk assets such as U.S. equities, gold and Bitcoin have surpassed all-time highs. Is this a sign of excess speculation?
In our judgment, it rarely makes sense for investors to make drastic changes to their strategic asset allocation based on short-term price fluctuations. But if one is concerned about stock market overvaluation, there are a number of ways to prudently adjust one’s portfolio risk without abandoning equities altogether. Some examples include shifting more assets to defensive sectors of the market (e.g. consumer staples, utilities, healthcare), re-allocating to international equities (whose performance has been lagging the U.S. for many years), or shifting to equities that are trading at more reasonable valuation metrics than many of the high-flying market leaders. Until the market reaches clear broad-based valuation excesses, we recommend maintaining one’s long-term strategic allocation to equities. Certainly, if stock prices continue to remain elevated and interest rates on fixed income securities continue to rise (as they have in the first quarter), we will consider modestly shifting our asset allocation in balanced accounts (stocks and bonds) from equities in favor of bonds.
Long Term Tax Planning; Roth IRA Conversions
One of the most common questions we receive from clients that are approaching their retirement years is how large one’s portfolio needs to be to comfortably retire without the risk of running out of assets. Managing one’s finances during this pre-retirement period requires careful planning to ensure optimal cash flow management. The fact that one can begin taking IRA distributions as early as 59 ½ and social security benefits as early as 62 raises several questions:
- Should one begin taking social security benefits early?
- If one decides to retire early, which investment accounts should one draw upon to maintain one’s current lifestyle?
- If one has a pension, should one take a lump sum or elect for an annuity stream?
Questions like these need to be answered on a case-by-case basis given that each retiree’s financial picture and objectives are unique. It is important to plan carefully during this time to ensure that decisions are made thoughtfully and will enhance the success of one’s long-term financial plan.
One opportunity that is especially intriguing for those with more than sufficient assets and cash flow streams is a “Roth Conversion”. Put simply, a Roth Conversion is an opportunity to transfer one’s pre-tax retirement assets (IRA, 401k, 403b, etc.) to a Roth IRA. This shift will result in a taxable event (i.e. those dollars will be taxed as income in the year of the conversion). But the Roth IRA assets will grow tax-free from then on. Moreover, under current tax law, there would be no need to take any required minimum distributions going forward. Finally, when the account is passed down to one’s descendants (or other beneficiaries), those assets will have the ability to grow and be withdrawn tax-free.
This strategy can be particularly advantageous to those who are currently in a relatively low tax bracket prior to drawing on their pensions, qualified retirement plan account distributions and social security benefits. The cost of paying taxes now may be advantageous rather than waiting until one begins receiving all the new retirement income streams. But again, there is never a “one size fits all” strategy. Every financial decision must be based on the specific financial needs of the retiree and within the context of the overall financial plan. Please feel free to contact us if you would like to review your retirement plan and to determine whether your current plan can be enhanced to your benefit.
Investment Advisory Services are offered through Mariner Independent Advisor Network (MIAN), an SEC Registered Investment Adviser. Caplan Capital and MIAN are not affiliated entities. Some information provided herein has been obtained from third party sources deemed to be reliable as of the date of original publication, and rules, laws and legislation are subject to change without notice. This article should not be considered personalized advice, and it is important that your unique circumstances be taken into consideration prior to making any financial decisions.
This material is provided for informational and educational purposes only. It does not consider any individual or personal financial, legal, or tax circumstances. As such, the information contained herein is not intended and should not be construed as individualized advice or recommendation of any kind.
There is no assurance that any investment, plan, or strategy will be successful. Investing involves risk, including the possible loss of principal. Past performance does not guarantee future results, and nothing herein should be interpreted as an indication of future performance.
Withdrawals from a Roth IRA are tax free if you are over age 59½ and have held the account for at least five years; withdrawals taken prior to age 59½ or five years may be subject to ordinary income tax or a 10% federal penalty tax, or both.