Broker Check


FIRST QUARTER UPDATE - 2024

| January 30, 2024

“Never underestimate the man who overestimates himself…”

– Charlie Munger

LOOKING BACK

A good year that wasn’t supposed to happen. Previously, we have discussed some of the hazards Wall
Street analysts may encounter when forecasting market returns.

On average, strategists predicted roughly a 2% decline for the S&P 500 Index in 2023, according to
Bloomberg. When the final returns were tallied, 2023 turned out to be a very good year, surprising nearly
everyone.

Disciplined Investors 1, Analysts 0

Strategists came up short in 2023 with most calling for a decline in the market, allowing the patient,
disciplined, and long-term approach to take top honors.

Why did the market have a strong year? Let’s discuss three factors.

1. As 2023 got underway, the prevalent view on Wall Street and many economists was that a recession was
inevitable. Usually, economists have always struggled to pinpoint turning points in an economic cycle. In
most cases, recessions sneak up on us. I suppose this should have been a clue as the herd is rarely right.

Last year, we observed the opposite. The loud din of recession calls failed to hit the mark. The miss was
probably the biggest economic story of the year, especially for the millions of Americans who would have
been thrown out of work. Instead, unemployment remains low. People with jobs spend money and drive the
economy.

2. As the rate of inflation began to slow, the Federal Reserve, which had slammed on the monetary brakes
in 2022, eased up. In 2022, the Fed raised the fed funds rate by 4.25 percentage points, according to St.
Louis Federal Reserve data. It was the fastest pace of rate hikes since 1980. The pace slowed to 1
percentage point in 2023, reducing a stiff headwind for stocks.

By December, the Federal Reserve had effectively shifted its stance and is now openly discussing potential
interest rate cuts in the coming year. Of course, forecasts can change, but the shift fueled the market’s
advance into the end of the year.

While the S&P 500 Index ended 2023 just shy of its all-time early 2022 high, the smaller but better-known
Dow Jones Industrials eclipsed its all-time high in December.

3. One other variable helped fuel last year’s rise: the emergence of artificial intelligence, which is putting
advanced programs into the hands of Main Street. The technology is in its infancy, but the potential is
enormous and cash began pouring into investments that could someday yield big dividends. Bottom line, the
tech-heavy Nasdaq Composite posted a gain of over 40%.

The same winners on the Nasdaq also powered gains in the S&P 500 Index.

TAX TIME UPDATE

Are you familiar with how our federal tax code originated?

In 1909, progressives in Congress attached a provision for an income tax to a tariff bill. Hoping to kill the idea
for good, conservatives proposed enacting such a tax as they believed 75% of states would never ratify a
constitutional amendment, according to the National Archives.

Much to their surprise, the 16th Amendment was ratified in 1913, establishing Congress's right to impose a
federal income tax. Initially, fewer than 1% of the population paid income taxes. The rate was only 1% of net
income due to generous exemptions and deductions.

Clearly, the tax code has changed dramatically over the years, and it will continue to change.

Diving into the details

The Internal Revenue Service announced last year the annual inflation adjustments for more than 60 tax
provisions (63 to be exact) for the tax year 2024, including the tax rate schedules. As incorporated into law,
the IRS adjusts various categories to account for inflation.

It’s not a perfect measure, but the adjustments help mitigate the impact of inflation on income. Without
indexing, a cost-of-living raise, for example, could automatically push you into a higher tax bracket or reduce
the value of your standard deduction. Annual inflation adjustments, however, do not cover all tax provisions.

We won’t cover each of the 63 changes. You’re welcome. We will touch on the high points. If you have
questions, please reach out to us or check with your tax advisor.

1. Tax brackets and tax rates have changed. Table 1 highlights the seven separate tax brackets for 2024 for
single, married, head-of-household, and married filing separately.

For example in 2024, if you are married, filing a joint return, and your taxable income is $50,000, you would
pay 10% to the federal government on income up to $23,200. You would pay 12% on the remainder of your
income up to $50,000. In contrast, the same situation in 2023 would have the first $22,000 of income taxed
at 10% and the rest up to $50,000 at 12%. So, in 2024 a married couple filing jointly would save $24. Well,
what are you going to do with all that extra cash?

2. The standard deduction in tax year 2024 rises to $29,200 from $27,700 for those who are married and
filing jointly. The standard deduction for single filers and married and filing separately rises to $14,600 from
$13,850. For head of household, the standard deduction rises to $21,900 from $20,800. If you are 65 or older
and single or head of household, you may take an additional deduction of $1,950. If married and filing jointly
or separately, you may take an additional $1,550.

Changes on the horizon

The Tax Cuts and Jobs Act (TCJA) of 2017 significantly increased the standard deduction, simplifying the
filing process, as it eliminated the need for many taxpayers to itemize. But it also scrapped the personal
exemption.

Unless extended, please be aware that many provisions of the TCJA will expire at the end of 2025.

Among the expected changes:

• Individual income tax rates will revert to their 2017 levels.

• The standard deduction will be cut roughly in half, the personal exemption will return, and the child tax
credit will be reduced.

• The estate tax exemption will be reduced.

• The cap of $10,000 on state and local income taxes, which is not adjusted for inflation, will disappear.
Those who are married but file separately may deduct up to $5,000 if they itemize.

3. Favorable treatment for long-term capital gains is a cherished tax break for investors. Long-term capital
gains, such as the profit on the sale of a stock held for more than one year, are taxed at a more favorable
rate than short-term gains. A short-term gain is taxed as if it were ordinary income. For most, this long-term
rate will be 15%3. Favorable treatment for long-term capital gains is a cherished tax break for investors. Long-term capital

4. The TCJA includes a 20 percent deduction for pass-through businesses. Limits on the deduction begin
phasing in for taxpayers with income above $191,950 and $383,900 for joint filers in 2024.

5. Other taxes you may be subject to or credits you may capture.

• High-income taxpayers are subject to the net investment income tax of 3.8%, levied on the lesser of net
investment income or modified adjusted gross income over $200,000 for single filers and $250,000 for
married filing jointly. These amounts have never been indexed to inflation.

In general, net investment income includes but is not limited to interest, dividends, capital gains, rental and
royalty income, and non-qualified annuities, according to the IRS. Net investment income generally does not
include wages, unemployment compensation, Social Security Benefits, alimony, and most self-employment
income.

• Congress enacted the AMT, or the alternative minimum tax, in 1969 following testimony by the Secretary
of the Treasury that 155 people with adjusted gross income above $200,000 had paid no federal income tax
on their 1967 tax returns.

Limits were never adjusted for inflation and, in time, threatened tens of millions with a parallel tax system.
More recently, annual patches were put into place until the TCJA was passed, dramatically increasing the
thresholds for avoiding the AMT. The AMT exemption amount for 2024 is $85,700 for singles and $133,300
for married couples filing jointly.

• Exclusions for the estate, gift, and generation-skipping transfer will increase from $12,920,000 in 2023 to
$13,610,000 in 2024. Higher lifetime-exemption amounts are set to expire at the end of 2025. Unless
Congress makes these changes permanent, after 2025 the exemption will revert to the $5.49 million
exemption (adjusted for inflation).

• The kiddie tax applies to unearned income, such as dividends or interest, for kids under the age of 19 and
college students under 24. Your child will be required to pay taxes on their unearned income in 2024, but if
that amount is more than $1,300 but less than $13,000, you may be able to elect to include that income on
your return rather than file a separate return for your child.

• The child tax credit is $2,000 for each child that qualifies. The child must be under 17 years old at the end

of the year. The refundable amount rises to $1,700 for tax year 2024, up from $1,600 in 2023. A refundable
credit means that you can take advantage of the credit above your tax liability, in this case, up to $1,700.

• For the tax year 2024, you can have a modified adjusted gross income (MAGI) of up to $252,150 and may
qualify for the adoption credit of $16,810 if you incur adoption-related expenses. The amount of the credit is
reduced for taxpayers with a MAGI of more than $252,150 and is eliminated when your MAGI tops $292,150.
The credit is nonrefundable, so the amount cannot exceed your tax liability. However, you may apply any
excess credit amount to future years, up to five years.

IRA contributions

The IRA contribution limit for 2024 is $7,000 for those under age 50, and $8,000 for those age 50 or older.
You can make 2024 IRA contributions until the federal tax filing deadline for income earned in 2024. This is
up from 2023’s limits of $6,500 for those under age 50, and $7,500 for those age 50 or older. You can make
2023 IRA contributions until your April 15th federal tax deadline for income earned in 2023.

SEP-IRA limits

You can contribute up to 25% of the employee's total compensation or a maximum of $69,000 for the 2024
tax year, whichever is less. That’s up from $66,000 in 2023. If you're self-employed, your contributions are
generally limited to 20% of your net income.

We are mindful that the tax code is quite complex. We are happy to answer any questions you may have.
Feel free to consult with your tax advisor.

LOOKING FORWARD

Expect surprises. No one can accurately see into the future. As we saw in 2023, expect the unexpected.

We believe that having a diversified portfolio is the best way to protect yourself against market volatility and
achieve your financial objectives. While it won’t completely shelter you from market pullbacks, it has
historically proven to be a strong strategy that can help you reach your financial goals.

Although volatility can be unsettling, it is often temporary, as demonstrated by the failure of Silicon Valley
Bank last year and so far, the ongoing war in the Middle East.

If we were to take a stab at issues on the front burner, we’d start with the economy. If inflation continues to
slow down, it will take pressure off the Federal Reserve, and rate cuts could come sooner rather than later.
Investors are currently betting on the soft-landing scenario. In this scenario, pricing pressure eases while
economic growth slows down slightly, avoiding a big hit to corporate profits. This scenario helped drive stocks
last year.

While the Fed didn’t reduce rates in 2023, the year followed a similar pattern to 1985, 1995, and 2019, when
the Fed was able to engineer a soft landing, and stocks performed quite well. But, if economic growth slows
too much, stalls, or a recession ensues (i.e., the hard-landing scenario, any tailwinds from a faster pace of
rate cuts might easily be offset by weak corporate profits), as we have seen in the past.

Rate cuts in 1974, 1990, 2001, and 2008 failed to prevent a slide in stocks until investors anticipated an
economic upturn. In other words, rate cuts that occur because the Fed “can,” not because they “must,” is
the more preferred path, in our view.

FINAL THOUGHTS

It is election year. Never underestimate the man who overestimates himself. Need I say more? No, but I will
give you a little more just in case the tax section didn’t cure your insomnia, perhaps another few paragraphs
will

As I write this, the stock market is sitting at all time highs. It is overbought and will likely retrace some it’s steps
because that is just how markets work. They move back and forth in a sometimes frustratingly slow fashion.
They aren’t escaltors to easy wealth, but they are wealth creation vehicles if one remains disciplined and
doesn’t get shaken out. The chart below shows a composite of all election years since 1950 and how the
market has behaved.

So, don’t be surprised if this year is similar. Mark Twain said “History doesn’t repeat itself, but it rhymes.”

As far as the market hitting all-time highs goes, I will leave you with another quote from Laszlo Birinyi:

"Historically somebody would have said days like this and numbers like this are like crossing state lines with
kids. They get so excited for five minutes and then they ask, where is the next McDonald's? I would not consider
it an indicator of any real substance or significance."

Almost all of the media headlines you come across in the financial world are noise. Learning to distinguish real
news from noise is one of the most important things an investor can do to protect against poor decisions.
Focusing on the long term and developing a simple investment strategy aligned with your timeline, risk
tolerance, and income goals can help you stay the course. In reality, almost all news is noise. Keep that in
mind this election year. Don't buy into the us versus them mentality. As I’ve said before, that's for fools and if
you're reading this, you're no fool.

If you have any questions or would like to discuss anything in this update or any other matter, please feel free
to give me a call. As always, I’m honored and humbled you have given me the opportunity to serve you.