The Market’s Strong Start, Investing at Market Highs, and Saving on Portfolio Taxes
In the latest episode of the Wealthy Behavior podcast, Bob Weisse and I discussed:
- Why and when the Fed should cut rates
- The market’s strong start and the strong economy
- Moderating inflation
- Advice to investors on investing at all-time highs
- Asset location – where to position your assets to reduce your tax bill
- How 529 plans fit into your wealth management strategy
Below are some highlights from the conversation condensed for clarity. Full episode available through link in title and wherever you get your podcasts.
Highlights
While we’re expecting multiple rate cuts in 2024 at today’s meeting we’re looking more of guidance to understand more the timing of those cuts.
The market is pricing in a 0% chance that Fed doesn’t cut rates this year, and the consensus is for cuts totaling 1.25% with May being the most likely time for cuts to start.
Why would the Fed cut rates if the economy is doing well? Is there a risk it triggers animal spirits and inflation? You have to remember the Fed’s dual mandate: inflation and employment. Inflation is not at 9% anymore, so it doesn’t make sense to keep rates at such a restrictive level and risk causing harm to the economy and labor markets from here, especially considering that there’s lagging effect to the hikes already made and modest cuts still keep rates in restrictive territory.
When the Fed cuts rate, short-term yields will drop, so we shared one more reminder to reposition money in short-term bonds, CD’s and money markets better for the long-term if it’s mid to long-term money.
Your variable rate loans will be cheaper as well if those rate cuts happen.
U.S. large cap growth has continued to do very well, but there are some attractive contrarian opportunities in China given how cheap that market has become.
Asset location is positioning your investments in different account types to reduce your overall investment tax bill.
There are three account types: taxable, tax-deferred, and tax-exempt.
You can shelter the highest expected return investments in the tax-exempt bucket since you will never be paying taxes on that growth.
Taxable bonds fit in the tax-deferred bucket since the bonds generate ordinary taxable income and whatever that bucket grows to the government is entitled to take its share out for taxes.
Stocks are a good fit for brokerage accounts stocks because they’re taxed more favorably.
529 plans can fit into this asset location framework as they’re another potentially tax-free bucket for multi-generational education savings and provide some estate planning benefits.
The U.S. stock market is at an all-time high. Our advice to investors doesn’t change at all-time highs. Bob’s analysis finds that strong market sell-offs are good buying opportunities, but strong markets don’t provide signals that it’s time to get out of stocks. Stocks have historically done well even when trading at or near their highs.
We touched on this blog post that shared that the stock market spends more than half its time within 10% of its all-time high and bull markets last a long time (over 1700 days on average) and generate powerful returns (over 150% returns on average).
Missed an episode? Catch-up on Wealthy Behavior here.