HM Wealth Monthly Letter 2024

August 2024

This quarter has been anything but stable, with various conflicting narratives driving market behavior. We've seen concerns about a potential recession clashing with reports of stronger-than-expected economic growth, inflation numbers that are both declining and stubbornly high, and speculation surrounding a tight presidential race. In addition, there is uncertainty around the election's outcome and debates on whether the Fed will cut rates sooner or later until after the election. It's no wonder we've witnessed both significant corrections and rallies, including some of the best and worst days in the U.S. stock market since 2022.

In times like these, long-term investors should focus on staying invested, diversified, and disciplined. This month's commentary dives deeper into these core strategies. We hope you find this analysis insightful.

Regarding Fed Chair Jerome Powell's recent speech at Jackson Hole, he confirmed what the market has been expecting—rate cuts are on the horizon. Let's break down Powell's remarks from last week, emphasizing three critical points:

His statement that "the time has come to finally adjust" aligns with market sentiment, especially given the labor data revisions showing over 800,000 fewer jobs created than initially reported.
Powell pointed out that "timing and pace will depend on incoming data," meaning that the schedule and extent of rate cuts will be data-driven, influenced by upcoming inflation and employment reports.
Powell expressed increasing confidence that "inflation is on the path to 2%," a positive signal for both the stock and bond markets.
In early August, volatility was on full display as the VIX topped 65 on August 5th, up from 23 the previous trading date. The VIX is a popular measure of the stock market's expected short-term volatility of the S&P 500. As of the end of August, the Vix is back around 16, slightly below its long-term average level. At the same time the VIX topped, the S&P 500 hit its low for the month amongst a slew of headlines citing fears of a worsening economic outlook and an unwind of the institutionally popular Yen Carry trade kicked off by a hawkish Bank of Japan raising interest rates. Coming to the end of the month, we have seen most of this headline risk dissipate, with the market looking forward to rate cuts and employment numbers.

As I mentioned, we do expect bouts of volatility to persist, suggesting it's a notably good time to remember the benefits of staying highly disciplined around diversification and rebalancing.

-Thomas May AWMA® CRPC® CLTC®

Partner Herrera May Wealth Management

September 2024

September has lived up to its tough reputation for the U.S. stock market, with the S&P 500 experienced one of its worst starts in history. In the first week of September, the index dropped 4.25%, marking its sharpest decline at the beginning of the month since the five-day trading week was introduced in 1953.

Historically, the S&P 500 has seen only four other years where it lost 2.5% or more at the start of September: 2001, 1987, 2008, and 2015. While a sluggish start doesn’t necessarily predict how the rest of the month unfolds, it does highlight the ongoing volatility and sensitivity in markets, especially considering the uncertain economic backdrop we face today.

For investors, this rough entry into September should serve as a reminder to keep a close eye on broader trends and remain cautious amid the seasonal headwinds. Historically volatile periods like these also present potential opportunities for long-term strategies, but careful navigation is essential.

The Federal Reserve made a notable move in September by cutting interest rates by 0.50% for the first time since March 2020, lowering the federal funds rate to a range of 4.75% to 5%. This follows the Fed’s last rate hike in July 2023, when rates were at their highest in two decades. In response, the stock market saw a boost, with both the S&P 500 and Dow Jones Industrial Average hitting new all-time highs for that week, despite some lingering volatility.

Fed Chair Jerome Powell clarified the reasoning behind this rate cut, emphasizing that it was aimed at maintaining the economy's current momentum rather than jumpstarting a slowdown. He also noted that while inflation has eased, the Fed’s job is not done, indicating that the central bank is still vigilant in its inflation-fighting efforts.

Positive economic data has supported this outlook. Recent reports on retail sales and housing both exceeded expectations, and the Atlanta Fed's GDPNow model estimates a strong 2.8% growth for the third quarter, which is above the long-term average. This suggests that the economy remains resilient despite the tighter monetary policy of the past year.

Investors are now split on what the Fed might do at its next meeting in November. The CME FedWatch Tool suggests a 50/50 chance between another 25 basis point cut or no change at all. This uncertainty highlights the balancing act the Fed faces—encouraging growth while keeping inflation in check. Investors should remain focused on economic trends and the Fed’s evolving policy to navigate the shifting market environment.

If you moved cash into a Money Market anytime in the last year or two like many investors, you should go check your funds interest rates. The cut this month has a direct effect on the money markets as their interest is earned from very short-term loans which will reflect the new rates much faster than long-duration bond funds. You can sleep well at night knowing your principal value is not what is going down, but the juicy risk-free interest we have come to enjoy is. If you have cash sitting on the sidelines and are considering how to keep up with inflation reach out to speak with an advisor about your individual goals.

-Thomas May AWMA® CRPC® CLTC®

Partner Herrera May Wealth Management

October 2024

We will keep things rapid fire and in bullet point format this month so you have time to get out cast your vote, and scoop that softening pumpkin off your front porch before it becomes a puddle.

· Early October handed us a major port strike on the heels of the Hurricane Helene and Milton which sent headlines racing, with flashbacks to 2020 lockdowns and shortages of toilet paper, some reports of consumers rushing out to stock up on some essentials surfaced. This was a very faint echo of 2020 as the strike ended on a tentative deal almost as soon as it began.

“The International Longshoremen’s Association and the United States Maritime Alliance, Ltd. have reached a tentative agreement on wages and have agreed to extend the Master Contract until January 15, 2025 to return to the bargaining table to negotiate all other outstanding issues,” The ILA and the USMX said in a joint statement.

ILA wages will increase 61.5% over six years under the tentative agreement, sources told CNBC. The final details surrounding the use of automation technology and have been tabled for future discussions.

· Election: With less than a week until the presidential election and the race nearly tied, any significant development could spark volatility. On that point, please keep in mind these important pre-election reminders:

1. Do not let election stress take the wheel in driving your financial decisions: the market historically yields positive results over time.
2. Do not become overly focused on short-term market movements that will not serve your long-term objectives.
3. Do not fall victim to “action bias,” thinking that if you react quickly and do more, you will have more impact.

· Updates to 401(k) Contributions. For 2024, the 401(k) catch-up contribution limit remains unchanged at $7,500, the same as in 2023. This brings the total contribution limit for eligible taxpayers to $30,500. The base 401(k) contribution limit for 2024 has increased slightly to $23,000, up from $22,500 in 2023.

Looking ahead to 2025, there are some important changes for participants aged 60 to 63. Starting next year, those in this age group can contribute the greater of $10,000 or 150% of the 2024 catch-up contribution limit, which will be adjusted for inflation. This allows for a significant increase in retirement savings for those approaching retirement.

It’s important to note that to take advantage of this enhanced catch-up contribution, individuals must turn 60 by the end of the calendar year but not yet reach 64.

2024 Year-End Reminders

401(k) Contribution limits and deadlines. For most 401(k) plans, the deadline to contribute is December 31, 2024. This deadline also applies to participants who are 50 or older at the end of the calendar year 2024.
IRA Contribution limits and deadlines. You can make 2024 contributions to your Roth or traditional IRA until April 15, 2025 or whenever you file your taxes, whichever comes first.
Required minimum distributions (RMDs). Remember that you face an excise tax on any RMD that you fail to take on time. You must calculate the RMD separately for each IRA that you own, excluding any Roth IRAs, but you can withdraw the total amount from one or more of your non-Roth IRAs.

-Thomas May AWMA® CRPC® CLTC®

Partner Herrera May Wealth Management

November 2024

Another election has come and gone. We can now go on with our everyday lives with a lot fewer political commercials! What does this mean for the financial markets? The answer is, probably less than you might think. Ultimately, we believe a company's value, and hence its stock price, is driven by earnings (as the graph below highlights) and we do not envision a significant change to the earnings outlook. Post-presidential election history shows a tendency for the market to advance following elections, even in hotly contested elections. The S&P 500 has advanced over the following 12 months in 9 of the last 10 elections, with a median gain of 17.2% (simple price appreciation). On November 6th, 2024, the S&P 500 index rose by 2.5%, marking its strongest post-election gain in the post-World War II era. Now, historically, the stock market has done better when there is gridlock in Washington. However, that does not seem to be the case now. As expected, the Senate has flipped to Republican control. From a practical standpoint, this likely means that the Trump administration's pro-business policies will have traction. Tax policy will be front and center as the administration will look to make permanent and/or extend the Tax Cut & Jobs Act tax cuts, which are set to sunset at the end of 2025. That means that companies will be operating under a tax regime with which they are familiar and can potentially grow earnings.

December 2024

Looking Back...

In early December, Bitcoin made headlines, reaching over the $100,000 per coin price. For context, this is the first time the cryptocurrency has reached this height and has now doubled in value from $50,000 just last summer.

The Federal Reserve had its last meeting of the 2024 calendar year, during which it announced a 25 basis point cut(0.25%). The comments from the Fed cited future policy moves will be dictated by market conditions such as unemployment and inflation. With a new Trump administration setting up to take office in January, a slew of policy changes are on deck, including the use of Tariffs, which some economists believe could be inflationary in certain sectors of the economy.

Many homeowners thinking of moving, or prospective buyers, were left disappointed through the end of the calendar year by mortgage rates, which have climbed back up near the highs of this year. While a broad brushstroke of logic would lead one to believe the lower the Fed Funds rate, the lower the mortgage rate. The Fed has lowered its target range by a full 1% since the middle of the year, yet the average 30-year Fixed Mortgage was around 6.85% in December. This confusion can be cleaned up by remembering that mortgage rates more closely follow the 10 YR Treasury rate or long-term bonds as opposed to the short-term Fed Funds rate. The short-term rates more closely affect things like savings account interest rates, CDs, Credit Cards, and HELOCs. Essentially, the Fed can pull its limited levers to try and get the economy to move a certain way, but sometimes it does not fall in line.

Here are a few headlines to remember that in fact, did happen this year:

The door to a Boeing Airplane door blew off
Apple released its VR headset
Sam Bankman-Fried was sentenced to 25 years in prison
A container ship brought down a bridge in Baltimore
Amazon cashier-less stores turned out to be run by human operators in India
Red Lobster filed for bankruptcy
Meme stocks came back
Nvidia's market cap hit $2 Trillion.....then $3 Trillion a few months later
Realtors commissions rules materially changed
Plans to reopen Three Mile Island by Microsoft were put in action
CrowdStrike took down almost everything on a computer for a day
Election betting went mainstream (and appeared to be more accurate than most polls in predicting the presidential election winner)

Looking Forward...

The Fed forecasts cuts for 2025; how many is the debate. Although the Fed initially forecasted four rate cuts in 2025, analysts are lowering expectations to two or three at most.

The Tax Cuts and Jobs Act (TCJA) is set to sunset at the end of 2025. Given the makeup of Congress and the incoming presidential administration, there are expectations that this piece of legislation will be extended or modified in some way to keep some of its changes active.

As of this writing in December, there is a bill (Social Security Fairness Act) going to the president's desk that would repeal the Windfall Elimination Provision (WEP) and the Government Pension Offset. The WEP and GPO reduce Social Security benefits for workers and spouses, respectively, if they are covered by a pension benefit from a public employer that is exempt from Social Security tax withholding. According to a Congressional Research Service report from November, "about 2.5 million Social Security beneficiaries, or almost 4% of all beneficiaries, had benefits reduced by the WEP, the GPO, or both" as of December 2023. The Congressional Budget Office, in a report, estimates that repealing the GPO and the WEP would cost $195.7 billion over ten years. It would also push Social Security's insolvency date, currently estimated at 2033, forward six months.

There is a lot of positive momentum going into 2025 which can be a powerful driver of the markets and the economy. Nevertheless risks still exist and should be monitored and hedged.

We stay vigilant, disciplined, and optimistic and look forward to 2025.

-Thomas May AWMA® CRPC® CLTC®

Partner Herrera May Wealth Management