Newsletter
VOLUME 03 | March 2024
This month, in addition to discussing market insights and economic trends, we explore two other crucial topics. The first focuses on maximizing equity compensation, while the second addresses a timely concern for many parents and grandparents: Preparing for a child’s transition to college.
Markets and economy
The Slow Race Ahead
The U.S. economy continues to defy expectations. The job market has spent more than two full years at under 4% unemployment, inflation has improved dramatically over the last year, consumer spending rose last month, and GDP estimates have the economy growing by a 2%-plus annual rate in the first quarter.
Combined with solid stock market momentum, this means we’ve been fortunate to inhabit something of a Goldilocks zone—not too hot and not too cold—over the first three months of 2024.
How long can it last? Let’s review factors that will influence the answer to this question.
Political Pressure
The conventions to nominate each party’s official presidential candidate are months away (July for Republicans and August for Democrats), but primaries point to a 2020 rematch between former President Donald Trump and President Joe Biden this fall. In addition, 34 Senate seats and all 435 seats in the House are up for reelection this year.
While the outcomes have sweeping consequences for the country, history has proved that election results are not reliable triggers to change your investment strategy. Since 1944, in the 13 election years when the incumbent president was on the ballot, stock markets gained an average of nearly 16%, which is above the long-term average of about 11% for all years over that period.
That said, we know the latest news from the campaign trail can create short-term volatility in the stock market. Even more impactful, election speculation can shake confidence in your plans for the future.
It’s our firm’s obligation to set political leanings aside and focus on your goals. As the slow race to this year’s elections gathers momentum, please know that your advisor is here to address your wealth planning concerns. We will support you in any way we can.
Jobs and Inflation Stability
The February employment report eases concerns about a softening labor market, with U.S. payroll growth posting a gain of 275,000 in the month. While it was notable that prior-month data was revised downward by 167,000 jobs, the three-month average rate of U.S. job growth still stands at a healthy 265,000-per-month pace.
Job growth continues to be led by service sectors, including health care, leisure and hospitality, and the government. While the unemployment rate did tick up from 3.7% to 3.9%, the increase was due to people entering the labor force and not immediately finding work.
February marks the 25th month below 4.0%, the longest stretch since the 1960s. And in a sign of inflation relief, average hourly earnings rose just 0.1% from January to February and showed steady year-over-year growth of 4.3%. This indicates wage inflation is not out of hand.
February’s consumer price index (CPI) report reinforces this inflation view. The year-over-year pace of inflation increased to 3.2% from 3.1% in January. While the Federal Reserve would prefer to have seen this report show more progress toward its 2% target, this figure is not out of alignment with the overall slowing trend. And for the first time since April 2023, food prices did not rise. The cost of groceries was flat and the cost of dining out rose by just 0.1%. At an annual rate of 2.2%, food price inflation is moving toward pre-pandemic levels.
The Federal Reserve was unmoved by the February CPI report.
A Patient Fed
In his testimony to Congress earlier this month, Fed Chair Jerome Powell reiterated his message of patience on policy while suggesting rate cuts may be appropriate later this year. As expected, the Fed left rates unchanged at the March policy meeting.
Powell was strong and clear that before acting, the Fed needs further evidence of disinflation, or at least further confidence that the underlying trend will continue to retreat to the Fed’s 2% target level.
We are close, though, and as Powell emphasized, “We’re doing the best of anybody. We’ve got the strongest growth and the lowest inflation of the advanced economies.” With those comments, investors now anticipate the first-round reduction in U.S. interest rates to come by June, with three likely cuts by year-end.
In the context of the soft-landing economic data drumbeat, a bit of interest-rate relief from the Fed will further fuel the fire of positive conditions for continued stock market gains.
Momentum Markets
Artificial intelligence (AI) mania continues to lift share prices higher and higher. Nvidia has been at the crest of the AI wave. It reported strong earnings for Q4 and its stock has gained more than 80% this year. In contrast, chipmakers Broadcom and Marvell missed expectations and experienced a downdraft, and share prices of two of the Magnificent Seven companies are also down—Tesla and Apple have languished since the start of the year.
Company stock prices in the AI space are reaping the rewards and disdain of traders based upon their tangible results from the theme, perhaps a sign that fundamental performance matters again.
However, broad financial markets continued their positive bias overall, even with the revelation that yet another bank was in the crosshairs. New York Community Bancorp (NYCB) shares tumbled this month on the news the bank needed a cash infusion as it struggled under the burden of underperforming commercial real estate loans. Former U.S. Treasury Secretary Steve Mnuchin heads a group of investors who provided that backing. Some market pundits believe commercial real estate losses will deliver a market reckoning before long, and so NYCB’s news increased jitters on that front.
Keeping Our Stride
While your portfolios have benefited from the AI theme to the extent they are exposed to these stocks, this rally will not continue indefinitely. At some point, the shares will become too overvalued or fall out of favor. A broader range of sectors and industries may then begin experiencing gains.
The catalyst for this could arrive with the Fed’s first rate cuts later this year, which should provide a tailwind for both stock and bond investors. And while we have a sense of the Fed’s timing, our approach is to prepare beforehand. For that reason, we are continuing to emphasize healthy diversification across sectors and asset classes in our core client portfolios. This allows us to manage according to your goals while taking a variety of short-term market, economic, political and geopolitical risks into account.
Please speak to your advisor if you have any questions about how your investment allocation fits into your overall wealth plan.
Understand Your awards
Maximizing Your Equity Compensation: The Guidance You Need
If you have earned equity compensation, our expert in-house team, led by Equity Compensation Planning Director Greg Evans, CFP®, will partner with you and your advisor to help optimize and integrate this significant source of income into your long-term financial plan. It’s part of the expertise and service you can take advantage of as a client.
It’s the time of year when many of our clients receive new equity awards or see their existing equity grants vest. Equity grants and stock purchase plans have the power to catapult your wealth and provide you with financial freedom and long-term security. However, understanding the nuances of equity compensation can be complicated. And the tax consequences and potential concentration risk your stock may pose to your portfolio can be costly.
The three most common types of equity grants are:
Restricted Stock
These grants are often used to reward individual performance. Restricted stock awards (RSAs) grant ownership at the time they are awarded but are subject to a vesting schedule, while restricted stock units (RSUs) grant ownership upon vesting. As a result, tax considerations differ between the two.
Stock Options
These give you the option to buy shares from your company within a set period at whatever their fair market value is at the time of granting. This means you have the option to buy at that predetermined price even if the value of the stock goes up. Incentive stock options (ISOs) and non-qualified stock options (NSOs) are the most common types; each offers tax benefits you need to be aware of.
Employee Stock Purchase Plans
Employee stock purchase plans (ESPPs) give you the opportunity to buy your company’s stock at a discounted price after a multiyear waiting period. The funds come out of your paycheck pretax, and qualifying sales of the stock are taxed at the lower capital gains rate.
Do you have restricted stock, stock options or an employee stock purchase plan? Importantly, do you fully understand the type of equity compensation you have and the decisions that come with it? Are you confident in your choices?
Equity Compensation and Its Impact on Your Wealth
Equity compensation rewards you for your hard work. But if mismanaged, this benefit could impact your taxes and lead to missed opportunities.
The prudent approach is to engage your advisor, who will partner with our dedicated team of in-house experts to provide tailored insights into your specific equity grant. They’ll help you navigate the intricate details, ensuring you grasp the fine print, while integrating your equity awards into your overarching financial strategy. This proactive step can help minimize your tax burden and transform your well-earned financial reward into a legacy to be proud of.
Have questions? Contact your advisor today.
A Checklist for Parents and Grandparents
Things To Know When Children Go Off to College
Over the years, our advisors have helped thousands of clients prepare their children and grandchildren for college.
In the next few months, graduating high school seniors across the country will hear from colleges and universities and decide where to attend. For parents, guardians and grandparents, this is a time of celebration, but it can also trigger stress. The following list will help you prepare as you get closer to dropping off your child this fall.
Financial Considerations
Let’s start with one of the biggest concerns—how will you pay for college?
Make sure you fill out the Free Application for Federal Student Aid (FAFSA) form. This lets you explore eligibility for both need- and merit-based programs provided by the federal government. For institution- or state-based financial aid, students may need to fill out a College Scholarship Service (CSS) Profile as well. Even students from high-net-worth families are eligible for merit scholarships. Your RWA Wealth Partners advisor can help you navigate this process and create a payment plan to cover the cost of college.
Here are some questions to consider.
Does your student qualify for financial aid?
- Colleges are required to have a net price calculator tool available for a preliminary estimate of the cost to attend. They must also provide information about grant programs available.
- Need-based programs include Pell grants and Federal Supplemental Educational Opportunity Grants (FSEOGs), among others.
- Other federal loans include direct subsidized loans (which offer lower interest rates to those who qualify), unsubsidized loans, parent loans for undergraduate students (PLUS) and direct consolidation loans.
- Merit-based scholarships can help reduce the cost of college. Eligibility is based on academic achievement, athletics, career track, community, ethnicity, interests and more.
Did you know some schools may match scholarships?
- If your student is offered an aid package from one school, another may match it—call or email the admissions office to inquire. You should be prepared to share copies of the financial aid packages offered by other schools and to complete a CSS Profile or a separate aid application with the institution. Do this as soon as possible, as rewards are given on a first-come, first-served basis.
Are you aware of the 529 plan distribution rules for paying tuition?
- The IRS does not treat tuition paid directly to the school by parents or grandparents as a taxable gift, and it won’t count against your annual or lifetime exemptions.
- Qualified 529 plan distributions are tax-free. Use them for tuition, room and board, books and supplies, and to pay off up to $10,000 of lifetime student loans.
- 529 plan funds can be used to pay for off-campus housing up to the amount of on-campus room and board costs. Schools publish this cost information, so use that as the basis for how much you can withdraw safely.
- 529 plan withdrawals do not need to be paid directly to the college; you can take the distribution and then pay for qualified expenses. This can be helpful when paying for off-campus housing or room and board.
- Form 1098-T, issued by the school, reports tuition and related fees (but not room and board, so keep records of those payments separately).
- Form 1099-Q reports distributions from the plan.
- If your student is eligible for low-interest subsidized loans, consider using those first and then paying them off later with 529 plan funds to maximize tax-free growth within the plan.
Can you claim deductions or tax credits for tuition or student loan interest? Here are some items to consider when preparing your tax return (speak to your tax preparer about these, as there are income thresholds).
- Student loan interest deduction
- American Opportunity Tax Credit
- Lifetime Learning Credit
- State-level tuition deductions
Estate Planning
Yes, even your child needs a basic estate plan as they leave for college and step into adulthood. Managing risk is one of the most important and difficult parts of parenting. To ensure you can take care of your child if they experience an accident or financial difficulty, consider creating these documents before they leave home:
- A health care power of attorney with medical directives. Once your child reaches the age of majority (18 in most states), health care providers can no longer legally share medical information or consult with you on care if they are incapacitated. This document makes sure you can be fully involved in the event of a medical emergency and can coordinate care.
- A HIPAA waiver. This will permit sharing health information with you and other providers.
- A financial power of attorney. This will give you access to your child’s accounts and will allow you to make financial decisions on their behalf as needed.
- A will. Even with small accounts or limited personal possessions, this is worth creating, especially if you’re already drawing up the other documents on this list.
- A Family Educational Rights and Privacy Act (FERPA) waiver. This will allow you to independently see your child’s grades.
Insurance Coverage
Protect what’s valuable while your child is away: Health and property.
What are your health insurance options?
- Students under the age of 26 can stay on their parents’ or guardians’ health insurance plans.
- Universities will likely offer competitive health insurance coverage (make sure your student waives the coverage each year if they’re covered under your plan).
- Students can also purchase coverage on the health insurance marketplace created by the Affordable Care Act in the state where they will attend school.
Does your student need property insurance on campus?
- Your homeowners policy may cover personal items your student keeps in their dormitory.
- Your policy may also provide identity theft coverage on campus.
- Confirm with your insurance company to be sure.
What if they live off campus?
- Consider renters insurance to cover property, liability and identity theft. The policy must be in the student’s name, even if you’re paying for it (make yourself an “interested party” on the policy).
- To help ensure a successful property or liability claim, have a detailed inventory of valuable items that includes a picture and the cost of each.
- Ask your insurance company if your umbrella liability policy covers your student while at school.
Financial Education, Savings and Responsibility
It’s never too early to teach your child about saving for the future and to help them form smart habits. You can enlist the help of your advisor.
Have you taught your child about saving for the future?
- If your child has a summer job or paid internship, you (or they) can contribute to an IRA in their name in 2024. You can contribute up to their taxable compensation for the year or $7,000, whichever is less—contributing more than they earn will incur tax penalties.
Have you spoken to your child about credit cards and the risks they pose to financial health?
- Set clear usage guidelines—when, why, where.
- Make sure your child understands interest rates, limits, budgeting, fees and any other features the card has (airline miles, rewards, etc.).
- Ensure that lost or stolen cards can be frozen quickly.
Studying Abroad
Getting a student ready to study in another country has many parallels to sending them off to their first year of school.
What insurance does your child need beyond U.S.-based health insurance? (Read this Forbes article for additional context.)
- Research international medical plans for the country, including psychological care.
- Look into medical and evacuation insurance in the event of an accident or national disaster.
- Assess travel insurance to cover trip cancellations, lost or damaged baggage, and delays.
- Consider kidnap and ransom insurance if your child is traveling to high-risk areas.
Have you considered the financial implications of studying in a foreign country?
- Understand preferred payment methods in the host country, both at the school and in the surrounding area.
- Find out if credit cards are widely accepted or if the country has a cash economy.
- ATM passcodes in some foreign countries are limited to four digits; consider changing the PIN on cards to match this standard for the duration of the trip.
- Invest in a money belt or other method to conceal cash if necessary.
Support and Advice On Call
After reading through the checklist above, we hope you feel empowered to create a smooth transition for your college student (and yourself). If you have questions, please contact your advisor—they are here to support you and your family. We look forward to hearing from you.
This material is distributed for informational purposes only. The investment ideas and opinions contained herein should not be viewed as recommendations or personal investment advice or considered an offer to buy or sell specific securities. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed.
Our statements and opinions are subject to change without notice and should be considered only as part of a diversified portfolio. You may request a free copy of the firm’s Form ADV Part 2, which describes, among other items, risk factors, strategies, affiliations, services offered and fees charged.
All investments carry risk of loss. Past performance is not an indication of future returns. Tax, legal and insurance information contained herein is general in nature and should not be construed as legal or tax advice, or as advice on whether to buy or surrender any insurance products. Personalized tax advice and tax return preparation is available through a separate, written engagement agreement with our wholly owned subsidiary, RWA Tax Solutions, LLC. We do not provide legal advice nor sell insurance products. Legal services may be available via a separate, written engagement agreement through our exclusive relationship with Hall & Diana LLC.
Always consult a licensed attorney, tax professional, or licensed insurance professional regarding your specific legal or tax situation or insurance needs.
Companies mentioned in this article are not necessarily held in client portfolios, and our references to them should not be viewed as a recommendation to buy, sell or hold any of them.
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