Taking stock for the new year

In a struggling economy still recovering from the effects of the global pandemic, reliable projections to help inform and guide investors are difficult to come by.

The Federal Reserve has taken steps to improve the U.S. economy in 2023 through a series of rate hikes that have helped stem inflation, which is trending lower but is expected to remain above the Fed’s long-term target of 2 percent throughout 2024. The Fed also projects GDP growth will slow to 1.5 percent and no longer anticipates an economic recession next year. But its own monetary policies also have driven interest rates up — both loan rates and short-term CD and savings rates — which in turn will likely have a stagnating effect on economic growth. Unemployment will rise incrementally to exceed 4 percent, although it is not expected to approach its long-term average of 5.7 percent. 

Not all experts agree, however. The Conference Board think tank, for example, sees GDP growth in 2024 at just 0.8 percent with a mini-recession in the first six months of the year. And the Federal Reserve Bank of New York posits a 56 percent chance of a U.S. recession by next September.

So, what’s a prudent investor to do?

A CONSERVATIVE COURSE

American investors ought to take a more conservative long view as we head into 2024, advise Wayne Duggan and Farran Powell, investment experts for USA Today Blueprint. 

“Investors looking ahead to 2024 should consider taking a cautious approach to their finances given the potential for a slowdown in gross domestic product growth, sticky inflation, and a delayed negative economic impact from the Fed’s aggressive rate hikes,” they said in a recent column.

Duggan and Powell offer the typical common-sense tips for safer financial management: pay down high-interest debt, build an emergency savings fund, and invest in a diversified portfolio of stocks and bonds. 

But some experts suggest the unconventional method of going into so-called “alternative investments” — those outside of the typical stocks, bonds, and cash investments. These might include private equity, hedge funds, real estate, and commodities, investments that may provide safeguards to their portfolios in case of a downturn in the value of conventional assets.

For that reason, alternative investments ought to be considered primarily by wealthier individuals, according to Curtis Congdon, president at XML Financial Group. 

“Investors may be drawn to alternatives if they have significant capital in traditional asset classes in hopes of either lowering portfolio risk or increasing alpha,” Congdon told Blueprint. 

YEAR-END WISDOM

One smart “investment” for 2024 is to make tax-advantaged money moves by the end of 2023, advises Matthew Plese, a Chicago-area CPA and occasional Legatus magazine columnist. 

“Whether it be loss harvesting, withholding changes, or maximizing deductions, now is the time to plan before it is too late,” Plese said.

Such moves may include maximizing retirement contributions such as to IRAs or 401(k) plans, opening or funding a SEP-IRA if you are self-employed, fully funding your HAS account, and using any flexible spending account funds that will not roll over. He also suggests using the annual gift tax exclusion for cash gifts or to fund 529 plans, revisiting estate planning documents, maximizing personal tax deductions, and catching up on estimated tax payments if necessary. 

A shrewd investor might consider selling some positions to offset gains. “You can deduct up to $3,000 of net capital losses against ordinary income and carry forward excess capital losses to future years,” said Plese.

Cryptocurrency transactions have special tax implications, he noted, and an investor who plans to buy a mutual fund this time of year should ensure it is making a sizable capital gains distribution.

THE MORAL LENS

For Catholic investors, every potential financial move or investment should be evaluated for how well it aligns with Catholic moral and ethical values. That calls for particular scrutiny, according to Richard Todd, CEO of Innovest and a member of Legatus’ Denver Chapter. 

“Many investment advisors will create a ‘Catholic values’ portfolio, but their own values can be anti-Catholic,” explained Todd, adding that some such portfolios offend Catholic teaching in part by supporting Planned Parenthood, LGBT organizations, or even paying for abortions in their benefits plans.

He suggests investors review the values of investment providers, such as their stand on religious liberty, whether they sponsor or support any organizations or causes that conflict with the Catholic faith, and whether their health plans cover abortions, abortion travel, or transgender surgery.

“Is it time to think about using firms that are truly in line with the Church?” he asked rhetorically.

PRUDENT GIVING

As for other investment advice, like Plese, he suggested investors engage in tax-loss harvesting and revisit the tax efficiency of their portfolio — particularly municipal bonds, which are offering their highest yields of the past 20 years. 

“Private debt has the highest yields in years and is offering better than equitylike returns,” Todd said. “Banks have pulled back on lending, and the private markets have soaked up the capacity.”

He also advised using low-basis securities for year-end gifting — and to participate in a Catholic donor-advised fund to distribute funds to favorite causes. 

Finally, Todd urged, investors should review their estate plan. 

“Carefully consider how much money will corrupt your heirs and consider the tremendous needs of the best Catholic apostolates and charities,” he said.

LOOKING BEYOND 2024

Even while making financial moves to close 2023, it’s smart to look ahead and plan for scheduled changes in tax and investment regulations in coming years — such as sunsetting estate tax exemptions.

“If your family is considering wealth transfer strategies, you should be actively developing and implementing your plan now, as the current estate exemption is scheduled to drop in half in 2026,” warn the advisors of Plante Moran Wealth Management. “If you’re considering wealth transfer to minimize future tax bills, timing is important, and you may benefit from doing so sooner rather than later.”

In the current year, there’s a substantial inflation adjustment to the gift tax exemption figure, which allows families that had previously maxed out their exemption to make additional gifts in 2023, they added.