Economic Highlights
The U.S. economy in August 2024 showed signs of resilience despite some soft data reported early in the month. The labor market experienced a slowdown, with only 114,000 new non-farm payroll jobs and the unemployment rate rising to 4.3%, partly due to the impact of Hurricane Beryl and an increase in job seekers entering the market. Despite this, retail sales and other economic activities indicated ongoing moderate growth. The Federal Reserve is expected to start cutting interest rates in September, with further cuts anticipated in November and December, aiming to support credit-sensitive economic activities such as home sales and stabilize the unemployment rate. Retail sales saw a boost in July, driven by higher auto sales. Initial jobless claims stabilized, and hotel occupancy rates remained steady, indicating a resilient hospitality sector. While the triggering of the Sahm Rule, which predicts a recession when the unemployment rate’s three-month moving average rises by half a percent, raised concerns, temporary factors like Hurricane Beryl’s impact and increased immigration likely contributed to the higher unemployment rate. Economic activity indicators point to continued growth in the third quarter, and the anticipated rate cuts by the Fed should help extend the economic expansion into 2025.
Federal Reserve communications in August were particularly noteworthy. At the annual Jackson Hole Economic Policy Symposium held from August 22 – 24, Federal Reserve Chair Jerome Powell emphasized the need for monetary policy to start to adjust to address the possibility of downside risks in the economy with the phrase, “The time has come.” Powell highlighted the importance of reassessing the effectiveness and transmission of monetary policy in light of recent weakness in the labor market. His remarks suggested that while inflation has moderated, the Fed remains vigilant and prepared to adjust policy as needed to sustain economic growth. This was a decidedly dovish turn.
Investment Highlights
The S&P 500 traded in a wide 10% range in August as investors at first became very concerned that an imminent recession was being ignored by the Fed, causing market volatility to spike to a level not seen since the heart of the Covid pandemic. But in the end, it all turned out to be another market whipsaw as data reported mid-month confirmed that the expansion is still intact, and the goldilocks narrative of low inflation and a soft landing once again carried the day. Thanks to optimism surrounding a soft landing and encouraging inflation results, equities managed to recover from the mid-month trouncing as the S&P 500 gained 2% for the month, outpacing mid and small-cap stocks, which both declined. International rebounded mid-month to finish with gains as well, up about 2%. Defensive sectors like consumer staples and real estate led, while energy and consumer discretionary were the laggards, a potential signal of risk-off sentiment carrying over from the global tumult earlier in the month. Looking back at August, perhaps the volatility that we have seen reflects a recognition of the ongoing issues we have been highlighting. Market valuations are high, with the S&P 500 trading at 22 times the next 12 months’ consensus earnings estimates. The outcome of the Presidential election is uncertain as Trump and Harris remain in a very close race with significant policy differences depending on the outcome. Furthermore, multiple geopolitical risks remain, from war in the Middle East to tension in the South China Sea and a bloody stalemate in Eastern Europe. Lastly, and probably most significantly for the markets, the Fed is poised to cut rates for the first time since the early days of the pandemic. On top of these factors, the post-pandemic economy makes it particularly difficult to evaluate multiple trends that are important to markets. Labor markets, for example, are slowing. But how much of the slowdown is simply tied to a change in immigration policy? Similarly, some have suggested that the U.S. consumer is beginning to fade, yet commentary this earnings season from a host of consumer companies suggests that the consumer is actually holding up just fine. Heading into the fall we are focused on a few themes:
- A.I. A.I. companies are in the middle of their initial infrastructure investment cycle, which should give way to a second stage of software investment in platforms and applications. NVDA also reported results last week, showing revenue up 122% year-on-year as customers like hyper scalers, sovereign governments, and enterprises continue to invest in computing power to fuel A.I. development. We think the build-out and actualization of the A.I. ecosystem will take years to play out.
- Weight Loss Drugs. Investing in GLP-1 drug companies offers a unique opportunity to benefit from the growing demand for treatments targeting obesity and diabetes, two of the most prevalent global health issues. These companies are at the forefront of developing innovative therapies with significant potential for market penetration, driven by their proven efficacy and increasing adoption by healthcare providers.
From Memorial Day to Labor Day, the S&P 500 was up 5.3%, which is not a bad return for three months. But it definitely was a summer roller coaster ride. We wouldn’t expect traders returning to their desks after the summer break to provide any salve to the ongoing volatility as September is traditionally the worst month for the markets, especially given the macro issues we outline above. Once past the election, however, we would expect the markets to regain their footing as lower interest rates, a still expanding economy, and higher earnings become the focus once again.
Wealth Planning Highlights
At the end of 2025, the Tax Cuts and Jobs Act (TCJA) of 2017 will expire. The 2017 TCJA cut top tax rate dropped from 39.6% to 37%. The 33% rate fell to 32%, the 28% rate to 24% and the 25% rate to 22%.
TCJA also increased the standard deduction from $13,000 in 2017 to $29,200 in 2024 for married couples and $6,500 to $14,600 for single filers. This encouraged many taxpayers to skip the complicated process of itemizing and allowed many more to reduce their taxable income.
Additionally, the TCJA capped paid state income deductions to $10,000 per year. This provision handicapped taxpayers in California, New York, and other states with higher income tax rates.
Finally, TCJA increased the per-person estate and gift tax exemption from $5.5 million in 2017 to $13.6 million in 2024, causing more Americans to leave their estates to heirs free of tax.
Here are three steps to consider before the expiration:
- Roth IRA Conversion: If income taxes do rise, paying taxes on investments now becomes more beneficial than paying later. Converting to a Roth IRA helps with that. A significant advantage Roth IRAs have over traditional IRAs is that account holders generally don’t pay income tax on their withdrawals in retirement. Another is that heirs don’t pay income tax on Roth IRA funds they inherit.
- Delay deductible expenses (such as charitable giving) to take advantage of a lower standard deduction in 2026. If you happen to take the standard deduction now, in 2026, you may have to itemize again. This means you should put off voluntary deductions such as charitable giving until 2026 in order to maximize your deductions.
- Take advantage of the lifetime exemption: the TCJA expiration would reduce the exemption level by about 50%. Planning is critical to take advantage of the exemption as it stands today. Bringing together a complete picture of all the assets an investor/family owns will help to increase the understanding of how close or far they are from these thresholds. Once you know and see that the levels may/will be hit, it’s time for the next-level planning meeting to decide how to approach the situation. We are happy to discuss this with you at any time. There are lots of decisions one needs to consider because some gifting strategies take control away from those making the gifts.
Disclosures
Investment advisory services offered through Robertson Stephens Wealth Management, LLC (“Robertson Stephens”), an SEC-registered investment advisor. Registration does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. This material is for general informational purposes only and should not be construed as investment, tax or legal advice. It does not constitute a recommendation or offer to buy or sell any security, has not been tailored to the needs of any specific investor, and should not provide the basis for any investment decision. Please consult with your Advisor prior to making any investment decisions. The information contained herein was compiled from sources believed to be reliable, but Robertson Stephens does not guarantee its accuracy or completeness. Information, views and opinions are current as of the date of this presentation, are based on the information available at the time, and are subject to change based on market and other conditions. Robertson Stephens assumes no duty to update this information. Unless otherwise noted, any individual opinions presented are those of the author and not necessarily those of Robertson Stephens. Performance may be compared to several indices. Indices are unmanaged and reflect the reinvestment of all income or dividends but do not reflect the deduction of any fees or expenses which would reduce returns. A complete list of Robertson Stephens Investment Office recommendations over the previous 12 months is available upon request. Past performance does not guarantee future results. Forward-looking performance objectives, targets or estimates are not guaranteed and may not be achieved. Investing entails risks, including possible loss of principal. Alternative investments are speculative and involve substantial risks including significant loss of principal, high illiquidity, long time horizons, uneven growth rates, high fees, onerous tax consequences, limited transparency and limited regulation. Alternative investments are not suitable for all investors and are only available to qualified investors. Please refer to the private placement memorandum for a complete listing and description of terms and risks. This material is an investment advisory publication intended for investment advisory clients and prospective clients only. Robertson Stephens only transacts business in states in which it is properly registered or is excluded or exempted from registration. A copy of Robertson Stephens’ current written disclosure brochure filed with the SEC which discusses, among other things, Robertson Stephens’ business practices, services and fees, is available through the SEC’s website at: www.adviserinfo.sec.gov. © 2024 Robertson Stephens Wealth Management, LLC. All rights reserved. Robertson Stephens is a registered trademark of Robertson Stephens Wealth Management, LLC in the United States and elsewhere.