The markets are attempting to prepare for the upcoming administration. What can we expect from the stock market, the bond market? Will Growth stocks outperform Value Stocks? Will Small-cap stocks outperform? How about the International Markets?
I have the pleasure of meeting with representatives from several well-known investment firms. I find their opinions well thought out and useful when preparing our investment model positioning. I utilize several sources to formulate strategy.
A common theme, sectors benefiting from deregulation, may outperform going forward. Much of the potential deregulation is expected to be centered around Value stocks, think Financials. Value stocks have underperformed growth stocks for a handful of years. Only recently have we seen value attempt to close the performance gap. Another common opinion is small US companies may outperform, as the Trump administration will be attempting to have US consumers purchase more from domestic manufacturers.
Many of the major stock indexes, such as the S&P 500 are now tilted toward growth stocks as they are cap weighted, meaning the larger companies do most of the heavy lifting of the index. Many investors may have an overweight to growth unknowingly.
In my opinion, having a neutral, growth versus value positioning is prudent for the time being.
Markets
Last week, most major US indexes climbed between 1 and 2%. The standout was small caps, moving higher by 4.5%. The international stock market trailed, rising .54% and emerging markets up .61%.
The yield on the US 10-year treasury finished last Friday @ 4.412%.
With earning season winding down, investors will turn their attention to economic data. This shortened trading week; we’ll hear several housing market reports and the important Personal Consumption Expenditures (PCE) inflation report.
We continue to follow the various international issues that continue to have reason for concern.
Roth Contributions/Conversions
If you are working, have the availability to contribute to your company 401K or similar plan, I hope you have been taking advantage of the forced savings benefit.
A common question I receive, should one make pre-tax or after-tax Roth contributions. The factors to consider are not the same for all investors, which is where much of the confusion sets in.
There is no exact formula that will provide science, as we do not know with any certainty, the future of tax rates 5, 10 and 20 years down the road. Most clients are aware, I believe at some point, income tax rates will increase as we’ll be forced to contend with the US debt situation. We’ll need additional revenue. I have been a proponent for accumulating different buckets of money from a tax perspective. Having funds in a Roth IRA/401K, a Traditional IRA and funds in a non-retirement account can provide flexibility when the time comes to begin living off your investment portfolio.
Many believe with the upcoming Trump administration, the current tax code will not expire, leaving tax rates lower. This may provide additional runway to implement a Roth Conversion Strategy. Many thought we had only 2024 and 2025 to do conversions prior to tax rates escalating. As we meet with clients, we’ll be discussing and analyzing the benefits of Roth Conversions when appropriate. For those working, we will re-examine the benefits and differences between pre-tax and after-tax Roth contributions based on your specific situation.
The calendar sure does move quickly.
As time moves, I never have to remind myself how fortunate I am to work with my clients. I am so grateful to work with each and every client.
Happy Thanksgiving!!
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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
