Dear Friends,
We wish you and your families a happy Thanksgiving. Over the past three weeks, the S&P 500 has enjoyed its best performance since 2020 as investors have started to regain confidence with cooling inflation. As we start to look toward the year’s end, we would like to remind you of a few important tax considerations to help manage your tax bill this year. If you ever have any questions, our team at The Legacy Foundation would be more than happy to assist. Find the insights in this week’s newsletter.
Four Strategic Considerations to Help Manage Your Tax Bill
1. Maximize Your Retirement
In 2023, the maximum contribution for 401(k)s and similar plans is $22,500 ($30,000 if age 50 or older). If your employer offers the option and you haven’t maxed out your traditional 401(k), you can make after-tax contributions to a Roth 401(k) up to the $22,500 limit ($30,000 if age 50 or older)—minus whatever you might’ve contributed to your traditional 401(k)—before year-end.
2. Optimize Your Giving
If charitable giving is part of your financial plan, ensure you act by year’s end to take advantage of the tax benefits:
Charitable Donations: In general, you can deduct cash donations to qualified charities worth up to 60% of your adjusted gross income (AGI), which is your total gross income minus certain deductions. Donating appreciated long-term investments can be particularly tax-efficient because you don’t have to recognize the capital gains and you can receive a tax deduction for the full fair-market value of the donation (up to 30% of your AGI).
Qualified Charitable Distributions (QCD): If you’re 70½ or older, in 2023 you can donate up to $100,000 to a charity directly from your IRA using a QCD. You won’t receive a tax deduction for the donation, but the gift amount can be used to satisfy all or part of your RMD without adding to your taxable income.
3. Harvest Losses
The end of the year is a great time to make sure your portfolio is still aligned with your goals. When rebalancing, you may be able to reduce your tax liability by offsetting any realized capital gains with your losses. If you have more losses than gains, you can offset up to $3,000 of ordinary income. If you do employ tax-loss harvesting, be sure not to buy the same or similar security within 30 days to avoid the pitfalls of the wash-sale rule.
4. 529 Contributions
When you think of 529 contribution limits, you might be thinking of the annual gift tax exclusion. That’s because the IRS counts contributions to 529 plans as gifts. In 2023, you can gift up to $17,000 (or if you’re married and file taxes jointly, up to $34,000) per recipient without those contributions counting toward your lifetime gift tax exemption.
If you want to contribute more to a 529 account in a single year without counting against your lifetime gift tax exemption, the account can be “super funded.” You can fund a 529 plan with up to 5 years’ worth of contributions all at once. But you couldn’t give more money to that same recipient within that 5-year period without counting against your lifetime gift tax exemption.
As for state income tax filings, Virginia529 and College America account owners who are Virginia taxpayers may deduct contributions up to $4,000 per account per year with an unlimited carryforward to future tax years, subject to certain restrictions. Those account owners who are Virginia taxpayers aged 70 and above may deduct the entire amount contributed to their account in one year.
Economy, Geopolitics, and Commodities
1. Cooling Inflation Likely Ends Fed Rate Hikes
Inflation’s broad slowdown extended through October, likely ending the Federal Reserve’s historic interest-rate increases and sparking big rallies on Wall Street. Consumer prices overall were flat last month and rose 3.2% from a year earlier, a slower pace than in September, the Labor Department said Tuesday. Overall inflation hit a recent peak of 9.1% in June 2022. Increases in so-called core prices, which exclude volatile food and energy items, also showed underlying price pressures are abating. Core inflation for the five months ended in October was at an annual rate of 2.8%, down from 5.1% during the first five months of the year. The easing reflected lower prices for cars and airfares and milder growth in the cost of housing and other services. Core inflation is often viewed as a better predictor of inflation’s future trajectory than the overall numbers. “The hard part of the inflation fight now looks over,” said David Mericle, chief U.S. economist at Goldman Sachs.
On Nov 14th, last Tuesday, stocks and government bonds soared as investors concluded the Fed was done raising rates and shifted attention to when officials might begin cutting rates. The S&P 500 rose 84.15 points, or 1.9%, to 4,495.70. The Dow Jones Industrial Average rose 489.83 points, or 1.4%, to 34,827.70. The Nasdaq composite rose 326.64 points, or 2.4%, to 14,094.38. The Russell 2000 index of smaller companies rose 92.82 points, or 5.4% to 1,798.32.
2. US Existing-Home Sales Slide Further
Sales of previously owned US homes fell by the most in nearly a year in October, highlighting the toll elevated mortgage rates and still-high prices continue to take on the resale market. Contract closings decreased 4.1% from a month earlier to a 3.79 million annualized pace, still the lowest since 2010, National Association of Realtors data showed Tuesday. The figure was weaker than all but one estimate in a Bloomberg survey of economists. The combination of soaring mortgage rates and stubborn prices has been discouraging buyers and sellers alike. However, with mortgage rates retreating as the Federal Reserve nears the end of its tightening cycle, that’s offering some hope that the housing market may be bottoming out.
“Fortunately, mortgage rates have fallen for the third straight week, stirring up buying interest,” said Lawrence Yun, NAR’s chief economist. “Though limited now, expect housing inventory to improve after this winter and heading into the spring. “The median selling price climbed 3.4% from a year earlier to $391,800, the highest for any October in data back to 1999. Yun added that nearly a third of homes sold above their list price, indicating that multiple offers are still occurring — particularly on starter and mid-priced homes. Even though the number of homes for sale ticked up from a month earlier to 1.15 million, it’s still the lowest for any October in the series. At the current sales pace, it would take 3.6 months to sell all the properties on the market. Realtors see anything below five months of supply as indicative of a tight market.
3. This Year’s Black Friday Bonus: Falling Prices
Holiday shoppers scouring Black Friday deals are in for a pleasant surprise: Many popular gifts are cheaper now than they were a year ago when inflation was still near its 40-year peak. Prices for TVs, smartphones, toys, sofas, and other items that often get wrapped up in bows have all dropped since last year’s holiday season. There are several reasons. Consumers are spending more on experiences such as travel and concerts, reducing demand for goods. Store shelves also are amply stocked—thanks to a lessening of the pandemic-era supply disruptions that triggered shortages last year. More broadly, overall inflation has declined significantly as the economy shows signs of cooling, from slower job growth to sluggish retail spending last month. Retailers such as Walmart say an era of price hikes is fading. Adobe, which tracks online sales through its analytics arm, predicts holiday discounting will hit record highs as retailers struggle with the uncertain outlook for consumer spending. It forecasts that toys, electronics, TVs, and furniture will see the most aggressive price cuts.
Electronics are a favorite for post-Thanksgiving deals, and this year isn’t likely to disappoint. Smartphone prices were down 12% in October from a year earlier, according to the Labor Department. TV prices were down 9.4% in the same period. Audio equipment—think speakers, earbuds, headphones, and the like—also were cheaper than a year earlier. Computers make the list, too. Adobe predicts that Black Friday, the day after Thanksgiving, will have the best deals on TVs, while Saturday, Nov. 25, will be the best time to buy computers. Home goods prices soared during the pandemic’s nesting phase but have since fallen back to earth. Prices for bed sheets, towel sets, and other linens slid nearly 10% in October from a year earlier. Prices for living room furniture, lamps, and wall décor have fallen since last year as well, though they are still way more expensive than before COVID-19. Cyber Monday—which falls on Nov. 27—should have the deepest discounts on furniture, while Tuesday, Nov. 28, should be ideal for snapping up appliances, according to Adobe.
4. World Needs $172 Billion More to Face Climate Impacts
The UN Environment Programme recently published its annual Adaptation Gap Report, examining how much funding the world’s developing countries will need to withstand the impacts of climate change. The report provides a complex but constructive understanding of the investment required, beginning with the striking shortfall today. According to UNEP, “Adaptation finance needs are 10 to 18 times as great as current international public adaptation finance flows — at least 50% higher than previously estimated.”
There is not one assessment of the investment required for adaptation; in fact, there are two, and they have significantly different dollar figures. The first is the “modeled” cost of adaptation, which is based on an “analysis of the adaptation needed to reduce incremental climate risks, relative to a reference period, without consideration of how this is financed.” UNEP gives this cost investment requirement as $215 billion dollars per year this decade. Digging into the numbers, the biggest distinction between modeled costs and finance needs is on a regional basis. The modeled costs of adapting Latin America and the Caribbean to climate change are almost twice the amount countries in that region say they need. On the other side, South Asian countries report they need more than double what modeled costs show. Both modeled costs and finance needs indicate East Asia will require the most, or around 40%, of all adaptation investment dollars between 2020 and 2030. Yet, this varies greatly from the adaptation finance flows today; sub-Saharan Africa currently receives the largest share (roughly 30%) of this investment.
5. Gold Marches Ahead to the Beat of a Weaker US Dollar
Gold prices climbed over the key $2,000 an ounce ceiling on Tuesday, buoyed by expectations that the Federal Reserve has concluded interest rate hikes, pressuring the dollar, while investors awaited minutes from the U.S. central bank’s latest meeting for further policy cues. Spot gold gained 1.1% to $1,999.29 per ounce, as of 12:17 p.m. ET, after earlier hitting $2,007.29, its highest level since Nov. 3. U.S. gold futures gained 1.1% to $2,001.40.
Financial Markets
1. Indexes Finish Higher Wednesday as Markets Head into Thanksgiving
Major stock indexes continued their November march higher ahead of the Thanksgiving holiday, finishing the day higher, while oil prices fell. The Dow Jones Industrial Average gained about 184.74 points, or 0.53%, to 35,273.03. The S&P 500 climbed 0.41% to 4,556.62. The Nasdaq Composite advanced 0.46% to 14,265.86.
More than half of the stocks trading on the New York Stock Exchange were up Wednesday, indicating widening breadth for the market rally. The tech-heavy Nasdaq also saw greater participation, with 62.9% of the stocks in the index rising. Small- and mid-caps outperformed Wednesday, rising 0.7% and 0.6%.
Treasury yields fell for a fifth straight day. Ten-year yields edged lower, settling at 4.415% from 4.417% late Tuesday.
Crude oil futures fell. A weekend meeting of the OPEC cartel was postponed. Energy stocks also lost ground. Benchmark U.S. crude fell 0.9% to just above $77 a barrel.
Bitcoin prices edged higher. The cryptocurrency traded above $37,000, rising over the last 24 hours according to CoinDesk. Binance Coin, the exchange’s native token, fell.
Overseas stocks finished mixed. The Stoxx Europe 600 and Japan’s Nikkei 225 edged higher. China’s Shanghai Composite Index slipped.
2. Altman to Return as OpenAI CEO After Days of Turmoil
OpenAI said Sam Altman will return as chief executive of the artificial intelligence startup that he co-founded, ending a dramatic five-day standoff between him and the board that fired him. OpenAI said the parties were “collaborating to figure out the details.” The company announced the formation of a new initial board that won’t include three of the four board members involved in removing Altman. The new board will include Bret Taylor, the former co-CEO of Salesforce; Larry Summers, the former Treasury secretary; and Adam D’Angelo, the only member of OpenAI’s previous board to remain. Taylor will be the chairman, the company said. Altman won’t be on the initial board.
The announcement marks the end of an impasse over who would lead the company that has become synonymous with the boom in AI technology. Since the board unexpectedly fired Altman last Friday, investors have been pushing the directors to reinstate him, employees have threatened to quit in masse and Microsoft, OpenAI’s largest backer, said it was hiring him to lead a new advanced AI research team. Altman and his camp had spent much of the past few days pushing to restore him as CEO and board member of OpenAI, people familiar with the discussions said. Altman also pushed for all the previous directors to resign. The board initially rejected those demands. The solution that emerged late Tuesday split the difference. While Altman is back as CEO, neither he nor Greg Brockman, the OpenAI co-founder who quit in protest on Friday, recovered their board positions. Meanwhile, only one of the four board members behind the initial decision to remove Altman—D’Angelo, the CEO of question-and-answer service Quora—will stay on the board.
3. Broadcom Plans to Close $69 Billion VMware Deal on Wednesday
Broadcom said it planned to close its $69 billion acquisition of cloud computing firm VMWare on Wednesday, wrapping up one of the biggest takeover deals in the technology industry that was closely scrutinized by regulators globally. The chipmaker has now received all regulatory approvals for the purchase after China approved the acquisition with additional restrictive conditions earlier on Tuesday, it said.
VMWare server software should work with local hardware and the deal should not restrict customers from purchasing and using Broadcom’s hardware products such as storage adapters, the Chinese regulator said in a statement. Some investors in the companies had feared about the outcome of the deal after reports said last month that rising Sino-U.S. tensions could lead China’s regulator to scuttle the deal. Tensions between Beijing and Washington had mounted after the Biden administration introduced tougher controls on exports of high-end chips to China in October. Broadcom shares were down more than 1%, while VMware was down 4.6%. The deal was previously expected to close by Nov. 26. Brokerage Bernstein attributed the sharp moves to some technical impacts from arbitrage trades around the deal.
4. Nvidia Triples Quarterly Revenue, but Sales in China Are a Concern
A start-up driving the artificial intelligence revolution may be in turmoil, but the semiconductor supplier propelling its innovations seems to be getting stronger. This Tuesday, Nvidia continued its string of blistering quarterly earnings reports, driven by stellar sales for A.I. applications of chips called graphics processing units, or GPUs. Microsoft uses thousands of those chips to handle calculations for OpenAI, the generative A.I. startup whose chief executive, Sam Altman, was fired Friday and swiftly hired by Microsoft as the head of a new advanced research lab.
Nvidia said revenue for its third quarter, which ended in October, tripled from a year earlier to $18.1 billion, while profit surged nearly fourteenfold, to $9.2 billion. The sales figure was nearly $2 billion higher than the company had predicted in August and much higher than analysts expected. The company’s lofty predictions since May have taken its market valuation above $1 trillion and provided evidence that Nvidia is reaping the biggest financial benefits among all companies chasing A.I. opportunities. One headwind involves China and the impact of new U.S. export restrictions, which also affect Saudi Arabia and Vietnam. Several of Nvidia’s GPUs, including models it developed for China, can no longer be shipped there without an export license. Nvidia added that any lost sales to China “will be more than offset” by strong growth in its other markets. The company still managed to project $20 billion in revenue for the January quarter, up a whopping 231% from the same period last year and 11% above Wall Street’s targets. But the tone of the warning was still a bit starker than statements Nvidia has made on the issue over the past several quarters as tensions between the U.S. and China have ratcheted higher. Nvidia’s share price—up 60% in just the past six months—slipped nearly 2% in after-hours trading following the company’s report and conference call.
Sources:
(1) www.bloomberg.com
(2) www.factset.com
(3) www.wsj.com
(4) www.barrons.com
(5) www.reuters.com
(6) www.cnbc.com
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. Economic forecasts set forth may not develop as predicted.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond and bond mutual fund values and yields will decline as interest rates rise, and bonds are subject to availability and change in price.
Investing in stock includes numerous specific risks, including the fluctuation of dividends, loss of principal, and potential illiquidity of the investment in a falling market.
Investing in foreign and emerging market securities involves special additional risks. These risks include but are not limited to currency risk, geopolitical risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks.
Investment advice offered through Private Advisor Group, a registered investment advisor and separate entity from The Legacy Foundation.
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