Tag: investing

Monthly Update – January 2025

Calendar Notes

  • Wednesday, January 1st – New Year’s Day: Stock market is closed.
  • Thursday, January 9th – National Day of Mourning for President Jimmy Carter – Stock market is closed.
  • Monday, January 20th – Martin Luther King, Jr. Day – Stock market is closed.

Stocks seemed a bit tired in December as the year-end rally flamed out. I can’t blame them. They worked hard all year, and it showed, racking up a 20%+ return for the second year in a row. This hasn’t happened since the 1990’s, which sounds so long ago. The biggest catalysts for this performance were the continuing AI expansion on all fronts as well as inflation dropping substantially over the past year.

For the month, the S&P 500 dropped about 2.5%. However, it was still able to finish the year with a gain of over 23.3%.

Looking ahead, we will have Q4 earnings reports coming out in a few weeks. Also, Trump and his new administration will be coming in later this month. Finally, the Federal Reserve meets at the end of the month in a very cloudy interest-rate environment. Those are some pretty big catalysts that can move the markets, making for a very busy start to the year.

Historically, January has been a good month for stock performance. It has also been a pretty accurate indicator of how stocks will perform the rest of the year. For instance, when stocks have a positive January, full year returns have been positive 77% of the time. Let’s hope history repeats itself this month.

Take a look at the Outlook section below to see what events could move the markets over the short term.

Bond prices flip flopped once again, reflecting the uncertainty in the current interest rate environment. Both corporate and government bond prices fell during the month of December as new inflation data coming in showed that inflation is stickier than anyone expected. Still, the Federal Reserve did cut rates another 25 bps at their December meeting but where they go from here is anyone’s guess, including the Fed.

The 10-year US Treasury note yield finished higher in December, settling at about 4.57%, above the 4.18% that it was at the beginning of the month. The 30-year bond yield closed out the month at 4.79%, higher than the 4.37% that it was a month ago.

Bond investors are waiting with bated breath for the new administration to get in office and lay out their plans for trade and immigration policies, which will heavily influence the direction of bond prices and their yields. We should get some clarity on those issues by the end of the month.

Savings rates either stopped dropping or even went up a little bit this past month. The change in direction is most likely due to the Fed’s talk of slowing down their pace of lowering short-term interest rates in 2025. The direction of where these rates are heading will continue to be uncertain until the inflation picture clears up, which will also depend on the incoming administration’s trade and immigration policies. That said, these rates are pretty good for savers and risk-averse investors. You can get above 4% return on your money currently. So, CDs and MMAs continue to be a great place to put your cash and your emergency fund, for now.

Now, take a look at the top rates for CDs and money market accounts (MMA):

MMA Rates

National AverageHigh Rate
0.66%5.00%

The best 1-year CD interest rate is currently at 4.60%, higher than last month. The best 5-year CD rate right now is around 4.25%, a 25-basis point rise from last month. Once again, MMA and traditional bank savings account rates changed very little from last month.

Savings rates are now in a holding pattern until we get a clearer picture on where interest rates are heading. This isn’t a bad thing, especially for risk-averse investors and savers. Knowing this, it makes sense in most situations to put cash that you don’t immediately need into CDs with up to 2-year maturities. For emergency cash, stick to high yielding money market and savings accounts, which are still yielding around 5%. As always, keep the total under $250,000 per person at any one bank to ensure you are fully covered by the FDIC.

Mortgage rates stayed about the same as a month ago, with the 30-year loan getting ever so close to the 7% mark. Currently, the 30-year rate sits at 6.85%, slightly higher than a month ago, at 6.81%. There is still low inventory, especially for existing homes, so any drop in rates continues to be met with a quick surge in demand.

Oil prices headed higher as hopes of new drilling to lower oil prices were dashed by oil producers’ comments. It seems that these companies like high oil prices (shocking!) and don’t necessarily want to pump more oil. This is a global market that is motivated by profits, so it is difficult to tell them how much oil to produce unless they become operated by the government.

For the month, the price for a barrel of oil closed at $71.72, down from $68.15 at the beginning of December. For the year, prices ended right where they started in January. Getting oil prices below $70 for an extended period of time would help greatly in lowering the overall inflation rate.

Here’s a look at the one-year chart for U.S. oil:

Gasoline prices lagged the rise in oil prices and fell once again in December, albeit barely. Regular unleaded gasoline is now averaging $3.04 per gallon, down from $3.06 last month. Oklahoma has the cheapest gas currently, checking in at $2.58 a gallon. Hawaii has the most expensive gasoline at $4.55 per gallon. FYI, a year ago, we were paying $3.11.

Check out the prices at the pump in your area: AAA Gas Prices.

Outlook

Events on the horizon that could move the markets in the near term:

  • Fed & Inflation: The Federal Reserve cut interest rates by another 25 basis points at their last meeting of 2024 a few weeks ago. They did state that they might not be as aggressive in cutting rates in 2025 as they thought just a few months ago. I believe they want to let the new administration get settled in to see what policies they plan to implement, particularly tariffs and mass deportation, since these could have a significant impact on inflation. We could know as soon as the end of this month so volatility in the stock and bond markets may be higher than normal this January.

Joe Baker, CFP®

Baker Asset Management, LLC

joebaker@bakerassetmanagement.com

What Is A Wash Sale When Selling Stocks?

This is the time of year that many investors sell some loser investments to offset their income or other capital gains, sometimes referred to as tax-loss harvesting. There is an obscure tax rule, known as the wash sale rule, that could affect how the IRS views these trades. So, here is a brief summary of how the wash sale rule works.

The wash sale rule was designed to discourage people from selling securities at a loss simply to claim a tax benefit.

A wash sale occurs when an investment is sold at a loss and, within a period of 30 days before or 30 days after the sale, the identical or “substantially identical” investment is purchased again.

Under such circumstances, that loss will be “disallowed” and may not be considered in calculating a taxpayer’s losses for income tax purposes.

An example is the easiest way to explain this rule:

Suppose Joe has a taxable brokerage account that holds 50 shares of XYZ stock with a cost basis of $500 because he bought the stock when it cost $10 per share. The stock is worth only $5 per share on July 31, and he sells all 50 shares for a total sales proceeds of $250. Joe now has a realized capital loss of $250.

If Joe purchases new shares in XYZ within 30 calendar days before the sale or up to 30 calendar days after the sale, his capital loss can’t be used to offset income or capital gains for that tax year but is deferred until he sells the new, replacement shares.

As you can see in the example, you temporarily lose the tax benefit of the realized loss, but you get it back when you eventually sell the newly purchased shares because you add the original capital loss to the new purchase price to establish your actual cost basis for the newly purchased shares. The only time that you lose the loss permanently is when you sell an investment in a taxable account, and you buy it back in an IRA.

If it sounds confusing, don’t worry. It is. That’s our tax code.

Please comment or send an email if you have any questions. Thanks!

Joe Baker, CFP®

Baker Asset Management, LLC

joebaker@bakerassetmanagement.com

Tax Loss Harvesting (TLH) – What It Is and When To Do It

Tax loss harvesting (TLH) is a term used in the financial industry to describe strategies employed by investors to minimize their taxes due on any realized gains of investment sales for the year. Realized gains occur when you sell an investment at a higher price than when you bought it.

Before reading any further, please note that TLH only applies to investments in taxable accounts, not retirement accounts or any other tax-deferred accounts. That said, let’s take a look at what this harvesting is all about.

I think an example is the best way to understand how this strategy works:

Suppose you sold shares of XYZ earlier this year for a $10,000 profit, also known as a realized gain. Let’s say that you also have a stinker, ABC, in your account that is down $15,000 from when you bought it. You can sell ABC and now have a realized loss of $15,000. This will offset the $10,000 realized gain. It will also offset up to $5,000 of any other realized gains that you have this year. If you don’t have any other gains, you can apply $3,000 to reduce your taxable income and the remaining $2,000 of losses can be carried forward to next year.

In this example, you were able to avoid paying taxes on that gain of $10,000 by using the TLH strategy.

Most investors prefer to do this strategy towards the end of the year, but you can do it any time during the calendar year. I like to do it for my clients during the slow summer months because that is one less thing to worry about during crunch time in December.

I also want to share with you some do’s and don’ts when you are considering TLH:

  1. Don’t sell losers just to offset gains. Make sure that the investment no longer fits with your investment objectives.
  2. Considering #1 above, do maximize your tax savings by using TLH when you have short term capital gains, since they are taxed at your ordinary income tax rate, which may be much higher than the long-term capital gain tax rate.
  3. Do sell losers if they no longer fit your strategy, even if you don’t have any gains to offset. You can always carry the losses forward to use in later years.
  4. Don’t buy the same investment within 30 days before or after the TLH sale. If you do, this will disallow the loss.
  5. Don’t ever consider any tax strategy, such as TLH, as the sole reason to buy or sell any investment. They should be incorporated into your investment decisions as part of your overall game plan.

Please comment or send an email if you have any questions.

Joe Baker, CFP®
Baker Asset Management, LLC
joebaker@bakerassetmanagement.com

Check Out The New Retirement Plan Contribution Limits for 2025

The IRS recently posted the retirement plan contribution limits for 2025. Here is a table of the new limits as well as the limits from 32024 so you can see how much they have changed:

20252024
 401k, 403b, 457 plans
Employee Contributions:$23,500$23,000
Annual Contribution Limit (employer plus employee contributions)$70,000$69,000
Catch-Up Contributions$7,500$7,500
Age 60-63 Catch-Up Contributions$11,250—
SIMPLE IRA/401k plans
Employee Contribution Limit$16,500$16,000
Catch-Up Contributions$3,500$3,500
Age 60-63 Catch-Up Contributions$5,250—
IRA Contributions$7,000$7,000
Catch-Up IRA Contributions$1,000$1,000

The changes are typical and not surprising except for a new catch-up amount that is allowed for those of us who reach the age of 60, 61, 62, or 63. It is called enhanced catch-up or super catch-up. Whatever you call it, it means you can put more money into your retirement plan in 2025.

For example, if you turn 60 in 2025 and participate in a 401k plan, you can contribute $23,500 plus $11,250 for a total of $34,750.

Please comment or send an email if you have any questions.

Joe Baker, CFP®

Baker Asset Management, LLC

joebaker@bakerassemanagement.com

How Long Will This Bull Market Last?

We recently hit the two-year anniversary of the current bull market in stocks. As a refresher, a bull market happens when stock prices have gone up 20% or more from the previous low for a sustained period of time. The current bull market started on October 12, 2022, and is being sustained by an expanding economy, low unemployment, and, most recently, falling interest rates.

Two years seems like a pretty long time for stocks to go up consistently, so how long can we expect this bull market to last? There’s no fool-proof way to determine the length of a bull market with any accuracy but we can look at historical data to see how long they have lasted in the past.

The table below shows all the bull markets of the S&P 500 index since the early 1930’s.

As you can see, bull markets have averaged almost 4.5 years in length so there’s a good chance that this bull market still has a ways to go. Of course, there are always unknown events that could throw a wrench into this bull, and don’t forget about an election that’s only a few weeks away that could stir up some volatility.

Please comment or send an email if you have any questions.

Joe Baker, CFP®

Baker Asset Management, LLC

joebaker@bakerassemanagement.com

U.S. Balance Sheets Are Looking Good

I was looking at some data last week to see if the U.S. still had a good chance of avoiding a recession and came upon some interesting charts that I wanted to share with you.

The first chart takes a look at the average and median net worth of U.S. citizens categorized by age as of 2023. Remember, net worth is just your assets minus your liabilities. The illustration above gives a great example of how net worth is calculated.

You can see there is quite a difference between average and median values. That’s because there are a bunch of households that are extremely wealthy and that will skew the average higher. The more realistic values are the ones in the Median Net Worth column. These amounts are calculated simply by locating the middle value of all the net worth values in that age group. That said, both show that the net worth of U.S. households is the highest that it’s ever been.

This next chart compares our household debt as a percentage of disposable income to our buddies in Canada and Australia. The lower the percentage, the better:

As you can see, we are below 100% which means that we have enough disposable income to pay off our debts. Also, we are in much better shape than our Canadian and Australian friends.

This is good news any way you slice it. The combination of rising asset values (homes, stocks, etc.), decent job growth, solid wage growth, and the Fed cutting interest rates, almost ensures that there is no recession on the horizon.

Please comment or send an email if you have any questions.

Joe Baker, CFP®

Baker Asset Management, LLC

joebaker@bakerassemanagement.com

What History Tells Us About Stock Performance in the 4th Quarter

History tells us that the fourth quarter of the year is typically a very good time to be invested in stocks. Take a look at this chart:

As you can see, the S&P 500 index has an average return of 4.3% in the fourth quarter over the past seventy-three years. This is more than twice as good a return as any other quarter of the year.

Historical data gets even better for stock market bulls when it comes to this year. When the S&P 500 index is higher the first eight of the nine months of a year, like it has been in 2024, then the fourth quarter is positive every single time (8 for 8), with an average gain of 6.6%. FYI, the index has never been up each of the first nine months of a year. This year, April has been the only down month.

I have to hedge this blog by stating that the upcoming election could have a greater influence on the markets than any other election in recent history. Even so, if history repeats itself, or at least rhymes, we should expect a pretty good quarter for the stock market to finish out 2024.

Please comment or send an email if you have any questions.

Joe Baker, CFP®

Baker Asset Management, LLC

joebaker@bakerassemanagement.com

How to Get Paid by the IRS to Save for Retirement

Do you want to get paid by the IRS for contributing to your IRA or other retirement plans? Well, you can because they will pay you to save for retirement.

There is a little-known tax rule that has been around since 2002 called the Retirement Savings Contributions Credit (Saver’s Credit). This tax credit essentially pays you to put money into your IRA, Roth IRA, 401k, TSA, and most other retirement plans. Here’s a quick summary of how it works:

Eligibility

You are eligible for the credit if you meet certain criteria:

  • Income limits: Your adjusted gross income (AGI) must be below a certain threshold. The exact threshold varies depending on your filing status and whether you are a qualifying individual.
  • Contributions: You must make qualifying contributions to a traditional or Roth IRA, or to an eligible employer-sponsored retirement plan.
  • Age: You must be at least 18 years old and not a full-time student.

Credit Amount

As with most tax credits, the amount is based on your adjusted gross income (AGI) in the year that you contribute. The maximum amount of the credit is 50% of the amount that you contribute to your retirement plan. The maximum contribution amount that can qualify for the credit is $2,000, making the maximum credit $1,000. Here is an example:

Jill, who works at a retail store, is married and earned $41,000 in 2024. Jill’s spouse was unemployed in 2024 and didn’t have any earnings. Jill contributed $2,000 to her IRA for 2024. After deducting her IRA contribution, the adjusted gross income shown on her joint return is $39,000. Jill may claim a 50% credit of $1,000 for her $2,000 IRA contribution on her 2024 tax return.

The following table shows how much of a credit that you are eligible for:

2024 Saver’s Credit Rates and Filing Status

For those that are eligible, it is like getting a match from the government on your contribution. Every little bit helps!

Please comment or send an email if you have any questions.

Joe Baker, CFP®

Baker Asset Management, LLC

joebaker@bakerassemanagement.com

Our Current Economy in Charts

I recently took a look at a whole bunch of economic data charts compiled by economists and strategists from the financial world. Much of this information shows that the U.S. economy can still achieve a soft landing coming out of the interest rate hiking cycle of the past few years.

Regarding the stock market, there are mixed reviews with some showing further room to run in this current bull market while others expect a pullback, especially with uncertainty picking up as we approach the November elections.

Here are a few of those charts that I wanted you to see:

Shelter and auto insurance have been the two stubborn pieces of inflation that haven’t subsided yet. The good news is that rents and mortgage rates are rising much slower or even dropping in some areas, which should help get inflation down to the Federal Reserve’s target of 2% sometime in 2025.

Because inflation has taken up all the oxygen in the room over the past few years, disposable income outpacing inflation is not a well-known statistic, but here it is. Both employee compensation and disposable personal income have increased more than inflation since the pandemic. Also, inflation is expected to continue to drop through the rest of this year, so consumers should see their disposable income increase, assuming their salaries remain the same.

Chicago Board Options Exchange (CBOE) Volatility Index, more commonly known as the VIX, is an options-based measure of expected S&P 500 volatility over the next 30 days. When this indicator is consistently below 20, stocks tend to perform well. This was the case in the mid-1990s, mid-2000s, and much of the 2010s. When the VIX spikes, it is an indicator of a recession, of which the four most recent are shown as the shaded regions in the chart above. So, we could be in a period of low VIX, which is good for stocks, or about to enter a period where the VIX spikes. Interest rate and election forces will be what moves this index through the rest of this year.

To summarize, the economy and markets have done well so far in 2024 but it feels like we are at an inflection point now. The two big influencers are interest rates and the elections. These will dictate how we finish up in 2024. It should be an interesting ride into the end of the year.

Please comment or send an email if you have any questions.

Joe Baker, CFP®

Baker Asset Management, LLC

joebaker@bakerassemanagement.com

Dot Com Vs. AI Era Comparison

I thought it would be interesting to take a look at the late 1990’s Dot Com era and see how it compares to the current AI era. There are some similarities that I see, particularly with investors’ mindsets, that make me think history will repeat itself. But there are also some key differences that could keep the AI era from suffering the same fate as the Dot com era. Here’s what I am seeing:

What’s the same

Transformational Change – In the 90’s, the internet was changing how businesses interacted with customers. We went from going to brick and mortar stores to sitting at a computer to transact business. Today, AI is involved not only on the transactional side of business, but also the marketing, manufacturing, research, and almost every aspect of business today.

Fear Of Missing Out (FOMO) – You couldn’t go to a party, restaurant or pretty much any social gathering without hearing someone talk about how well their Dot Com investments were doing. This caused a great deal of FOMO among both retail and institutional investors. If there was a “.com” at the end of a company’s name, you wanted to own its stock. Now, investors are lining up to buy any company that is involved in AI infrastructure and willing to pay a premium for them.

What’s different

Earnings – The Dot Com era ushered in an incredible number of companies that went public based on hype and the promise of amazing revenue and profits. Many had no revenue but the push to get their stock publicly traded was so great that they rushed to the markets. The insanity was that investors couldn’t get enough of them. Of course, once reality set in, these companies went bankrupt, and investors lost everything. Now, most companies involved in AI are already well established (Microsoft, Amazon, Google, Nvidia, Meta, etc.) and are very profitable already.

Behind the Scenes – AI is helping make companies more efficient, productive, and profitable by improving operations and procedures behind the scenes. It is involved in almost every aspect of a company’s business whereas in the Dot Com era, the internet was more concentrated in just the sales and marketing sectors.

Far Reaching – Back in the 90’s the internet focused mainly on the interphase between businesses and consumers. Today, AI is not only involved there, it is changing nearly every aspect of every industry. In health care for instance, AI can read x-rays, CAT scans, and biopsy slides with incredible accuracy, detecting and diagnosing diseases faster. In the forest fire arena, AI is now being used to detect fires much quicker than humanly possible. California has 1,000 cameras monitoring their forests using AI. The money, manpower, and property saved by employing AI is immense. Now, extrapolate that across every industry and you can see why AI is a game changer.

That being said, it does seem that the markets might be getting ahead of themselves in this AI era. But it is nowhere near the frenzied euphoria that caused the Dot Com era bubble to burst…..for now.

Please comment or send an email if you have any questions.

Joe Baker, CFP®

Baker Asset Management, LLC

joebaker@bakerassemanagement.com