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  • Writer's pictureColumbus Wealth Management

Columbus Wealth Management Quarterly Update - 2023 Q4

Updated: Apr 5

Thank you for reading our newsletter! For those of you joining for the first time, we post these newsletters at the start of each quarter to keep you updated on our firm, your portfolios, and other relevant issues. We will also include a current educational topic for our clients who want to understand what we are doing for them in more detail. For those of you who are not working with us, please reach out if you feel you could benefit from these strategies. We hope you enjoy, and as always, please don’t hesitate to contact us with any questions or feedback!

 

Personal Updates

We celebrated Max’s first birthday (picture below), as well as holidays with family and friends. We hope you and your family had a wonderful holiday season and that 2024 is off to a great start!

Max's First Birthday

 

Firm Updates

With the release of this newsletter, we celebrate the two-year anniversary of Columbus Wealth Management! We would like to thank each of you for your support, and for being the best part of CWM.

We continue to invest in our firm to improve the client experience and expand our offerings. This quarter, we partnered with YCharts to bring even more advanced investment analytics into our portfolio construction process. Also, keep an eye out for some cool new charts in our newsletters!

 

Market Update & Investment Commentary

Data as of 12/31/2023 (unless stated otherwise)

 

2023 was a year full of surprises. Among those surprises were excellent investment returns, amidst a backdrop of not-so-great news. We saw significant interest rate increases designed to combat high inflation, the collapse of Silicon Valley and Signature Bank in March, followed by 3 more banks later in the year, layoffs of thousands of tech workers, strikes in Hollywood and Detroit, continued turmoil in Ukraine and a new war between Israel and Hamas. We also saw a 26.3% return for the S&P 500. The U.S. economy continues to show more resilience and stability as time goes on. We know our clients are better served when we commit to a strategic, long-term approach and remain invested per the guidelines on our Investment Policy Statements and avoid market timing and other speculative strategies. Below, we’ve included one of our favorite charts from J.P. Morgan’s “Guide to the Markets,” which shows the latest investment returns for each major asset class in 2023, as well as the previous 15 calendar years. Notice how the top performing asset class doesn’t remain on top for long, and the balanced portfolio “Asset Allocation”, which has an allocation of about 60% equities and 40% bonds, sails right through the middle!

Asset Class Returns

 

For those interested, on to some details about the current state of the economy:  

  • Gross Domestic Product (GDP) growth has been encouraging at 4.9% for Q3 (quarter-over quarter, annualized). Year-over-year, it was 2.9%, which is heading back toward the long-term trend of 2% after seeing a major dip on the other side of the pandemic. Consumer spending has continued along at a healthy rate, and businesses, though cautious not to overspend, are investing in things like Artificial Intelligence which help with productivity and maintaining profit margins. Divided government has prevented significant increases in government spending. For now, we seem to be dodging a recession and a “soft landing” (successfully lowering inflation by increasing interest rates without causing a recession) remains in sight.

  • On interest rates, the Fed has paused, and it seems short-term rates may have peaked at a range of 5.25% - 5.5%. However, they’ve reserved the option to resume increases should inflation discontinue its downward trend. It’s also possible we could see rate cuts in 2024, but at this point we expect any cuts to be modest (and perhaps later in the year), unless we go into a recession. Lower rates mean cheaper financing for companies, investors and households, and lower mortgage rates, all of which can help boost the economy.

  • Inflation (measured by the US Consumer Price Index) reached a peak of 9.1% in June of 2022, and we’re now down to 3.1% as can be seen in the chart below.


Inflation 01/21-12/23

  • Housing costs are still a major contributor (it makes up about 35% of CPI), but rent inflation has slowed, and we should see “owners’ equivalent rent” moderate as mortgage rates come down (see below for a chart on housing affordability). Food and energy inflation have also both moderated significantly.


Housing Affordability

 

  • The labor market seems to be normalizing as well. The latest unemployment reading for 12/31/2023 was 3.7%, which marks 25 months with a reading below 4% (the first time that’s happened since 1969). We have about 8.7M job openings, or about 1.4 openings per unemployed person, which is down from a high of just over 2 openings per unemployed person recorded in March 2022. It’s still a tight labor market (hard for companies to find workers, easy for workers to find jobs), but we aren’t seeing employees with quite the advantage they enjoyed at the end of the pandemic, which should keep wage pressures down and therefore help control overall inflation.

  • Politics - Everyone’s favorite topic! However, we don’t think political views should influence investment decisions. The chart below, which goes back to WWII, shows 3 scenarios: one in which Republicans control the White House, Senate, and House, one in which the Democrats control all three, and one which is some kind of mixed control. All three show positive GDP growth and S&P 500 returns on average, and no obvious correlation between the party in control and the presence of an “up or down” year. Bottom line: stay invested!


Government control, the economy and the stock market


Educational Topic

In this newsletter, we want to mention the IRS underpayment penalty. You may have seen this in the past (on line 38 of your federal tax returns) if your estimated payments and/or withholding from your paycheck fell short of your total tax bill at filing. At lower interest rates, this penalty was easier to overlook, but the interest rate used to calculate the charge has increased to 8% (up from 3% just two years ago). This is particularly relevant for self-employed workers, who don’t have tax withheld from their income, but rather must make quarterly estimated payments. At Columbus Wealth Management, we help our clients stay on top of this issue so they can avoid surprises when filling their taxes in the spring. For those of you reading this who aren’t clients yet, we provide a few tips to help avoid this penalty and keep more of your hard-earned dollars!

  1. Keep accurate records of your self-employment revenue and expenses for your business throughout the year so you always have a good idea of your net income. Bookkeeping software like QuickBooks makes this much easier. Don’t wait until the end of the year to organize this data.

  2. Using your prior-year tax returns as a guide, your accountant should be able to help you project your current year income using your bookkeeping data, as well as any changes to W-2 income from you and/or your spouse. You should also keep your accountant updated on other changes to your tax situation, including but not limited to: rental properties, investment income, pensions/annuities/social security, purchase/sale of a home, and itemized deductions.

  3. You are responsible for covering at least 90% of your tax liability via estimated payments or other withholding throughout the year. The IRS won’t charge a penalty if the balance due at filing is less than $1,000. Further, the timing of your estimated payments matters too. For example, if you skip Q1, Q2, and Q3 estimates and make one large payment for your Q4 estimated payment, you may still owe penalties unless all your income also came in Q4.

  4. If all the above seems like too much work, you can also avoid the penalty by sending in estimated payments that equate to at least 100% of your prior year tax liability (or 110% for filers with adjusted gross income of more than $150,000). This method works well if your income and deductions are similar to the prior year. However, if you have a big drop in your income, you might want to rely on steps 1-3 above to avoid sending in much more than you need to, especially if cash flow is tight.

  5. Lastly, if you become aware toward the end of the year that you missed or undershot your first few quarterly estimated payments, remember that W-2 withholding, as well as withholding from retirement account distributions (IRAs, pensions, annuities), is considered to be paid throughout the year. For example, if you plan to take a large IRA distribution in December, tax withholding on that distribution will go toward your overall tax liability and won’t be subject to the timing issues outlined in #3 above.

 

For those of you interested in learning more, check out this Wall Street Journal article which includes various scenarios and links to calculators, or reach out to us if you prefer to get the stress of tax penalties off your plate!

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