October 2024 Newsletter
Navigating Markets in an Election Year
The Real Money Pros
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In 2024, citizens around the globe will head to the polls, making decisions that will shape the future of their countries. National elections are scheduled in nations that account for 40% of the world's population(1). The actions and policies of those elected can have a profound impact on our daily lives, often resulting in laws and regulations that affect us directly.
Given the high stakes, it’s no surprise that national elections often evoke strong emotions. However, emotions and investing don’t always mix well. Let’s put aside the emotional aspect of partisan politics for a moment and let the data provide insight into some of the most common investment questions that arise during an election year.
Are Election Years Bad for the Markets?
Since 1926, the average annual return of the S&P 500 during election years has been about 11.5%. Interestingly, the S&P has delivered positive returns in 84% of those election years. That sounds like a pretty good track record. But when we look at non-election years, the average return is slightly higher at 12.4%, with only 70% of those years ending positively(2). You could argue that both election and non-election years have their pros and cons, but statistically, they're quite similar. Trying to predict the market based solely on the four-year election cycle is a bit like predicting the weather based on whether Punxsutawney Phil sees his shadow—it's not exactly a solid strategy.
Source: S&P 500 returns since 1926. Wikipedia Party Divisions since 1789
What Do Elections Tell Us About the Market and the Economy?
Not much, really. Elections are mainly about getting votes and making promises, not necessarily about passing laws or policies right away. History shows that the stock market has done well under both Democratic and Republican leadership, with only a small difference in performance between them. But it's important to remember that these numbers can be cherry-picked to fit a particular narrative—depending on the time period or economic conditions you look at. In the long run, profits don’t care about political parties. So, making investment choices based solely on political agendas doesn’t really make sense.
Source: Wikipedia Party Divisions since 1789. Return is the average return of large cap US stocks since 1926. Trifecta is defined as one party controlling the executive branch, House of Representatives and the Senate.
What Does the Market and Economy Tell Us About Elections?
More than you might think. As James Carville, Bill Clinton’s campaign strategist, famously said, "It's the economy, stupid." He was spot on. The state of the economy during a President’s term often influences how successful they are seen to be. Since 1926, 16 sitting Presidents have tried to get reelected. Of those, ten didn’t face a recession in their last two years, and nine of them were successful in winning another term.
Source: Wikipedia Party Divisions since 1789. Return is average return of large cap US stocks since 1926 Recession dates based on the National Bureau of Economic Research.
On the other hand, out of the six Presidents who ran for reelection during a recession, only one managed to win. Interestingly, years when a sitting President is up for reelection tend to be better for the markets. Reelection years usually see average market returns that are 5.7% higher compared to open years(3).
In the coming months, you'll hear a lot of campaign speeches designed to stir up emotions and drive people to the polls. However, it's wise to focus that energy on voting rather than changing your investment strategy. Elections usually don’t determine market outcomes, and no matter what happens, the markets often find a way to move forward.
Disclosures & Definitions
Comparisons to any indices referenced herein are for illustrative purposes only and are not meant to imply that actual returns or volatility will be similar to the indices. Indices cannot be invested in directly. Unmanaged index returns assume reinvestment of any and all distributions and do not reflect our fees or expenses.
This report is intended for the exclusive use of clients or prospective clients (the “recipient”) of Apollon and the information contained herein is confidential and the dissemination or distribution to any other person without the prior approval of Apollon is strictly prohibited. Information has been obtained from sources believed to be reliable, though not independently verified. Any forecasts are hypothetical and represent future expectations and not actual return volatilities and correlations will differ from forecasts. This report does not represent a specific investment recommendation. The opinions and analysis expressed herein are based on Apollon research and professional experience and are expressed as of the date of this report. Please consult with your advisor, attorney and accountant, as appropriate, regarding specific advice. Past performance does not indicate future performance and there is risk of loss.
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The S&P 500 is a capitalization-weighted index designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
Material Risks
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Domestic Equity can be volatile. The rise or fall in prices take place for a number of reasons including, but not limited to changes to underlying company conditions, sector or industry factors, or other macro events. These may happen quickly and unpredictably.
Apollon Wealth Management, LLC dba Tree City of Apollon (Apollon) is an investment advisor registered with the SEC. This document is intended for the exclusive use of clients or prospective clients of Apollon. Any dissemination or distribution is strictly prohibited. Information provided in this document is for informational and/or educational purposes only and is not, in any way, to be considered investment advice nor a recommendation of any investment product or service. Advice may only be provided after entering into an engagement agreement and providing Apollon with all requested background and account information. Please visit our website http://apollonwealthmanagement.com for other important disclosures.
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Figure 1: Image generated using Canva Magic Media from the prompt "A voting booth mixed with the investment markets".
(1) Strategas Washington Policy as of January 2, 2024
(2) S&P 500 returns since 1926. Wikipedia Party Divisions since 1789
(3) Return is average return of large cap U.S. based on Wikipedia Party Divisions data since 1789.
There's Still Time to Reduce Your 2024 Tax Liability
As we approach the final months of 2024, the window of opportunity to make strategic decisions that reduce your tax liability is closing fast.
Why Act Now?
By taking action before year-end, you can implement key strategies that will lower your taxable income and maximize your deductions. Waiting too long could mean missing out on critical opportunities to reduce what you owe.
Hereʼs what you need to know to ensure you donʼt leave money on the table.
Strategies to Consider:
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Max Out Retirement Contributions
Contributing to tax-deferred retirement accounts, such as a 401(k) or SEP-IRA, can significantly reduce your taxable income. Make sure youʼre contributing the maximum allowed for 2024 before the December 31st deadline.
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Year-End Business Expenses
If you're self-employed or run a business, consider purchasing necessary equipment or software, or prepaying for services before the year ends. These expenses can reduce your taxable income and ease your cash flow into the new year.
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Tax-Loss Harvesting
If you have investments, now is the time to consider selling underperforming assets to offset capital gains. This can lower your taxable investment income for the year.
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Charitable Donations
Making charitable contributions not only helps a good cause, but also reduces your tax liability. Ensure you document all eligible donations to claim them on your tax return.
Donʼt Wait Until Itʼs Too Late
Itʼs important to start planning now. The closer we get to December 31st, the fewer options youʼll have. Speak with a tax professional or financial advisor today to create a tailored strategy that works for you and ensures youʼre prepared for tax season.
Are you self-employed or a small business owner?
Reach out to the team at Formations today, and letʼs work together to optimize your strategy before the window closes!
Secure Act 2.0: Employer Requirements for 2025
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The SECURE Act 2.0 aims to enhance retirement savings opportunities within employer-sponsored plans and introduces various provisions that impact employers, particularly regarding the management of their retirement plans. While the Act does not mandate that all employers offer retirement plans, it does introduce several requirements and incentives designed to encourage participation and improve accessibility. Employers need to be aware of these provisions, as well as the administrative work and potential liabilities they create.
1. Automatic Enrollment in New Plans
One of the most significant changes introduced is the requirement for automatic enrollment in newly established 401(k) plans. Starting in 2025, all new 401(k) plans must automatically enroll eligible employees at an initial contribution rate of at least 3%. This rate must escalate annually by at least 1%, eventually reaching a maximum of between 10% and 15%. The rationale behind this provision is straightforward: automatic enrollment significantly increases participation rates in retirement savings plans. Employers are permitted to allow employees to opt out of this automatic enrollment.
2. Inclusion of Long-Term Part-Time Employees
While employers could previously choose to include part-time employees in plan eligibility, SECURE 2.0 now requires retirement plan eligibility for long-term part-time employees. Employers must allow part-time employees who have worked at least 500 hours per year for three consecutive years to participate in their retirement plans. This provision aims to address the increasing number of part-time employees in the U.S. workforce and ensures they have access to retirement savings options.
This change is particularly significant for industries where part-time work is common, such as retail and hospitality. By extending eligibility to part-time employees, employers can contribute to their financial well-being and enhance overall job satisfaction and retention.
A point of caution for employers regarding part-time employee participation: It’s important to ensure that part-time employees are aware of the need to communicate if they have multiple part-time jobs, especially if they participate in a retirement plan through another employer. Maximum annual contribution limits are based on the individual, not on each plan. Without proper communication, an employee could unintentionally over-contribute if they don’t inform the payroll department of their contributions to other plans, which could lead to complications for both the employee and employer.
3. Student Loan Repayment Matching Contributions
In recent years, many employers have sought ways to help employees with their student loan payments. The SECURE Act 2.0 provides employers with another way to do this. Employers can now offer matching contributions to employees' retirement accounts based on their student loan payments. To facilitate this, the employee makes their student loan payment and provides the payment details to their employer. The employer can then contribute an equal amount to the employee’s retirement plan.
4. Emergency Savings Account
The Act also introduces the option for employers to offer emergency savings accounts linked to retirement plans. These accounts allow employees to save up to $2,500 in a tax-advantaged account. Employees can withdraw funds from these accounts without penalties, providing a safety net for unexpected expenses.
5. Enhanced Tax Credits for Small Businesses
Small businesses face unique challenges when it comes to establishing retirement plans. The SECURE Act 2.0 addresses this by expanding tax credits for small employers that set up retirement plans. The credit offsets a portion of the startup costs associated with establishing a retirement plan and is available for up to three years.
For small businesses, these tax incentives can significantly reduce the financial burden of implementing retirement benefits during the first three years of the plan. While this helps with initial set up, it’s important to plan for the ongoing expenses once the credit expires.
6. Simplifying Plan Administration
The SECURE Act 2.0 aims to simplify retirement plan administration for employers, making it easier to establish and maintain retirement plans. This includes streamlining the process for multiple employer plans (MEPs), allowing multiple businesses to join together in offering a retirement plan. This approach reduces administrative costs and responsibilities, making it more accessible for smaller employers to offer retirement benefits.
Many associations have set up MEPs since the Act was signed into law. However, without proper administration of the plan, employers involved may face challenges with service and payroll coordination. Poor administration can also create difficulties for employees.
Ataraxis offers an MEP to its clients and their employees at no cost. Since we handle payroll for our clients and work directly with their employees, both our clients and their employees get the best of both worlds. Employees receive personalized service and a retirement plan with great investment options, while employers can rest easy knowing they have no plan responsibilities—Ataraxis manages everything. Without a coordinated provider like Ataraxis, employers must stay informed and alert to ensure they do not risk having a poorly administered plan.
7. Enhanced Reporting Requirements
While the SECURE Act 2.0 encourages retirement savings, it also places additional reporting requirements on employers who offer retirement plans. Employers must ensure that employees are informed about their eligibility and the benefits of participating in these plans. This includes clear communication about automatic enrollment and investment options.
As mentioned in the section above, Ataraxis clients don’t have to worry about these reporting requirements, because we handle them all. If you are considering joining an MEP, make sure the sponsor of that plan takes care of these responsibilities and relieves you of the liability associated with these requirements.
Conclusion
The SECURE Act 2.0 introduces many new requirements that employers need to consider when deciding whether to start a retirement plan. There can be significant liability for employers who sponsor a plan. If you do not have the capacity to manage it properly, be sure to find partners and service providers that can assist you.
Employees have consistently ranked retirement plans as a top priority in their list of desired employer benefits. The changes introduced by this Act will only make offering a retirement plan even more important for employees.
If you would like to offer a plan but don’t have the structure or desire to manage it, feel free to reach out. We’ll be glad to help you with that and any other employer-related issues.
Figure 1: Media from Wix from the search "Business Owner".
Major Tax Law Changes Coming in 2025
Stephanie Helms, CPA
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With every presidential election there are proposed changes in legislation and tax policy. A notable tax law that is set to change - the Tax Cuts and Jobs Act (TCJA) - is sunsetting in 2025. The TCJA, enacted in 2017 under the Trump administration, added many provisions to the code that aimed to simplify tax returns and reduce tax liabilities. The expiration of the TCJA will result in many provisions to be reverted and it is pertinent to understand how it will affect your taxes.
Below are some of the key changes when the TCJA sunsets:
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The standard deduction will revert to the former lower amount (TCJA nearly doubled the standard deduction) and personal exemptions would return for filers and dependents
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More filers will itemize their deductions, consequently requiring greater tax assistance and more complex returns
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Tax rates will increase to pre-2017 levels (see graph from Tax Foundation)
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$10,000 cap on state and local taxes (SALT) expires
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More taxpayers will be liable for the alternative minimum tax (AMT)
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Qualified Business Income Deduction (QBI), a 20% deduction on qualified income for business owners, will no longer be available
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The Child Tax Credit (CTC) of $2,000 will revert to $1,000, along with the phase-out thresholds reverting to their lower amounts (it should be noted that both presidential parties have indicated that they would favor increasing the CTC if elected)
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Tax Planning for the Future
Typically, major changes to tax law are not finalized until the end of the year and are then retroactively implemented. This makes it difficult for accurate tax planning. A widely held belief is that tax rates will not be lower, causing accelerated transactions in 2024 to avoid higher future rates. Due to the uncertainty caused by the TCJA sunsetting, we recommend consulting with your tax professionals for both 2024 and 2025 tax planning.
written by:
Stephanie Helms, CPA
brought to you by:
Stewart & Associates, P.A.
Superior Cloud Accounting
Figure 1: Media from Wix from the search "Taxes".
Figure 2: Tax Foundation. The TCJA Lowered Average Tax Rates for All Income Groups. Tax Foundation. https://taxfoundation.org/data/all/federal/tax-calculator-tcja-expiration/#:~:text=The%20TCJA%20reduced%20average%20tax,and%20the%20alternative%20minimum%20tax. March 12, 2024. Accessed October 9, 2024.