Quarterly Economic Review: Third Quarter 2024

November 26, 2024

October 22, 2024

By

Conway Wealth

  • The U.S. economy continues to demonstrate surprising strength bolstered by a hardy labor market with the unemployment rate hovering around 4%. The consumer was also a bright spot with consumer spending increasing by over 8% during Q2.
  • The Fed moved forward with its first rate cut of this cycle, reducing its policy rate by 50 basis points. While on the higher end of the anticipated range, the Fed likely now faces resistance against more extensive easing into a seemingly still robust economy.
  • Inflation is still trending lower yet there are several factors that could contribute to cyclical flare-ups, including rising geopolitical uncertainty and rising deficit concerns, natural disasters, and unexpected disruptions to supply chains (ex. dockworkers strike).
  • Risk assets welcomed a ‘goldilocks’ environment with supportive growth, tamer inflation, and incrementally more accommodative monetary policy. Consensus around a ‘soft’ or ‘no landing’ leave performance more vulnerable to disappointments going forward.
  • The yield curve fell meaningfully over the quarter as lower policy rates became a reality. Fixed income volatility remains elevated as markets search for a new equilibrium factoring in long-term inflation and growth trends.
  • Fixed income markets were buoyed by falling rates and a still benign credit environment. Notably, the belly of the curve has risen following the end of Q3 responding to stronger growth and concerns about the potential for reignited inflation.
  • Within equity markets, strength broadened to include previously left out value-oriented and lagging sectors. Emerging markets were also a standout, driven by China’s sweeping economic support measures, the long-term impact of which is yet to be determined.
  • Oil prices, which had been muted due to robust supply paired with the expectation of weakening demand, surged towards the end of September following further escalation in the Middle East and could remain volatile in coming months.
  • Core private market asset classes (private equity, credit & real estate) offered stability and income enhancement over the quarter and year-to-date. Real estate valuations (outside of office) may be bottoming while private credit market defaults are still at bay.
  • With the U.S. presidential election on the horizon, elevated market volatility is probable in the near-term. In some cases, the candidates are aligned on key issues (expanding the deficit, securing the border) while they disagree strongly on others (tax and foreign policy). Regardless of the outcome, markets historically look through transitions in leadership and focus on long-term fundamentals, such as structural growth and profit trends.
  • Despite constant anxiety-inducing headlines, many facets of the economy are supportive. The aftermath of pandemic related disruptions is fading and a new equilibrium is closer to being achieved. In the new normal with the potential for structurally higher inflation, its essential to properly invest assets to ensure purchasing power is maintained.

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Initial 2021 Tax Considerations

With the swearing-in of a new President and Vice President, plus convening of the next Congress, affluent Americans are weighing how changes in federal government may financially impact them.

Given that Democrats hold the Presidency and control both Houses of Congress by a slim margin, it now seems likely that tax reform could be passed as a budget reconciliation bill and then signed into law. While there is a remote chance that expected tax changes will be retroactive, it is more probable that they would take effect immediately upon becoming law or even at the start of 2022.

Since 2021 may be a last opportunity to capitalize on current income, capital gains, and transfer tax laws, families are considering key financial & estate planning adjustments, where appropriate.

Income & Capital Gains Tax Proposals

With the swearing-in of a new President and Vice President, plus convening of the next Congress, affluent Americans are weighing how changes in federal government may financially impact them.

Given that Democrats hold the Presidency and control both Houses of Congress by a slim margin, it now seems likely that tax reform could be passed as a budget reconciliation bill and then signed into law. While there is a remote chance that expected tax changes will be retroactive, it is more probable that they would take effect immediately upon becoming law or even at the start of 2022.

Since 2021 may be a last opportunity to capitalize on current income, capital gains, and transfer tax laws, families are considering key financial & estate planning adjustments, where appropriate.

“Be fearful when others are greedy and greedy when others are fearful.”

Responsive Planning

Given the above proposals, there is great uncertainty surrounding future tax policy. Even if some of the more benign tax provisions now in effect are not repealed, many of them are scheduled to sunset at the end of 2025 already.

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  • Phase out the 20% pass-through deduction on qualified business income for people with annual income exceeding $400,000
  • Eliminate capital gain deferral through like-kind exchanges of business & investment real estate for people whose yearly income exceeds $400,000
  • Increase the highest corporate income tax rate from 21% to 28% and subject corporate book income of $100,000,000 or more to a 15% alternative minimum tax
  • Double the tax rate on global intangible low tax income (GILTI) earned by foreign subsidiaries of American businesses from 10.5% to 21%
  • Impose a 10% surtax for U.S. companies that move manufacturing & service jobs to another country and then provide services or products for sale back to the American market
  • Create an advanceable 10% “Made in America” credit for manufacturers’ revitalizing, re-tooling and hiring costs
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