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Jan 19, 2024

2023 4th Quarter

CPWA Newsletter Main

From the Portfolio Management Team

Another Year In The History Books
History tells us that there is a strong relationship between inflation leading to higher interest rates and higher interest rates leading to recessions. As 2023 began, we knew that the US economy had endured substantial inflation (regardless of which inflation measure you use) and the Federal Reserve continued raising interest rates in the steepest and quickest rate hiking cycle since the 1980s. So, it didn’t surprise us to start 2023 with repeated declarations from economists and analysts that the year would bring a recession.

And yet as 2023 carried on, no recession. Workers remained employed, wages grew, consumers continued to spend, and businesses kept growing profits.

For the year, the S&P 500 was up 25.1%, the Nasdaq soared a stunning 41.7% and the Bloomberg US Aggregate Bond Index returned 4.7% (see graph below, Ycharts). In equity markets, it was a blow-out year based primarily on very high returns from the Magnificent Seven: Apple, Amazon, Microsoft, Meta (Facebook), Alphabet (Google), NVIDIA and Tesla. Prospects for artificial intelligence (AI) fueled much enthusiasm, but underlying sales and profit growth supported the run-up as well. Bonds had a more challenging year with volatile interest rates and intermittent inflation scares but finished with the first positive return in three years as inflation appeared tamed and the Federal Reserve predicted interest rate cuts would begin in 2024.

2024 chart returns

The Economy
The economy grew around 3% in 2023, which is above this century's average. In addition, inflation came down from 7.1% last November to 3.1% this November (see graph below, Statista). The manufacturing part of the U.S. economy has been a laggard—contracting all year—but the services part, which is much larger at over 75% of the broad economy, maintained growth in 2023. Employment has been strong with unemployment below 4% and net job growth throughout 2023.

2024 inflation

Looking Forward
As we kick start 2024, the economy appears to be on solid footing and the financial markets optimistic. The Federal Reserve continues to hold the Fed Funds rate steady, aimed at achieving a “soft landing” where inflation cools, employment remains robust, and the economy returns to steady, low-single-digit growth. The Fed currently states that they expect to cut rates 3 times in 2024, which insinuates that they predict a softening economy that will allow them to reduce rates, at least a little. Corporate profit and sales growth look strong (although perhaps not as spectacular as stock prices indicate). Bonds promise some of the best short-, intermediate-, and long-term yields seen in decades as economists forecast 2 to 3% economic growth in 2024.

We are not quite as optimistic as the financial markets. We remain concerned about the possibilities of resurgent inflation or a quick downward shift in the economy as corporations, governments, and people around the world navigate the realms in which they operate. The 2024 consensus expectation among analysts for S&P 500 earnings growth is currently north of 11% while the historical average is around 6%. Will earnings indeed grow at almost double historical averages in 2024 (which we believe is currently reflected in stock prices), or will expectations and potentially stock prices revise downward?

Despite our cautious stance, we constantly look at historical and current data to guide our portfolio management decisions, and we remain steadfast in our belief that a well-balanced portfolio aligned with your time horizon and risk tolerance will serve you best in 2024 and beyond. We could share hundreds of charts with you to explain our viewpoints, but we think the following graphic is particularly insightful in viewing stock market returns. Although the stock market is volatile, this graphic illustrates that since 1926, the stock market as measured by the S&P 500 has been positive 72 out of the 98 years...but even more impressive to us is that 37 of those years have yielded greater than 20% returns in that single year while only 6 years saw greater than 20% declines.

market returns bar chart

Fourth Quarter 2023 Reports
Your quarterly portfolio reports have been uploaded to your CPWA client portal. If you don't recall your login and/or need your password reset then please email us.

Financial Planning: Taxes
Your 2023 tax documents will come directly from Fidelity, likely between mid-February and early March. If you would like us to send a copy of your tax documents directly to your tax preparer via secure email then please let us know (if we already do this for you then we plan to continue doing so without your request, and you will be Cc'ed on such emails).

Each new year brings tax changes, and 2024 is no exception. We have seen three major pieces of tax legislation passed within the last four years, and with each piece of legislation, we have more nuances, more inflation adjustments, more expiring tax breaks, and more rules to follow. We strongly suggest working with your tax advisor to plan for 2024 and beyond, and we are happy to participate in those meetings where we may be useful.

For quick reference, here are a handful of 2024 tax numbers:
- Traditional and Roth IRA contribution limits: $7,000 for those under age 50 and $8,000 for those 50 and over (SEP and SIMPLE IRAs offer higher contribution amounts for small business owners)
- Standard deduction: $29,200 for those who are married filing jointly, $14,600 for single filers and married and filing. For head of household, the standard deduction rises to $21,900. If you are 65 or older and single or head of household, you may take an additional deduction of $1,950. If married and filing jointly or separately, you may take an additional $1,550
- Annual gift tax exclusion: $18,000, meaning any individual may gift another individual $18k without taxes becoming a factor
- The lifetime estate, gift, and generation-skipping transfer tax exclusion will increase to $13.61 million. The currently higher exclusion amount is set to revert to $5.49 million (adjusted for inflation) at the end of 2025 unless Congress takes action
- There are still seven federal income tax rates, which were set by the 2017 Tax Cut and Job Act: 10%, 12%, 22%, 24%, 32%, 35% and 37%. The IRS increased its tax brackets by about 5.4% for each type of tax filer for 2024 after increasing by 7% in 2023. This means that you can earn more income before the incremental earnings jump into a higher bracket, and these historically large increases are a result of high inflation

In Personal News: Our 2023 Highlights
2023 brought two new lives into our CPWA family. Brianna and her husband welcomed their second child in March while Lyle and his wife became first-time grandparents in May. These two babies, Rory and Zoey, are the CPWA 2023 highlight by far! Along with our growing family, we posed the question "What is your favorite memory of 2023?" to the team, and here are the responses...

Dan: "The Speirs clan (3 generations) took a wonderful trip to Colombia in 2023. We visited the beautiful city of Cartagena, stayed in the Amazon rainforest, and enjoyed the coffee regions and the bustling city of Medellin. We can’t wait for the next adventure."

Lyle: "My favorite memory was sitting with a large group of friends on my birthday and wagering as to the specific date and time of birth for my soon-to-be-born granddaughter. She was born the following day."

Jenni: "The first day of school when my youngest—our baby—started kindergarten. My husband and I had looked forward to this day for years...the day when we would have one drop-off and one pick-up location! And yet, as the day came, also came the reality that life goes quickly even when you're wishing for it. I soaked up every moment of that morning, in a hurry to be nowhere else. I watched and listened to my kids and their peers buzz with excitement to be reunited with friends, a 'year' older, and fresh with enthusiasm for the academic year ahead. It was an experience that brought parental mixed emotions along with high energy from the kids and reiterated to me how very fortunate I am!"

Brianna: "My favorite thing about 2023 was the birth of our son, Rory, and all of the joy and wonder that comes with bringing a baby into the world. It has been amazing seeing Nieve transition from being our only child into such a loving big sister. She is gentle and amusing, and Rory in turn laughs and smiles at his big sister. Their interactions are awesome to watch."

Meredith: "Only one favorite thing?! Last year, Gil and I went to Oaxaca twice, which was a special treat. We were there for Dia de Muertos, where we painted our faces and celebrated with the was FUN! I was lucky enough to spend Thanksgiving with my sister's family in Seattle, enjoying their company and playing with my niece & nephews. And Lucas (our son) and I resumed our Thursday date nights!"

collective team

Gratitude and Well Wishes
We cannot end our quarterly newsletter without reiterating our thanks to you, our clients and friends, who employ us to do what we love—manage your investment portfolios and provide financial guidance to hopefully help you enjoy a more fulfilled life. We wish you and your favorite people a wonderful, healthy 2024 filled with an abundance of what makes you happiest!


Cerro Pacific Wealth Advisors LLC is a Registered Investment Adviser. Advisory services are only offered to clients or prospective clients where Cerro Pacific Wealth Advisors LLC and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Cerro Pacific Wealth Advisors LLC unless a client service agreement is in place.