January 24, 2024

EWA Quarterly Update: Reflecting on Q4 2023 and Looking Ahead to Q1 2024

This weeks blog is a written version of our Quarterly Market Update video in which we will review the events of quarter 4 2023 and provide insights into the economic landscape for quarter 1 2024. We are excited to announce some significant changes to the EWA portfolio, to keep you informed about relevant financial planning topics and discuss some exciting internal developments at EWA.

EWA Initiatives      

2024 marks a new year, and with it, we will introduce several initiatives aimed at enhancing the client experience and addressing their evolving needs. These initiatives encompass both internal improvements and client-focused enhancements.

One of our primary initiatives involves bringing tax services in-house at EWA. The feedback on this idea has been overwhelmingly positive and, as a result, we are actively exploring the possibility of incorporating a CPA into our team to offer high-level tax advice, tax preparation services, and seamless communication between our advisors and clients, streamlining the tax-related processes. This would be effective by Jan of 2025 for the 2024 tax year if we do decide to move forward. If you have not already filled out our survey form about this, please do so here.

This move is expected to provide immense value to our clients, allowing them to access tax-related services conveniently within the EWA ecosystem. It also aligns with our commitment to keeping costs low while delivering comprehensive financial solutions.

Another continued focus for EWA in 2024 is education. We understand the importance of financial literacy, and we are dedicated to empowering our clients with knowledge. You can expect to see new educational videos on our website and YouTube channel, covering topics that are timely and relevant to your financial well-being. We will continue our “FIN-LYT by EWA” podcast, where we will delve into various financial subjects, share insights, and introduce you to some of our exceptional clients and their stories. These clients will not only discuss their professional endeavors but also share their life stories, providing inspiration and valuable perspectives. We believe that real-world experiences and stories from our clients can be incredibly educational and motivating.

Review of Q4 in 2023 and Its Impact on the Markets

In 2023, we witnessed positive returns in the equity markets, particularly in the United States. Market movement in quarter 4 played a significant role in erasing the downturn experienced in 2022. The Federal Reserve’s decisions regarding interest rates became a focal point. The Fed’s recent announcement of three interest rate reductions in 2024 brought optimism to investors. This strategic approach aimed to maintain economic stability and prevent a recession, despite ongoing inflation concerns.

Inflation remained a factor, but it moderated compared to previous periods. This, coupled with the anticipated rate cuts, contributed to the surge in US stock prices at the end of 2023. Notably, the performance of US growth stocks, often referred to as the “magnificent seven” (Amazon, Google, Microsoft, Nvidia, Apple, Tesla, and Meta), played a significant role in the stock market gains, outperforming other asset classes.

Looking Ahead to Q1 2024 – Four Key Themes to Consider

  1. Federal Rates: The Federal Reserve’s interest rate decisions will continue to be a focal point. While the possibility of rate reductions exists, the overall rate environment is expected to remain stable or experience a slight decrease. Clients may explore opportunities such as refinancing mortgages or making significant purchases with lower loan rates.
  2. Inflation: Inflation is likely to persist, with costs of everyday goods remaining high. To maintain portfolio growth and outpace inflation, clients should consider investments returning more than the prevailing inflation rate.
  3. Portfolio Strategies: EWA maintains a diversified approach in its portfolios. Regardless of interest rate fluctuations, our strategies are designed to protect clients’ investments and ensure stable returns, whether rates rise or fall.
  4. Market Transitions: 2024 is marked by potential market transitions due to global elections and evolving economic landscapes. EWA is actively evaluating opportunities to enhance its investment portfolio to align with these shifts.

Changes to the EWA Portfolio

In 2024, the EWA portfolio strategy is set to undergo some changes to adapt to the prevailing theme of uncertainty. The first area of focus is the large-cap section of the portfolios. In recent years, certain stocks have thrived, benefiting from strong balance sheets and significant investments in AI. The goal is to maximize returns while minimizing risk, so our strategy combined a minimum volatility ETF, which focuses on defensive industries like healthcare and energy, with a momentum-based ETF. This balanced approach aims to achieve market-like returns with lower risk, providing flexibility for different economic scenarios.

A significant shift in the portfolio is towards quality investments. Quality here refers to companies with low debt levels, making them resilient to rising interest rates. Given the uncertainty in 2024, these companies are expected to adapt quickly to changes in the political and economic landscape, making them a key focus for both US large-cap and international investments.

In the international space, there’s a decision to reinclude China in the emerging market exposure. This change is motivated by the growth potential and a shift in global sentiment. Besides China, Japan, Mexico, and India are also promising markets with opportunities for growth. These adjustments are based on a cautious optimism that the political situation will stabilize, and the global economy will improve.

Additionally, the portfolio will add a sector investment into the area of semiconductors, which play a crucial role in AI and most technology. The rise of AI is expected to be a significant driver of growth, and investing in semiconductors is seen as a strategic move to capitalize on this trend and bring the allocation to technology in the overall portfolio up to the proper benchmark. The goal is to invest in the building blocks of AI and technology by investing in the essential components of these industries and avoiding speculation on which companies will thrive.

In fixed income, there will be a shift towards a layering strategy with slightly longer durations overall to a 6 year average, offering flexibility in response to changing interest rates. Importantly, these changes are expected to reduce costs for investors, maintaining a commitment to a low-cost portfolio. Finally, a ticker change in the small-cap space is planned, transitioning from Vanguard Small Cap growth and Value to the iShares small cap to maintain consistency across the portfolio in index definitions.

Financial Planning Tips for 2024.

Tip 1. Maximize Your Retirement Contributions

If you’re saving for retirement, take advantage of the increased contribution limits for 2024. The 401(k) contribution limit has risen to $23,000 (from $22,500 in 2023), allowing you to save more for your retirement tax-efficiently. Additionally, if you’re 50 or older, you can make catch-up contributions, allowing you to contribute up to $30,500 in total.

For IRAs, the contribution limit has increased to $7,000 (from $6,500 in 2023), or $8,000 if you’re 50 or older. Make sure to adjust your contributions accordingly and take advantage of these higher limits.

Tip 2. Be Mindful of Social Security Taxes

The maximum income subject to Social Security taxes has increased to $168,600 in 2024. If your income exceeds this limit, you’ll be paying Social Security taxes on a larger portion of your earnings. Keep this in mind when planning your finances and consider adjusting your budget accordingly.

Tip 3. Review Your Tax Bracket

Tax brackets have been adjusted for 2024, potentially affecting your tax liability. Take some time to understand how these changes impact your tax situation. For example, the 37% tax bracket now kicks in at $731,200 (up from $693,750 in 2023). Being aware of your tax bracket can help you make informed decisions about your investments and deductions.

Tip 4. Make Use of Gifting Limits

In 2024, you can gift up to $18,000 to an individual without reporting it as a gift or impacting your lifetime gift exemption. For married couples, this means a combined annual gift limit of $36,000 to an individual. Gifting can be an effective estate planning tool, allowing you to transfer wealth to your loved ones while reducing your potential estate tax liability.

Tip 5. Estate Planning and Exemptions

The individual estate tax lifetime exemption has increased to $13.61 million in 2024. For married couples, this exemption allows for over $27 million in assets to be passed on estate tax-free. If your net worth exceeds this exemption, consider estate planning strategies to minimize potential estate taxes, and remember this is going to get cut in half on Jan 1st, 2026.

Tip 6. Contribute Early to Tax-Advantaged Accounts

To maximize the growth potential of your investments, consider contributing early in the year to tax-advantaged accounts like IRAs and Health Savings Accounts (HSAs). These accounts benefit from compounding over the entire year. However, be cautious when front-loading contributions to your 401(k) if your employer offers a match, as you might miss out on some of the match later in the year if you max out your contributions too soon.

Tip 7. Fund for the Previous Year

Don’t forget that you can still fund certain accounts for the previous year before you file your taxes in April. This includes contributions to your IRA, HSA, and any business-related retirement plans like profit-sharing and cash balance plans. Review your finances to see if there are any additional contributions you can make for the previous year to reduce your taxable income.

Remember that your personal financial planning should align with your unique goals and circumstances. It’s essential to consult with your financial advisor to ensure you’re making the best financial decisions for your situation. By staying informed and proactive, you can make 2024 a financially successful year.


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Important Disclosures:

Securities and advisory services offered through EWA LLC dba Equilibrium Wealth Advisors (a SEC Registered Investment Advisor).
* Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.  However, the value of fund shares is not guaranteed and will fluctuate.
* Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest rate and credit risk as well as additional risks based on the quality of issuer coupon rate, price, yield, maturity, and redemption features.
* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. You cannot invest directly in this index.
* All indexes referenced are unmanaged. The volatility of indexes could be materially different from that of a client’s portfolio. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. You cannot invest directly in an index.
* The Dow Jones Global ex-U.S. Index covers approximately 95% of the market capitalization of the 45 developed and emerging countries included in the Index.
* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
* Gold represents the afternoon gold price as reported by the London Bullion Market Association. The gold price is set twice daily by the London Gold Fixing Company at 10:30 and 15:00 and is expressed in U.S. dollars per fine troy ounce.
* The Bloomberg Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.
* The DJ Equity All REIT Total Return Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
* The Dow Jones Industrial Average (DJIA), commonly known as “The Dow,” is an index representing 30 stock of companies maintained and reviewed by the editors of The Wall Street Journal.
* The NASDAQ Composite is an unmanaged index of securities traded on the NASDAQ system.
* International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.
* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
* The risk of loss in trading commodities and futures can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition. The high degree of leverage is often obtainable in commodity trading and can work against you as well as for you.  The use of leverage can lead to large losses as well as gains.
* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
* Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
* Past performance does not guarantee future results. Investing involves risk, including loss of principal.
* The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee it is accurate or complete.
* There is no guarantee a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
* Asset allocation does not ensure a profit or protect against a loss.
* Consult your financial professional before making any investment decision.

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