Week of May 27th, 2024

Key Points for the Week

• This is one of the best starts ever in an election year. Election years tend to have additional volatility due to uncertainties created by the election. Markets tend to stabilize as election day approaches.  This year promises more uncertainty than many election years. However, historically strong start in the stock market, in an election year, tends to be a positive for stock market returns for the year.
• U.S. small-caps and international stocks continue to appear inexpensive on a historical basis.

Current Trends & News is a weekly financial recap curated by SPC Financial®’s team of wealth management and tax-integrated advisors.* We monitor and explore the intricacies of the financial world and share insights into market developments.

This Week in the Markets

As we show below, the usually weak months of June and August tend to be quite strong in an election year, so be open to potential strength as we head into fall.

It is quite normal to see volatility in the months leading up to a presidential election. In 2016 and 2020, stocks were weak and volatile ahead of the election, but they soared after the election was over. Similar patterns may play out once again this year.

A Glance at Global Valuations

In May, value investors from around the world came to Omaha for the “Woodstock of Capitalism,” a chance to listen to Warren Buffett opine on life and his latest investments. The event serves as a good reminder to step back and look at the long term. After an April swoon, a May rebound, and a nearly complete earnings season, now is as good a time as any to review the current valuation picture.  

Resurgent interest rates have not been enough to slow the equity rally in 2024, as growth stocks have led the way once again, building on strength in 2023 on the back of artificial intelligence hype and strong earnings results. Beneath the surface are signs of waning strength in growth stocks and broadening participation in value stocks. This strength in the top growth names is nothing new, but it has pushed valuations to new highs relative to the rest of the market.

Below is a look at the valuations of the major equity asset classes around the world relative to the entire global stock market. U.S. large-cap stocks, dominated by large growth names, command a higher valuation relative to the global market than they normally have. On the flip side, the remainder of the U.S. market — value stocks, mid-caps, and small-caps — are all trading cheaper than they have historically, in some cases meaningfully so. U.S. small-caps are trading nearly two standard deviations below where they have traded historically (on average). Put another way, U.S. small-caps have been cheaper than they are today only 6% of the time. Developed international markets also look attractive.

U.S. vs International: Comparing Apples to Apples

This comparison uses as much history and as many valuation metrics as we can find to provide an unbiased view on where markets currently trade. As country, sector, and security weights change over time, they will have an impact on these indices, but history should still be a reliable guide for comparison. With that being said, we are often asked whether comparing domestic to foreign markets is “apples to apples” given the differences in sector and style weights, especially with technology’s prominence in U.S. large-cap indices.

There are several ways to explore this idea, but one is to reweight domestic and international indices based on the other’s sector composition. For example, in the chart on the left side above, if we look at the S&P 500, but with the same sector weights as the MSCI EAFE, a widely used index of developed market stocks outside the U.S., the forward price-to-earnings ratio drops from 26.6 to 24.9. That is a smaller drop than might be expected given the large differences in technology sector weights.  

Looked at another way on the right-side chart above, if we reweight the MSCI EAFE with S&P 500 sector weightings (i.e., more technology), price-to earnings rises by roughly three points. That is meaningful but not extreme. The larger changes for both indices come into play when we look at equal weighted price-to-earnings ratios. Both indices see a large drop in valuations — attributable to less expensive mid-cap stocks — but remain separated by a wide margin.

Looking for a Graduation Gift?

Graduation season is well underway. If you are looking for a gift for a high school or college graduate, consider giving one or more shares of appreciated stock. This is usually done by transferring shares from your account to the recipient’s account.

There can be significant benefits to gifting an appreciated asset, including:

• Realizing a tax advantage. When people gift shares of appreciated stock, they may realize a tax advantage. Typically, when shares that have increased in value are gifted to another person, the gift giver does not owe capital gains tax on the shares.
• Allowing the asset to grow over time. The gift recipient may owe tax when they sell the shares, depending on the sale price and the recipient’s tax bracket. If the shares remain invested, though, they have an opportunity to grow over time.
• Creating a teaching opportunity. When gifting shares, share the story of the stock with the recipient. Why did you buy it? How much has it appreciated? Do you think the recipient should keep it or sell it? Gifting shares creates an opportunity to share knowledge and increase financial literacy.

The government limits the amount of money that can be gifted to an individual without filing a gift tax return. The annual gift tax exclusion is $18,000 per recipient in 2024. In general, a person can give up to $18,000 per recipient without having to file a gift tax return. Appreciated shares can also make great birthday and holiday gifts.

There can be complexities when gifting an appreciated asset. If you would like to explore the idea, please let us know.

A Reminder About Scams

Scams usually start with a phone call, email, text, or another form of communication. The person typically claims to be from an agency or organization you know – or one that sounds like it might benefit you, such as the National Sweepstakes Bureau or a lottery.

The person may know your name and address. They may give you their official title or an identification number. No matter how official they seem, you can be confident it is a scam if the person contacting you:

• Indicates there is a problem with your benefits.
• Asks you to pay to receive a prize.
• Suggests that paying will increase the chance of winning.
• Requests financial information, such as a bank account or credit card number.
• Pressures you to act immediately.
• Tells you to pay using a specific method, such as a gift card or cryptocurrency.

If this happens, remember that the Social Security Administration, the Internal Revenue Service, Medicare, and your bank do not call, email, or text to ask for money or personal information. They do not demand that you pay immediately, and they do not accept payment by gift card, prepaid debit card, cryptocurrency, or another untraceable form of money transfer.

When you suspect a scam:

• Hang up or close the message. Do not respond in any way.
• Remain calm.
• Think back over the call. Write down any personal information you may have inadvertently shared.
• Report the scam. Contact the Federal Trade Commission at ReportFraud.ftc.gov. You may also want to report the incident to your state’s attorney general or your local consumer protection agency.
• Share your knowledge. Talk with family, friends, and neighbors about your experience so they know what to look out for.

When you receive a digital message, no matter how official it seems, do not click on any links. Do not give or confirm any personal information, including your name, birth date, phone number, address, email address, place of birth, driver’s license, passport, or Social Security numbers, bank or other account numbers, and PIN numbers.

Being skeptical can keep you safe. Remove yourself from the situation. Do not share information. If you feel anxious and need to confirm that it was a scam, contact the organization using a method provided on their official website.

Corporate Transparency Act

The Corporate Transparency Act was enacted in 2021 and was passed to enhance transparency in entity structures to combat money laundering, tax fraud, and other illicit activities.

Beginning January 1, 2024, certain business entities created or registered to do business in the United States will be required to report identifying information about the beneficial owners to FinCen, the Financial Crimes Enforcement Network. Per FinCen rules, a beneficial owner is an individual or group of individuals who, directly or indirectly, owns or controls the company. Reporting companies typically include:

• Domestic reporting companies: Corporations, limited liability companies, and any other entities created by the filing of a document with a secretary of state or any similar office in the United States.
• Foreign reporting companies: Entities (including corporations and limited liability companies) formed under the law of a foreign country that have registered to do business in the United States by the filing of a document with the secretary of state or any similar office.

FinCen has updated their FAQs that includes new information about the reporting process, reporting companies, reporting requirements and much more, with the expectation that further guidance will be provided in the future. The updated FAQs can be found here.

Did you Know? This Week in History

May 29, 1848: Wisconsin Enters the Union

Following approval of statehood by the territory’s citizens, Wisconsin entered the Union as the 30th state on May 29, 1848.

In 1634, French explorer Jean Nicolet landed at Green Bay, becoming the first European to visit the lake-heavy northern region that would later become Wisconsin. In 1763, at the conclusion of the French and Indian Wars, the region, a major center of the American fur trade, passed into British control. 

Two decades later, at the end of the American Revolution, the region came under U.S. rule and was governed as part of the Northwest Territory. However, British fur traders continued to dominate Wisconsin from across the Canadian border, and it was not until the end of the War of 1812 that the region fell firmly under American control.

By 1840, population in Wisconsin had risen above 130,000, but the people voted against statehood four times, fearing the higher taxes that would come with a stronger central government. Finally, in 1848, Wisconsin citizens, envious of the prosperity that federal programs brought to neighboring Midwestern states, voted to approve statehood. Wisconsin entered the Union the next May.

Weekly Focus

Only in logic are contradictions unable to coexist; in feelings they quite happily continue alongside each other.

Sigmund Freud, Austrian Neurologist

You can observe a lot just by watching.

Yogi Berra, American Baseball Player