The original idea behind the “Page One” article in our Quarterly Market Perspectives (QMP) was to explain why our clients should be at Woodstock and not some other investment firm. One of our portfolio managers, Tom Stakem, says he wants to read something that he can’t find elsewhere. A recent article in the WSJ described good opinion writing as “impressive with its enterprise, originality, passion, boldness, depth, flair or wit.”[1] We try. We also borrow ideas and attribute them extensively. We keep in mind the line often attributed to Oscar Wilde: “Plagiarism is the sincerest form of flattery.”

We began 2024 in a very different place—investors had expected slow growth, or like me, a recession. The Bloomberg consensus estimate for US gross domestic product (GDP) growth was about 1 percent. We expected federal spending would decline following the pandemic response stimulus, while 2022-2023’s steep interest rate hikes were still percolating through the economy, and high overall price levels were expected to crimp consumer spending.

The theory and philosophy around taxation sometimes starts with the US Supreme Court’s distinction between “avoidance” and “evasion.” No American is obligated to pay more than what is required. Measures taken to avoid tax within the rules are fine; measures taken to defeat the rules—evasion—are criminal.

In looking at the universe of investable assets, there are warning signs. Recently, JP Morgan CEO Jamie Dimon lamented that public companies currently number 4,300 in the US, down from 7,300 in 1996. He cited some of the reasons companies are hesitant to go public: “increasingly burdensome regulation, intensifying public scrutiny and a growing obsession with short-term financial results.”[1]  The article highlights the growth in the number of companies choosing to remain private, backed by private equity.

We have often been asked “how should we be positioning our portfolios for the incoming administration?” One can make incremental changes to investments on the margin, tilting a portfolio to favor a particular outcome depending on what policies one expects to gain traction. It is difficult to predict these outcomes with any certainty, and this year has been no different. Therefore, gambling on one or another candidate or party victory generally does not warrant dramatic adjustments to a portfolio. This year, with the odds split on a winner in the months leading up to November 5th, we stuck to owning companies that we expected would prosper under either party’s victor, and would be capable of riding out any short-term volatility from post-election results.

This year’s cost of living adjustment (COLA) for Social Security recipients is expected to be 2.5 percent.[1]  Last year’s increase was over 8 percent. This is overshadowed by the Social Security Administration’s board of trustees report in May that “the trust funds for the Old-Age and Survivors Insurance and Disability Insurance programs are on course to be depleted (2035) and will only be able to pay out 83% of scheduled benefits.”[2] Potential and current beneficiaries of the program don’t seem to be panicking. The assumption seems to be that the elected politicians will not have the stomach to reduce benefits or stop annual increases. The economists who believe cutting taxes increases federal revenue assert that we can grow our way out of the problem with the right fiscal policies. Comparing percentages to gross domestic product (GDP), “it is hard to find a sustained reduction in government receipts attributable to tax cuts”[3] from the 1980s to now.

Woodstock prides itself on taking care of its clients, and we periodically like to use QMP to shine a spotlight on how individuals at Woodstock impact the larger community. In this holiday season of giving, we highlight the Boston-area nonprofit started by Lisa Supple, vice president and portfolio manager at Woodstock Corporation. For Pete’s Sake is a 501(c)(3) that funds hockey camp scholarships for children in inner-city Boston neighborhoods, formed as a way to honor the memory of her friend and former colleague Peter W. Smith, who died tragically in a fire in Boston’s North End on November 22, 2017.

We watch investment management industry trends to understand what others are doing and, hopefully, validate our approach. Also, we look for those with similar approaches to ours— hopefully, successful. And we look for innovative approaches to complex investing subjects. We have all three this quarter.

What’s the latest trend for wealth managers and asset managers? Cooperation. “Wealth and asset managers will focus on renewed growth triggered by strategic partnerships and M&A” (mergers and acquisitions). The article discusses this trend against a backdrop of previous trends: ESG investing, private equity investing and AI investing, each losing steam for reasons of “wokeness,” illiquidity, and too early to tell, respectively. The tying together of backroom operations of wealth and asset managers will aid in “capturing investors’ wallet share.” For simplicity, we’ll call wealth managers client-facing and asset managers product producers. “This transformation can involve a delicate balance. Tech-led mass market production (asset management) must be industrialized while trust-related private banking (wealth management) specialties must be preserved.”

In the first half of 2024, a handful of stocks with large weightings in the S&P 500 Index performed very well, leaving most of the rest of the index constituents underperforming. The S&P 500 Index returned 15.3%, with the seven largest names in the index returning about 31.5% collectively, accounting for 62% of the gains for the entire index, while the “other 493” returned an estimated 7.7 percent. The Invesco S&P 500 Equal Weight ETF (RSP), indicative of what the average S&P 500 stock has done, returned 5.0% year-to-date. The Russell 2000, an index of two thousand smaller-capitalization stocks, was up 5.2% through March, before falling 3.3% in the second quarter.

As we’ve discussed in the past, we are very focused on the sunsetting of existing tax provisions after 2025. The main areas getting the attention of advisors and their clients are “estate taxes, the deduction for qualified business income and federal brackets.”[1] Some of the planning techniques suggested involve “strategic or lump-sum gifts and life insurance held in trusts.” One adviser mentioned in the Financial Planning article lists “spousal lifetime access trusts, gifts, leveraged gifts, loans, family limited partnerships or family LLCs” as available “tools.” The applicability of any of these depends mostly on the specifics of an individual taxpayer’s situation. An election happens in three months, so many taxpayers may have to pick something, if needed.