This Week in Review:

AI Dominates the Investment Scene

This Week:

As Hollywood writers and actors take to the picket lines, artificial intelligence (AI) is having its 15 minutes of fame. To be fair, AI has been at the forefront of tech innovation for decades, with chatbots and self-driving cars among its buzzy commercial applications.

And as an investment theme, it’s certainly not new to us. We own and will continue to own AI stocks as part of our core portfolios—they’ve driven growth for us just as they have for the broader market. One could even argue that the present bull market is a result of investor enthusiasm for AI. As we’ve mentioned in recent weeks, most of the gains in the S&P 500 year-to-date have come from a handful of companies, including Nvidia, Microsoft and Tesla. One thing these mega-techs have in common is that they all create AI-based products and the chips they run on.

Note: The AI-company-dominated QTUM ETF is handily beating the S&P this year as AI stocks outperform. Dollar values represent returns on hypothetical $100 investment in QTUM ETF and SPY ETF. Sources: Morningstar Direct, Polaris.

Beyond our core portfolios, our private markets offering provides accredited investors with access to earlier-stage AI companies that are not yet publicly traded.

The way we see it, an increasing number of businesses and industries are lining up to adopt AI, boosting efficiency and raising their potential for profitability. The health care, education, financial services, retail and manufacturing industries all stand to benefit from the adoption of AI.

There are caveats we’re watching as well. For instance, government legislation or ESG concerns could possibly slow commercial adoption of generative AI. Another fly in the ointment is questionable accuracy. Like social media and plain vanilla search, ChatGPT and its competitors sometimes spit out replies that are demonstrably false—and acting on bad data opens up numerous legal and reputational risks for businesses.

Our research team is on top of this macro trend and we’re here to talk to you about how it is (or is not) dialed into your specific portfolio plan now and in the future. Let us know what questions you have—we’re here to help.

Secure Act 2.0 Spotlight

When Secure 2.0 was signed into law in December, Americans faced upward of 100 revisions to retirement plans spread over the next decade—it’s a lot to absorb. But as with the topic of AI (mentioned above), we’re here to help break it down.

Here are two timely points to consider.

A Smart Tax Strategy for Charitable Giving

First the good news: Secure 2.0 provides a one-time opportunity for qualified individuals (70 1/2 and older) to take a tax-free withdrawal of up to $50,000 from their IRA to make a charitable donation known as a QCD, or qualified charitable distribution. Here’s why this matters: The QCD lowers your taxable income and fulfills your RMD amount for the year.

A donor can make the gift in one tax year only. That could be one $50,000 gift or several smaller gifts up to the $50,000 limit.

There are a few ways to set this up, but we suggest using a charitable gift annuity. This type of annuity establishes the charitable donation in exchange for a partial tax deduction and a fixed stream of income from the charity to the donor or the donor’s spouse. The annuity requires a minimum payout of 5% annually for the donor’s lifetime and it’s taxed as ordinary income.

Charities have offered gift annuities for years, but this is the first time donations can be made directly from retirement accounts. There are other advantages and risks to consider, so let’s talk about this in more detail in our next call.

New Limits for Catch-Up Contributions

Now for the bad news: Catch-up contributions for high earners are about to get more complicated thanks to Secure 2.0.

Under current law, anyone age 50 and up is eligible to make a $7,500 additional contribution to their employer-sponsored retirement plan. That catch-up contribution can be made pretax, effectively lowering your tax liability for the year.

Beginning in 2024, if your W-2 income is greater than $145,000, any catch-up contribution is required to be treated as a Roth contribution. That means the contribution is made with after-tax dollars, so it will not reduce your current taxable income, but it can be withdrawn tax-free in the future.

To be clear, this new rule does not apply to catch-up contributions made to IRAs—only to employer-sponsored retirement plans like 401(k)s and 403(b)s.

This raises an obvious question: What if your company-sponsored plan doesn’t include a Roth option? The new law says that if the plan doesn’t include a Roth catch-up contribution option, then the contribution is not allowed. And if the plan doesn’t allow for Roths, this not only blocks high-wage employees, but it also blocks all employees in the plan from making catch-up contributions regardless of their income.

The upshot? Expect expanded Roth contribution features across employer-sponsored retirement plans. In the meantime, let’s talk about solutions if you think your catch-up contribution will be affected next year.

Market & Economy Snapshot

Here are some of the other items our research team is watching and why they matter:

  • Inflation has cooled, with consumer prices rising a mere 3% in June. A year ago, that figure exceeded 9%. Is the Federal Reserve on track to deliver the elusive “soft landing” (taming inflation without cratering the job market and economy)? It’s looking increasingly possible—though we’re not ready to sound the all-clear on a recession and will continue to maintain a slightly defensive posture in positioning client portfolios.
  • Retail sales rose in June for the third straight month, with spending on electronics, furniture and online shopping driving the momentum. It’s unclear if this trend can continue. Recent data from Citi Research suggests that savings built up during the pandemic are almost depleted. While the strong labor market and wage growth (which is finally beginning to outpace inflation) will keep some wind in consumers’ sails, these dwindling savings plus credit card interest rates could curtail consumption and economic growth.
  • A strike by UPS employees could have major repercussions if an agreement is not reached by the Aug. 1 deadline. It could be the largest labor strike in U.S. history (and the costliest in at least 100 years), according to the Anderson Economic Group. The supply chain could be a key casualty, resulting in higher prices for consumers as products become less available and alternate carriers capitalize by raising shipping rates.

Welcome Ropes Wealth Advisors!

We are excited to share that our partnership with Ropes Wealth Advisors (RWA), which we first announced in May, has been finalized. The merger expands our ability to assist you with trusts, legacy planning, estate settlement and charitable gifting. As we integrate our services this summer, we’ll look for opportunities to better support your needs and goals.

Remember to visit for our timely and ongoing wealth management commentary.

Please note: This update was prepared on Friday, July 21, 2023, prior to the market’s close.

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