2024 is in full swing, and the start of a new year is a good reminder to take stock of our lives and plan for the future. Effective estate planning is a crucial aspect and its importance cannot be overstated. A well-thought-out estate plan ensures that your assets are distributed according to your wishes, minimizes tax liabilities, and provides for your loved ones while building your legacy. This estate planning checklist covers five priorities for 2024 that should be on your radar.

Work with your estate planning attorney to review and update your will and trusts

One of the fundamental elements of estate planning is having a valid and up-to-date will. Life is dynamic, and circumstances change, so it's crucial to review your will regularly, especially after significant life events such as marriages, births, or deaths in the family. Engage your trusted estate planning attorney to revisit and update any trusts you may have established. This ensures that your assets are distributed as you intend and that your loved ones are provided for according to your current wishes.

Don’t overlook digital estate planning

In this digital age, our lives are increasingly intertwined with online platforms and digital assets. Make 2024 the year you address your digital estate planning. It’s smart to create a comprehensive list of your digital accounts, including usernames and passwords, and store this information securely offline. If you have photos, documents, and other valuable information stored online, consider tapping a trusted individual to act as your “digital executor” to share your digital assets with your beneficiaries. 

Long-term care planning

As life expectancy increases, planning for long-term care becomes more critical. Evaluate your options for long-term care insurance and make decisions regarding potential care facilities. If you already have long-term care insurance, review your policy to ensure it aligns with your current needs and circumstances. Planning for long-term care can protect your assets and provide financial security for you and your family in the event of extended healthcare needs.

Estate plan tax strategies

Estate taxes can significantly impact the distribution of your assets. In 2024, consider working with a financial advisor or tax professional to explore tax planning strategies that can minimize the tax burden on your estate. This may include gifting strategies, setting up trusts, or taking advantage of any available tax credits. A proactive approach to tax planning can help preserve more of your wealth for your beneficiaries. Some of the key changes to be aware of in 2024 include that the gift tax exclusion amount has increased (last year it was $17,000 per individual and $34,000 per married couple). The new amount in 2024 is $18,000 per individual and $36,000 per married couple. Another update to consider: The Federal Estate and Gift Tax exemption has increased to $13.61 million per individual (double that, at $27.22 million for a married couple). In 2026, the amount is expected to drop down to $7 million per individual, so it’s important to work with your tax expert to strategize about how best to maximize your wealth via tax and estate planning, and the start of a new year is a great time to begin. 

From IRS Rev Proc 2023-34

Healthcare directives and powers of attorney

It’s important to ensure that your healthcare directives and powers of attorney are up to date. These documents designate someone to make medical decisions on your behalf if you are unable to do so. Now is a great time to review your choices for healthcare agents and make sure they are still willing and able to fulfill this responsibility in accordance with your wishes. It’s vital to discuss your wishes regarding care with your chosen healthcare agent, providing them with clear guidance on your preferences. This step can alleviate the burden on your loved ones during difficult times and ensure that your healthcare decisions align with your values.

The new year presents an excellent opportunity to reassess and update your estate plan. By working through this simple estate planning checklist you can boost your peace of mind that everything is in order and help safeguard your legacy, protect your assets, and strategically provide for your loved ones. Take the time to consult with legal and financial professionals to ensure that your estate plan is comprehensive, up to date, and aligned with your current goals and circumstances. Planning for the future is not just for yourself; it's a gift to those you care about most.

If you have any questions about estate planning or how Whittier Trust’s wealth management services can help you navigate maximizing your legacy for future generations, we’re here to help. Start the conversation with an advisor today by visiting our contact page.

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Efficient tax planning demands a forward-thinking approach, strategically organizing financial affairs to minimize tax liability. An essential element of this approach is the anticipation and understanding of changes in tax laws over time.

The last major overhaul of the tax code came in 2017 when many tax code provisions were changed or added by the Tax Cuts and Jobs Act, commonly referred to as the TCJA. Most of the TCJA provisions that impact individuals, estates, and pass-through entities will expire or phase out in 2025, an event being referred to as the Great Tax Sunset. However, the TCJA’s biggest change impacting the taxation of C corporations, reducing the corporate tax rate from 35% to 21%, will not sunset. This means that while the highest individual income tax bracket will increase from 37% to 39.6% after 2025, the C corporation tax rate will not change and will remain at 21%. 

The TCJA also introduced the Qualified Business Income deduction, or QBI deduction. This allowed taxpayers to deduct up to 20% of business income from flow-through entities, such as businesses that appear on Schedule C, as well as S corporations and partnerships. The QBI deduction was originally intended to help businesses that were not C corporations compete with the new 21% tax rate for C corporations. The QBI deduction is currently scheduled to be eliminated after 2025. 

While it is impossible to predict what tax legislation will be implemented by a future Congress and POTUS, the sunsetting of QBI, the increase of the highest marginal tax rate for individuals, and the continuation of C corporation tax rate makes choosing the appropriate entity for a small business owner less straightforward than it was before 2017. 

To illustrate, imagine five taxpayers, each owning an equal share of a C corporation doing business in 2017, before the implementation of the TCJA’s modified tax rates. The C corporation has a net income of $1,000,000 and pays 35% income tax, or $350,000. For the sake of simplicity, all remaining income is distributed to the five taxpayers and none of the distribution is considered compensation. The taxpayers pay tax at the highest long-term capital gains tax rate plus net investment income tax on the dividend, or 23.8%. The tax paid by all taxpayers in this example is $504,700, for an overall effective tax rate of 50.47%. 

Compare this to the taxation of an LLC owned and operated by five partners with equal ownership. The LLC has a net income of $1,000,000, pays no income tax, and passes the income to its five partners. For the sake of simplicity, all remaining income distributed to the five partners is subject to the highest marginal individual tax rate of 39.6%, and none of the income is considered compensation. The five partners pay a total of $396,000 in tax for an overall effective tax rate of 39.6%. The basic illustration demonstrates why C corporations were seldom used as an entity of choice by small business owners since one level of taxation is considerably lower than two levels of taxation for C corporations.  

After the TCJA, C corporation taxation became more appealing as the tax rate was lowered from 35% to 21%. Using the same example above, let’s imagine that the same C corporation doing business in 2018 has a net income of $1,000,000 and pays 21% income tax, or $210,000. The remaining net income is distributed to shareholders who then pay tax at the highest long-term capital gains tax rate plus net investment income tax on the dividend, or 23.8%. The total tax paid by all taxpayers in this example is now $398,020, for an overall effective tax rate of 39.8%. That’s a huge improvement for the two levels of tax for C corporations. 

Pass-through owners also had a new advantage under the TCJA with the QBI deduction. As a comparison, the same LLC with a net income of $1,000,000 passes its income to its five partners. Each of the five partners can fully utilize the 20% QBI deduction, which reduces the taxable income from $1,000,000 to $800,000 for all five partners. The five partners pay $296,000 in tax at the highest marginal tax rate for individuals, now lowered to 37%. While C corporation taxation became more appealing, it was still not as appealing as a pass-through entity where individual taxpayers could take a QBI deduction.

However, this is about to change. That same C corporation doing business in 2026, after the Great Tax Sunset will continue to have its $1,000,000 of net income taxed at 21%. Nothing else changes for C corporations in this example, and the total tax paid by all taxpayers is again $398,020, for an overall effective tax rate of 39.8% 

The five partners of that same LLC can no longer take advantage of the QBI deduction, which was eliminated in the Great Tax Sunset. Furthermore, the highest marginal tax rate for individuals increased from 37% to 39.6%. The five partners now pay $396,000 in tax for an overall effective tax rate of 39.6%. Suddenly, pass-throughs no longer have the dominant tax advantage they had a few years before. 

Lastly, one intriguing side-effect of the corporate tax rate reduction was the renewed interest in the Qualified Small Business Stock exclusion, also referred to as the QSBS exclusion. This tax benefit allows C corporation owners to sell stock without incurring capital gains tax after a statutory period. This additional benefit may tip the balance in favor of C corporations for many small business owners. 

Does this mean small business owners should run out and check the box of their LLCs to be treated as C corporations? It is impossible to know what the future holds for tax law changes. While it is not so difficult from a tax perspective to move an LLC treated as a partnership to an LLC treated as a C corporation, it is far more difficult to go back the other way. Nevertheless, if nothing else changes, the analysis of entity choice for small business owners is far more interesting. The Great Tax Sunset will play a significant role in tax planning for several years to come.

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There’s no denying that artificial intelligence is developing quickly—at warp speed, even. In fact, in March 2023, some of the biggest names in technology—including Elon Musk and other professors, researchers, and business leaders—signed a letter asking for a pause for artificial intelligence labs training AI systems out of concern for the dangers such technology may present. Additionally, the United States and the United Kingdom have held high-level summits about AI safety in 2023. 

Even with such concerns about what a proliferation of AI could mean for society as a whole when it comes to AI and wealth management, there’s a place for using tools based on technology. “When you’re looking for a statistical or high-level outcome or solution, it’s helpful,” says Whittier Trust SVP and Senior Portfolio Manager, Teague Sanders, who notes that quantum computers, such as the one built by Google, are approximately 158 million times more powerful than the supercomputers used today. That means that answers—from researching companies that may present investment opportunities to pulling numbers to analyze industry trends—can be at our fingertips more quickly than ever. Savvy client services advisors can leverage such technologies to inform expedient answers, recommendations, and reporting.

Fact-checking: a vital component for the use of AI in wealth management

Large language models (LLMs) are deep databases pre-trained on mind-boggling amounts of information. That’s why ChatGPT Bard, LLaMA, PaLM2, and many more have become popular tools for asking a question and waiting for an (almost instant) answer. While Sanders says that Whittier Trust has subscriptions to some LLMs because they can be useful for summarizing things and finding links and patterns, Whittier Trust team members always thoroughly double-check the results to verify the veracity of the information. Case in point: “There can be ‘hallucinations’ within a dataset,” Sanders explains. “If you ask an AI-driven LLM such as Bard a question like, ‘What was the revenue generated by X business?” and it gives you an answer you don’t think is right, it will re-generate a different response. You have to make sure that, when an LLM does a calculation, it’s analyzing the right thing and using authentic data.” Again, it comes down to focused human oversight. 

AI and LLMs can also be useful for shaking up the thinking on a particular topic, sparking creativity and brainstorming. “If we have a client situation or an investment we’re considering, we might throw six or seven different prompts about a topic into one of the LLMs and just see what comes out,” Sanders explains. “That can be a catalyst for creative thought.” For example, if the team is thinking about an investment, an AI-driven tool can help. “If we’re looking at Mr. Carwash, we might ask the LLM to show us the entire landscape of car washes in the United States or the last six quarters of earnings of car washes in the American Southwest.” Such queries can help frame issues the team is considering, but it won’t be the deciding factor.

Why wealth management AI won’t replace a human touch

Artificial intelligence (AI) is everywhere, it seems, from predictive text in our Google searches and chatbots in customer service to facial recognition when we check in for a flight at the airport. Even though those things and more have become commonplace, there are some areas of our lives where such technology isn’t compatible: namely, the expansive use of AI in wealth management. “Wealth management, specifically, our style of wealth management simply doesn't lend itself to leaning heavily on AI,” says Sanders. “Even with all the advantages and efficiencies AI can bring, when you look at our clients and what we do for them, it’s really about the integration of our complete service offering; specifically our five pillars of expertise [family office, investments, philanthropy, real estate, trust services]. The comprehensive service these areas of expertise bring allows us to provide the personalized and compassionate approach that makes us successful, unique, and powerful for our clients.” The use of AI in wealth management can be valuable in some instances, while simultaneously complementing human expertise and intelligence for even greater results. 

One of the primary ways Whittier Trust serves clients and sets itself apart from other firms is its highly personalized approach to serving the whole person or family. “An AI-driven solution does not exhibit empathy right now, it does not get to know someone’s hopes for family continuity or heart-felt goals for making a difference in a philanthropic endeavor. A computer doesn’t hold someone’s hand as they’re going through a difficult season,” Sanders says. “Those things require a lot of human touch because there's still a lot of emotional involvement when you're trying to come up with a customized, tailored solution for each very complex family.”

 

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Despite domestic and geopolitical uncertainty, equity portfolios performed quite well in 2023 as measured by the S&P 500 Index. The market return was largely driven by the seven largest constituents of the S&P 500, also known as the Magnificent Seven. The Magnificent Seven includes: Apple, Microsoft, Alphabet, Amazon, Meta Platforms, Nvidia, and Tesla. These companies account for over twenty-eight percent of the S&P 500 Index and collectively more than doubled in 2023.  The spectacular returns concentrated in a few names left the average stock returning less than half of the S&P 500 Index overall.  The Magnificent Seven masked the underlying share price weakness of most stocks in the S&P 500 Index.  The concentration of returns and weightings raises the question of whether the S&P 500 Index should be dissected for opportunities and imperfections.

S&P 500 Index

This leads us to our next point in which we discuss the construction of the S&P 500 Index and lessons to learn from the evolution of the index.  The S&P 500 Index is often referred to as a “passive index,” meaning there is not an active manager changing the constituents of the Index on a regular basis.  It may come as a surprise that in any given year there are several changes to the S&P 500 Index.  As companies are acquired, merged, or face challenging times, they must be replaced in the index so there remain exactly 500 companies.  Over the past decade a shocking 189 companies were added to the S&P 500 Index! 

Before we delve into the implications of the 189 additions to the “passive” S&P 500 Index, we should highlight that over 28% of the S&P 500 Index is now in just seven companies, aka the Magnificent Seven.  These seven companies are the largest because of their extraordinary performance over the past 15 years.  The magnificent seven returns (measured in multiples) since the market peak before the Great Financial Crisis (12/31/2007) through the most recent quarter (12/31/2023) are as follows:

  • Apple 32.1x
  • Google (Alphabet) 8.1x
  • Nvidia 63.4x
  • Amazon 32.8x
  • Tesla 156.3x (since IPO in 2010) (1.1x since S&P 500 Index inclusion in 2020)
  • Microsoft 14.5x
  • Meta 12.0x (since IPO in 2012) (6.5x since S&P 500 Index inclusion in 2013)

Usually, we talk about stocks and bonds in percentage terms reserving double digit multiples on investment for only the best Venture Capital hits.  In this case, writing about Apple stock’s 3,113% return (32.1x multiple) if purchased at one of the worst times in history (right before the financial crisis) through today seems absurd.  Thus, we can simply say that an investment in 2007 would today be worth 32.1x as much including dividends (equally absurd you say!).  This is a great reminder of how favorable investing in high quality companies can be over long periods of time.  (Imagine a game table in Las Vegas that gave you a greater than 50% chance of winning each day, a greater than 65% chance of winning over one year and a nearly 100% chance of winning over multiple decades.  You would want to play that game and only that game for as long as you possibly could.)  While the magnificent seven have all returned multiples of investment since 2007, the S&P 500 Index has also returned a handsome 4.5x (347%) return over that time frame. 

The 189 additions to the S&P 500 Index

Now back to the 189 companies that were added to the S&P 500 Index in the last decade. The 189 additions have been selected by a committee known as the S&P Dow Jones Indices Index Committee (within S&P Global).1  These additions have to be disclosed before they are added to the index.  Thus, the average of those 189 stocks saw a bump immediately before they were added to the S&P 500 Index.  On average, those 189 stocks returned 11% over the three month period prior to the announcement date.  As more and more investors allocate a portion of their portfolio to index funds, the newly added stocks see more and more demand for their shares ahead of being included in the index.  According to the Investment Company Institute, midway through 2023 there were over $6.3 trillion dollars invested in S&P 500 Index funds in the United States.  As a company is added to the S&P 500 Index there is significant buying power behind that addition.  

Magnificent Seven

The Magnificent Seven stock price appreciation in 2023 reflects their strong fundamentals.  These seven companies generally have high margins, low input costs, strong balance sheets, and no unionized labor.  Conveniently avoiding the major pitfalls of 2023.  Perhaps more importantly, the strong performance from the top seven companies and the outsized weightings of those companies, obfuscates the weakness of the other 493 stocks that are on average still down from the beginning of 2022.  After two years of negative returns for the majority of the stocks in the index, perhaps there are some bargains out there for long-term investors.

Conclusion

We can draw a number of conclusions from the above analysis:  

  1. The S&P 500 Index returns over the next few years will be heavily dependent on the Magnificent Seven. Fortunately, the majority of the Magnificent Seven have low debt levels, high profit margins, low labor expense relative to revenue, and are cash generative (higher interest rates may boost earnings).  
  2. The imperfect index will continue to evolve and change despite the passive moniker.  
  3. Being attentive to potential index inclusions will be ever more important as the size of assets invested in the index grows faster than the index itself.
  4. 2023 market returns have been skewed by the Magnificent Seven leaving potential bargains beneath the surface.  
  5. Finally, investing in high quality companies may pose risks in the near term, but continues to look favorable over extended periods of time.

 

Endnotes:

      Source:  S&P Global
      Source:  Bloomberg Intelligence
      Source:  Investment Company Institute

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Whittier Trust, the oldest multi-family office headquartered on the West Coast, is pleased to announce the recent hiring of Gregg Millward as Vice President, Client Advisor in its Pasadena office. In this role, Gregg provides a comprehensive range of wealth management, family office and trust services to affluent individuals and families, working closely with clients and their advisors to tailor strategies that meet their unique needs. He will be pivotal in fostering multi-generational relationships in the service of stewarding and growing family wealth. 

"We welcome Gregg Millward to the Whittier Trust family with open arms," said Peter Zarifes, Managing Director, Director of Wealth Management operating out of Whittier Trust’s Pasadena Office. "His years of experience in philanthropic giving is bolstered by a clear dedication to fostering relationships across generations. This aligns perfectly with our commitment to providing unparalleled service and highly personalized wealth management."

Before joining Whittier Trust in 2023, Gregg spent more than 15 years at the University of Southern California. He most recently served as Senior Associate Director at The Center of Philanthropy & Public Policy, where he collaborated with philanthropic families, individuals and corporations to optimize the approach and maximize the impact in their charitable giving.

In expressing his excitement about joining Whittier Trust, Gregg Millward stated, "I'm genuinely honored to be joining Whittier Trust. The firm's commitment to client-centric service is well known, and its implementation of philanthropy and family-office services as tools to bring families together strongly resonates with my values. I'm looking forward to contributing to Whittier Trust's ongoing success and serving our clients with the utmost level of care and professionalism.” 

Gregg holds a Master's in Educational Leadership from the University of Southern California and a Bachelor of Science from Kutztown University of Pennsylvania. He also possesses an executive certificate from the Sports Management Institute. When not in the office, Gregg has demonstrated his commitment to community service by serving on the Swim With Mike Foundation board and contributing to various nonprofits.

Watch this video of Sandip Bhagat, our Chief Investment Officer, discussing the latest market insights.

Slow... But Steady

The last four years have felt like one endless blur of unprecedented events ... all unfolding in rapid succession. And 2023 was no different; it was perhaps even more extraordinary than the previous three years.

The surprises in 2023 were numerous. Much like the spectacular spike in inflation, the pace of disinflation in 2023 was remarkably rapid as well. Even as long-term interest rates rose unexpectedly in the second half, the U.S. economy remained remarkably resilient. As a result, U.S. large cap stocks performed magnificently in 2023 as the S&P 500 index gained 26.3%.

At the dawn of a new year, we reflect on our 2023 predictions with fond satisfaction.

We had practically ruled out the possibility of a deep and protracted recession in 2023. Our base case for the economy last year was a soft landing – with a short and shallow recession as the worst case scenario.

Our optimism on economic growth was based on what we believed were under-appreciated tailwinds from the post-pandemic stimulus. We perceived that the residual effects of prior monetary and fiscal stimulus were likely to offset the headwinds of higher inflation and higher interest rates.

Our view on inflation at the beginning of 2023 was relatively benign. We felt that fears of sticky and stubborn inflation were overblown. We predicted that core measures of inflation would be closer to 3% by the end of 2023. As a result, we also felt that the Fed would end up with more flexibility on future rate cuts than it believed or the market expected.

And finally, our constructive views were also reflected in our stock market outlook for 2023. We had ruled out the possibility of retesting prior lows in stock prices or making new ones. Our expectation for solid double-digit gains was based on the view that earnings growth would bottom out by mid-2023 and then rise subsequently.

We are pleased that these views were validated by what transpired in 2023. We were misguided, however, in our forecast that bonds would provide a decent term premium. Bonds were in negative territory for most of 2023 and finally eked out positive returns in the midst of high volatility.

Today, the odds of a recession have receded significantly and a soft landing is now the consensus view. We begin to develop our 2024 outlook from this vantage point.

Drivers Of The 2024 Outlook

Even as market optimism turned higher at the end of 2023, a number of concerns still linger in the minds of investors. Here, in no particular order, we walk through a long list of worries that investors may yet harbor.

  • An inverted yield curve has been a reliable predictor of recessions in the past. At this point, the yield curve has been inverted for more than 300 days.
  • Leading economic indicators have declined steadily for almost a year and a half.
  • Bank deposit growth and money supply growth are both in negative territory and close to levels seen in the 1930s.
  • The adverse economic effects of Fed tightening tend to be felt on a lagged basis – many fear the worst is yet to come.
  • The last mile of disinflation may prove difficult or even elusive.
  • The Fed may make a mistake by keeping policy too restrictive and interest rates too high for too long.
  • And finally, investors fret that stock valuations and earnings growth expectations are too high.

We address these concerns in forming our 2024 outlook by taking a closer look at inflation, growth, interest rates, profit margins, stock valuations and the earnings outlook.

Our headline summary is more constructive than the concerns highlighted above.

a. We believe GDP growth will continue to slow but only to below-trend levels; it is unlikely to turn negative.

b. We assign low odds to a moderate or deep recession and believe that growth may surprise to the upside.

c. Inflation will continue to recede but may normalize above the Fed’s 2% target.

d. Earnings may exceed expectations due to a potential improvement in profit margins.

e. We expect that both stocks and bonds will deliver modestly positive returns.

We validate our outlook with a closer look at four key fundamental drivers: inflation, interest rates, growth and earnings.

Inflation

We have made significant progress with disinflation in recent months ... probably more than many had expected.

And yet, two concerns remain on the inflation front.

  1. Will any unusual economic strength rekindle inflation and send it higher?
  2. Will the last leg of disinflation simply be too stubborn and difficult to achieve?

Inflation is unlikely to revert meaningfully higher for a number of reasons.

One, the sticky shelter component of inflation has just turned the corner and will continue to head predictably lower.

Two, the job market has long peaked in strength and will continue to weaken further. This will exert downward pressure on wage inflation.

And finally, we believe that the recent gains in productivity will continue into 2024.

Pandemic-related disruptions caused productivity to plummet. Employers had to scramble to train new workers who initially were not as productive as their predecessors. As the labor force normalizes, a pickup in productivity gains will ease overall inflation.

And this brings us to our second question: Can inflation subside all the way down to the Fed’s 2% target? And if so, how soon?

Our view here is a bit mixed. We believe inflation will continue its orderly decline in 2024. We expect headline and core inflation to soon head below 3%. However, we suspect that inflation may eventually come to rest below 2.5%, but above the Fed’s 2% target.

A couple of factors inform our view here. We expect growth to remain modestly resilient in 2024. We also expect an ageing population to constrain labor supply and put a higher floor on wage inflation.

Finally, we believe that even inflation of almost 2.5% will still be favorable for stocks and bonds.

Interest Rates

Our positive outlook on inflation makes it easy to develop a view on interest rates. We begin with the Fed and then move to long-term interest rates.

The Fed’s policy rate of 5.4% is already far above inflation which is averaging 3-3.5% on a year-over- year basis. The implied short-term real interest rate, which is simply the spread between policy rates and inflation, of 2-2.5% is already quite restrictive. We rule out any further rate hikes; the Fed is done with tightening.

Figure 1 shows just how restrictive Fed policy has become in recent months.

Source:  FactSet

The blue bars in Figure 1 show 12-month core PCE inflation (PCE stands for Personal Consumption Expenditures). Core PCE is the Fed’s preferred inflation gauge.

We can see how core PCE has fallen steadily in 2023 and is projected by the Fed itself to fall further in 2024.

The green line shows the Fed funds rate which is now higher than inflation by well over 2%. Under normal conditions, the Fed funds rate exceeds inflation by about 0.5%. A real short-term interest rate in excess of 2% is clearly restrictive. If inflation falls by another 1% or so in 2024, the Fed will have the flexibility to cut rates several times.

We expect five to seven rate cuts in 2024 beginning in March or May.

We are cognizant of the possibility that the Fed begins later and implements fewer rate cuts. Such a policy misstep would undoubtedly magnify the depth of the slowdown. But it is still unlikely to be a devastating event for the markets; we reckon the economy is just less rate-sensitive now than before.

Our view on the 10-year Treasury bond yield is derived from our outlook on inflation. We expect inflation to normalize below 2.5% in 2024. We expect a positively sloped yield curve to evolve over time. We also predict positive real rates and a positive term premium in the future.

We coalesce these thoughts to form our forecast for the 10-year Treasury bond yield in the range of 3.7-3.9%.

Growth Prospects

A long list of reliable indicators argue for a traditional, perhaps even a deep, recession in 2024 – just like they did in 2023.

In 2023, our counter-view on the topic was based on the under-appreciated tailwinds of massive prior stimulus from 2020 to 2022. A simple example of this support was the excess savings that consumers had accumulated from the post-pandemic fiscal stimulus. One of the legacies of ultra-low interest rates from that period was that consumer and corporate debt got locked in at low fixed rates.

For 2024, we argue against a modest or deep recession along different lines.

The biggest concerns right now revolve around the consumer and the job market. Many fear that it is only a matter of time before the consumer wilts under the pressure of high interest rates. And as the job market begins to soften, the skeptics fear it will eventually lead to the dreaded 1% increase in the unemployment rate.

We tend to disagree with both narratives.

We have pointed out extensively that the U.S. economy is less sensitive to interest rates now than it has been in the past. The consumer may, therefore, be more insulated from the lagged effects of Fed tightening. We also note that discretionary spending for lower income households is more affected by rent, food and energy costs than it is by interest rates.

And as resilient as the job market has been, we find it hard to believe that the unemployment rate will go above 4.5%. So far, employers have hoarded labor to prevent disruptions; we expect this trend to continue.

We conclude with our key under-appreciated takeaway on the growth front. Lower inflation in 2024 will help support consumer spending and offset the lagged impact of higher interest rates.

Earnings Outlook

Stocks have sold off in the early going so far in 2024. There is now a growing sense of foreboding that both earnings expectations and stock valuations may be too high. It is feared that these, in turn, may lead to mediocre stock market returns in 2024.

S&P 500 earnings for 2024 are projected to grow by about 11%.

Investors perceive risk in this 11% earnings growth estimate for 2024 because of a well-documented historical pattern. Analysts chronically overestimate earnings at the beginning of a year. As the year progresses, those estimates come down predictably by 4 to 8 percentage points.

We are aware and respectful of that trend. However, we identify a couple of potential positive offsets to that downtrend.

Profit margins have been compressing for the last year and a half because of high inflation. Higher input costs for labor and raw materials generally cause margins to decline.

We see this downtrend in Figure 2.

Source: FactSet

Inflation in 2024 will be a lot lower than it was in 2022 and 2023. We expect that a lower cost of goods sold will improve profit margins and provide some upside to earnings. The decline in interest rates should also help profit margins to some extent.

We also note that earnings have been unusually erratic in the last ten years or so. A crisis in commodities and currencies roiled markets in 2016. The Trump tax cuts abruptly boosted earnings in 2018. The pandemic wreaked havoc in 2020 and then war and excessive stimulus unleashed inflation and curtailed profits in 2022 and 2023. We see this wayward trajectory of earnings in Figure 3.

Source:  FactSet

S&P 500 earnings per share for 2023 will likely come in within a range of 219-220. This is well below the trend level of earnings assuming historical growth rates from 2015 onwards. We notice that even the 244 level of earnings forecasted for 2024 remains below the trend line of normalized earnings. As macro headwinds diminish, we are optimistic that the consensus earnings forecast for 2024 will be met or exceeded.

And finally, a word on stock valuations.

The forward P/E ratio for the S&P 500 currently stands at about 19 times. While it is high by historical standards, it is not so different from recent averages. We believe that the stock market is gradually evolving to a structurally higher normalized P/E than its long- term historical average.

The S&P 500 index in aggregate produces free cash flow margins of about 10% and return on equity of around 20%. These are unprecedented levels of high profitability. We believe these are sustainable levels of profitability for large U.S. companies going forward and, therefore, supportive of higher stock valuations.

We are more tolerant of today’s P/E ratios than most investors.

2024 Outlook

We are aware of the long list of indicators that still argue in favor of a recession. These include the continued inversion of the yield curve, steadily declining leading economic indicators and negative growth in bank deposits.

  1. We acknowledge these factors will continue to slow down growth. Our base case calls for below- trend, but still positive, GDP growth. Our worst case scenario is a short and shallow recession. We assign low odds to a traditional or deep recession.
  2. Lower inflation in 2024 will support consumer spending and offset any lagged effects of higher interest rates. Even as the job market softens, the unemployment rate will remain well below 4.5%.
  3. We do not anticipate any meaningful uptick in inflation from here on. Inflation should continue to decline in a fairly orderly manner to below 2.5%. The impetus for lower inflation in 2024 will come from declining shelter inflation, a weaker job market and continued productivity gains.
  4. It may be difficult to achieve the Fed’s 2% inflation goal in the next couple of years. A higher floor on inflation may emerge from a couple of factors: modestly resilient growth in the near term and an ageing population which limits labor supply in the long run.
  5. With the significant progress on disinflation, the Fed is already quite restrictive in its policy. If inflation falls further in 2024, the Fed will have the flexibility to cut rates several times. We expect five to seven rate cuts in 2024 beginning in March or May. We expect the 10-year Treasury bond yield to normalize just below 4%.
  6. We are more comfortable with earnings estimates and stock valuations than the current consensus view. We believe that lower inflation in 2024 will lead to higher profit margins overall. We also believe that higher P/E ratios are fundamentally supported by the higher profitability of companies within the S&P 500 index.

  7. We do not expect political or geopolitical risks to materially affect stock or bond returns.
  8. For calendar year 2024, we forecast mid-single digit bond returns and high single digit stock returns. We see more upside for stocks than we do for bonds. We remain bullish on stocks but at a lower portfolio weight than in prior years.

We are confident that the battle against inflation has been largely won and will soon come to an end. Investor focus is now squarely on growth, which becomes the key determinant of investment performance.

We realize that a lot of uncertainty still persists about the future trajectory of economic and earnings growth. As a result, we emphasize high quality and sustainable competitive advantages in our investment decisions. After a highly rewarding year, we will exercise even more caution and care in client portfolios.

 

We believe GDP growth will continue to slow but only to below-trend levels; it is unlikely to turn negative.

 

Inflation will continue to recede but may normalize above the Fed’s 2% target.

 

Earnings may exceed expectations due to a potential improvement in profit margins.

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Giving together can create a lasting bond.

“Philanthropy has the power to bring a family together,” says Pegine Grayson. “It can be life-changing, not just in its impact on a community, but also its impact on the donors.”

Invitation to Share

As Director of Whittier Trust's Philanthropic Services department, Grayson and her team help high-net-worth families meet their charitable goals, but the personal rewards for families are sometimes among the most meaningful outcomes.

Grayson recounts the time she helped plan a family retreat with the goal of getting three young adult children involved in the family foundation. While the two sons were enthusiastic, the daughter had been largely estranged from the family and only reluctantly agreed to attend.

“About an hour into the retreat, we asked the father to talk about why he wanted a foundation—what happened in his life that made him want to use his wealth in this way,” Grayson recalls. “He began talking about his reasons for joining the military decades ago, the experiences he had during his service that left a lasting impression on him, his own experiences as a veteran, and why he cares so deeply about helping fellow vets. As his story unfolded, he broke down and cried. The kids were stunned. They had never heard this story. After so many years, they finally had a key to begin to understand what their father was about.”

The father's vulnerability created a major shift in the room, Grayson says, which transitioned to asking each of them about their own lives and areas where they'd like to have an impact. Although no one's causes were the same, there were no wrong answers, and everyone was truly listening and hearing each other. “By the end, the kids realized that it's not always going to be the dad show; it can be the family show,” Grayson concludes. “And they've all been active in the family foundation since, including the daughter.”

The School of Philanthropy

Because the work of Philanthropy is steeped in personal values, it's an ideal vehicle for a family to talk about what has shaped them as individuals and what it means to them to align their wealth and values. Philanthropic pursuits open the door for a family to work together as a team on projects or initiatives that will benefit others outside of the family unit. Grayson discusses her top five:

1) Values and succession

As a parent, you don't want wealth to undermine your children's initiative and drive for success. You want them to be equipped with the tools and values they need for a good life. Philanthropy provides that foundation, prompting discussions of family members' backgrounds and beliefs and helping everyone embrace family history and carry forward important values.

2) Life skills 

Even once you have settled on a charitable mission, it can be surprisingly challenging to select grantees, develop a decision-making process, decide the type of impact you want to have and how to evaluate it, etc. Making these decisions as a family provides a rich learning environment, as members research the causes they care about and learn how to communicate respectfully, make persuasive arguments, appreciate other perspectives, and compromise. You also have to learn how to represent your family effectively in the community so that every encounter leaves people, grantees, organizations, and other philanthropists with a positive impression. 

3) Financial literacy

By tending to the business of the foundation, family members learn about investments, financial planning, budgeting, market fluctuations, and other financial management practices, including how to calculate the 5% required distribution for private foundations.

4) Resolving ambivalence 

It's not uncommon for family members to have a love-hate relationship with the family's wealth, particularly for those who didn't earn the money themselves. Sometimes, there are expectations of achievement; sometimes, politics and unconscious messages of distrust. But coming together to decide how to use the wealth for good can serve as a pressure relief valve for some of those issues and get family members rowing in the same direction as they focus on the positive impact they can have on issues they care about.

5) Togetherness

With families spread all over the country, or even the world, philanthropy can keep you united around a common purpose and provide an impetus to physically come together, visit grantees, see your work in the community, and then talk about what you've seen.

Strategy for Family Continuity

“One longtime Whittier client had a situation that demonstrated all five of these benefits,” Grayson says. 

The origin of the family's wealth went back many generations, and as the family branched out, they created a variety of foundations. By the fourth generation, everyone had their own separate interests, and they were no longer collaborating. 

“We saw a way to bring everyone back together,” Grayson explains. “For the fifth generation, we had the idea to create a junior board to start talking about seamless succession planning for the family foundations, identifying promising charities, and learning about making grants. So, we formed a group of cousins and started to educate them on the responsibilities of being a board member of a foundation and the legal and tax constraints in which they operate. We focused on fundamental activities such as researching grantees, making site visits, and budgeting. As the training sessions progressed, the cousins wanted to know more. Some of the questions that came up were, While we're talking about philanthropy, can we also talk about why my parents set up a trust, what it means, and what are the differences between stocks and bonds and other investments? They were hungry for knowledge.

“As the group started to learn together, they started respecting each other. That has led to even deeper relationships over time. They're all still very close and doing collaborative grant-making across branches of the family. Every other year, they have a ‘G5’ retreat in person, and they plan it themselves!” Grayson says. “Philanthropy created those relationships. That fifth generation got to know each other in a way that never would have happened without the common bond of using the family's wealth for good. It's the best feeling to be able to help facilitate that.”

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To our Whittier Trust Family,

I want to express my deepest gratitude to each of you--clients, employees, and partners--who have been an integral part of the Whittier Trust family since I started here over 30 years ago. This journey has been extraordinary, and your unwavering support and commitment have made it all possible. This is a significant milestone, and as I reflect on the past 30 years, I am reminded that success is not a solitary endeavor. Success is a collective achievement, a testament to the incredible people around me.

My journey in wealth management began with a personal connection, perhaps foreshadowing the mantra that so many of my colleagues at Whittier and I would be guided by as we worked to serve our clients. I vividly recall a neighbor noticing my fervent, insatiable curiosity about investing, and him making the time to share the Wall Street Journal with me. From that curiosity, I began my career in institutional money management. My role often included presenting performance results to large public funds. If the investment performance was good, the meeting was short. There was very little personal connection with the actual investors. When visiting smaller public funds – the entire fire department would show up. I will never forget a fireman approaching me after a meeting and saying, "Mr. Dahl, I really don't understand much of what you just said here today, but I want you to know that you have everything I own – my pension – and it is there for my wife and daughter. Just don't blow it!" Now, that is a personal touch. Truly successful people in this business have to be able to deliver exceptional performance and also have the ability to connect. That same emphasis on personal touch and genuine connection ignited a passion within me and has made Whittier Trust feel like home all these years.

For almost the entirety of its existence as a multifamily office, I have been proud to help grow the wealth and legacy of our clients and privileged to welcome so many into the Whittier Trust family. Over the past three decades, we have navigated various challenges, from the dot-com bubble to the rise of Silicon Valley, the 2008 financial crisis, and the hurdles posed by a global pandemic. We have witnessed the birth of the internet, smartphones, gene therapy, gene editing, and artificial intelligence. Yet, through it all, Whittier Trust has not just adapted; we have thrived. We have embraced change, continuously thinking like entrepreneurs, evolving our methods, and incorporating new technologies while holding to the timeless principles of the “Whittier Way” and putting our clients above all else.

In a world increasingly moving towards less personalization, Whittier Trust remains committed to being that second call for our clients in times of great need (after their spouses, of course). We empower our team to provide holistic, tailored approaches across all five pillars that build families and grow value. We seek to be a beacon of safety for our clients.

Through our unique approach, we are honored to bring families together, create visions for legacies today and tomorrow, offer meaningful career paths for our team members, and bring preeminence to the multifamily office arena. As I reflect on the last 30 years, I find immense pride in knowing that Whittier Trust has been a guiding force in our clients' journeys and our team members' professional pursuits.

Looking ahead to the next 30 years, our vision remains unwavering. With the recent opening of West LA and Menlo Park offices, alongside the relocation of our largest office to Pasadena, we continue building momentum and unlocking opportunity. While we are growing, our focus remains on fostering success from within for the benefit of our clients. We are committed to nurturing and developing our talent, ensuring that our team continues to drive our success.

In closing, I want to express my deepest gratitude. Your belief in Whittier's mission and continued trust and dedication to that mission truly shine through. It’s this shared spirit drives us towards our goal of being the preeminent multifamily office, and I am confident that each of our team members embodies and embraces that ambition.

Looking ahead, I am confident that we can reach even greater heights. With your talent, drive, and collaborative spirit, there's no limit to what we can achieve together.

With heartfelt appreciation,

David A. Dahl, CFA

President & CEO 

On November 9, the IRS released its annual inflation adjustments for tax year 2024 covering updates to more than 63 tax provisions. The 2024 adjustments will affect tax returns filed in 2025.

On December 31, 2025, a significant amount of the individual tax provisions passed under the 2017 Tax Cuts and Jobs Act (“TCJA”) will sunset, including: the TCJA’s lower tax rates, the 60% AGI threshold for cash gifts, the doubling of the Unified Gift and Estate Tax Credit, the elimination of the $10,000 state and local tax cap, the return of the 2% miscellaneous tax deduction, and more. Whittier Trust’s Tax Department can assist with modeling these upcoming changes.

2023 tax year filings are due in 2024; certain tax due dates fall on a weekend or holiday. A list of 2024 federal tax due dates can be found available for download in the attached PDF.

In 2022, the United Kingdom’s Queen Elizabeth passed away at 96 years old, leaving behind four beloved dogs, Candy, Lissy, Sandy and Muick. The Queen, famous for being a dog lover, worried about the fate of her pets and planned ahead for her children and staff to adopt them after her death. Ultimately, it was a happy outcome for the royal pooches. 

Many of us can relate to pets feeling like full-fledged family members. In fact, according to the American Veterinary Medical Association, in the United States, 85% of dog owners and 76% of cat owners consider their pets to be a member of the family. Those numbers are huge since, according to the American Pet Products Association, as of 2023, 66% of U.S. households have at least one pet. Still, the overwhelming majority of pet owners neglect to plan for their animals in their estate plans (Everplans reports that only 9% of people with wills include provisions for their cats, dogs, or exotic birds). 

More and more Whittier Trust clients have questions about how best to provide for their fur babies and feathered friends. Whittier Trust Senior Vice President and Director of Philanthropic Services Pegine Grayson sat down with Christine Chacon, a partner at Best Best & Krieger LLP. Chacon has extensive estate planning experience in the areas of trusts for individuals and pets, wills, powers of attorney and healthcare directives.

Pegine Grayson: Why do you believe it’s important for people of means to engage in advance planning for their pets?

Christine Chacon: Our pets are like family members. And despite their shorter life expectancy, it’s actually very common for pets to outlive their owners. Most of us can’t imagine a scenario in which our beloved animals are just dropped off at the nearest shelter with no idea how they would fare. Even if you have a family caregiver in mind, pets are expensive and most of us don’t expect others to have to shoulder the costs of caring for our pets into the future.

Pegine Grayson: That makes sense. What can we do to ensure the best outcome for our pets after we’re gone?

Christine Chacon: I usually begin by asking my clients whether or not they have a successor caregiver—a family member, friend or a neighbor—in mind. Their options will be different depending on how they answer.

Pegine Grayson: Then let’s take those one at a time. What are the options for people who do have a specific caregiver in mind for their pets?

Christine Chacon: First, make sure they know of your intention and agree to serve in this capacity. Consider naming a second person in case something happens to the first one or they become unable or unwilling to serve. The next step is to craft a letter with instructions to guide them (the pet’s medical history, medical conditions, vet contact, special dietary restrictions, habits, etc.). In short, these are tips for success. Finally, ensure your chosen caregiver will have enough resources to care for your pet in the way that you would want them to. This can be accomplished as a simple, outright bequest to the caregiver for this purpose or by arranging a pet trust. The best option depends on the pet owner’s assets, other chosen beneficiaries and circumstances.

Pegine Grayson: Let’s discuss the bequest first. That sounds easier than establishing a trust. Why not just opt for this solution?

Christine Chacon:  It’s a simpler option, but it may not provide sufficient protection under some circumstances. For example, what if your chosen caregiver falls ill or passes before your pet does? What if he or she turns out to be less financially responsible than you had assumed and squanders the money you leave them on a new car? I always advise my clients to hope for the best outcome but plan for the worst one.

Pegine Grayson: So it sounds like a trust structure would be safer, but is that possible for pets?

Christine Chacon: Absolutely! Many states have provisions in their Probate Codes for this type of structure. For example, in California, it is found in Section 15212. You’ll want to engage an attorney who is experienced in setting up these special trusts. Typically, people name the same personal or professional trustee that they have in place for their other trusts and specify that distributions can be made for all expenses reasonably necessary for the pet’s care. The trustee would be obligated to invest the funds prudently, so they may grow over time. The trust would stay in place even if the caregiver ends up changing over time.  Finally, you’ll need to decide what happens to any fund balance remaining upon the pet’s death. Most people designate a trusted animal shelter to receive the residue.  

Pegine Grayson: How does one determine the right amount of money to put into the trust?

Christine Chacon: I suggest you make a list of your typical monthly expenses (food, grooming, vet bills, walking, toys, medications, etc.) as well as the annual ones (dental cleanings, boarding for vacations, even plane tickets) and come up with an average annual amount. We can specify varying amounts to be transferred to the trust upon the owner’s death, depending on the age of the animal at the time of the owner’s death.

Pegine Grayson: OK, you’ve been talking about the situations where the pet owner has a specific caregiver in mind. What if they don’t have anyone willing or able to step in and take the pet?

Christine Chacon: In that case, most of my clients still opt to establish a trust with a professional trustee and name a trusted animal shelter or other appropriate nonprofit as the beneficiary. For dogs and cats, a local shelter is typical. For horses, they’ll need to find a ranch or stables willing to board them for the remainder of the animal’s life. It’s important to reach out to the organizational beneficiary in advance and get their consent to the arrangement. It would be tragic to make plans that you thought were iron-clad only to have the organization say that they’re not willing to take the animal in. The trust instrument will provide that if the pet is adopted, the organization may retain the funds as a charitable contribution.

Pegine Grayson: Can you share a story of a pet trust you established and how it worked out?

Christine Chacon: I counseled a Trustee through the administration of a pet trust which just ended a few years ago. The decedent left a large portion of her estate in trust for the benefit of her dog. Her dog was young when she died, so the trust lasted for the dog’s lifetime. A friend cared for the dog, and a professional licensed fiduciary managed the trust account. The dog was very well cared for, from grooming to boarding, supplies, food, equipment and anything else you can imagine. When the dog died of old age, the balance of the trust fund was given to a local pet organization. It was a lovely arrangement, because the dog’s life continued as her owner would have liked, and a charity was benefited as well. 

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