The PCE, or Personal Consumption Expenditures Price Index, is the Federal Reserve Bank’s preferred measure of inflation. Last week, the core PCE was reported at 2.8%, which is lower than expected. The report indicates that inflation is flat, or slightly declining. Coupled with a weakening job market, analysts expect the Fed to reduce interest rates by another quarter of a percent. This has a trickle effect through the economy, reducing the cost to borrow for businesses and consumers, while also encouraging people to move money from lower-yielding savings accounts into stocks.
As a result, the S&P 500, a common gauge for the stock market as a whole, was up almost one percent last week. Year-to-date, the index is up over 17%. This follows two strong years, with 2023 up over 24% and 2024 up over 23%. Year-end is a good time to rebalance your portfolio. Think about how long you have until you’ll need each account. A house, college, or boat fund may be needed in a few years, where a retirement account may have ten years or longer. The longer out the need is, the more aggressive you can be. If, due to the strong market performance of the last three years, you have more stock than your time horizon would indicate, this is a good time to look at making changes.
For tax reasons, we generally favor holding bonds in retirement accounts. This will allow you to rebalance, or bring your portfolio back to its intended stock-bond mix, without significant tax consequences. If you do need to sell things to rebalance, consider the tax implications. If the gain will be large, you may want to split the changes, doing half now and half in the new year.
If you’ve retired, or had a low-income year, you may also want to talk with your tax professional and financial advisor about a Roth conversion. A conversion is when you move funds directly from a pre-tax, or traditional, retirement account and into a Roth, or pre-tax account. You’ll have to pay taxes on the money you move, but there are no penalties if you are under 59 ½. A Roth IRA has several advantages, including tax-free growth over your lifetime (and your spouses’, if you are married) plus ten years. A Roth does not have Required Minimum Distributions, and taking income from one does not impact your Medicare premiums.
Your action item this week is to make certain you and your loved ones have taken any Required Minimum Distributions. While we think of this for individuals 73 and older, it also applies to inherited IRAs.
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CovingtonAlsina is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.