Hevel Capital: Monthly Newsletter - July 2024

Introduction

Hi ,

Welcome to the third edition of the Hevel Capital newsletter! Our commitment to empowering you with the knowledge and strategies for financial success remains steadfast. In future issues, we will continue to explore new topics, provide overall market updates, and offer financial planning strategies relevant to you. Thank you for your time and consideration!

From Classroom Curiosity to Hevel Capital: My Journey in Finance

I founded Hevel Capital in early 2024 following 13 years of experience in a variety of finance roles. My passion has always been investments and doing something bigger than myself where I feel like I’m making an impact, hence the launch of Hevel Capital. I knew I wanted to do something in finance since my senior year in high school. I can vividly remember the birth of this passion in a senior high school political science class in 2006 where several classmates started a virtual stock trading competition. I was initially skeptical and had little interest but it quickly captured my attention. A great teacher noticed the interest from the class and taught a few lectures about the stock market. 

The more I dug in, the more interested I became which resulted in invitations to a stock club that the teacher was part of and some of my favorite memories with my grandpa. I went to my grandparents place a few times per month for several months before leaving for college to talk about stocks and learn investments from him. He even introduced me to his financial advisor at the time! The class birthed an interest and my grandpa fueled the passion through quality time that we spent together. Those moments went far beyond just discussing stocks; they were deeply meaningful, especially in retrospect.

Fast forwarding nearly two decades, I now hold both the Chartered Financial Analyst (CFA) and Certified Financial Planner (CFP®) designations, which are the major certifications in the financial industry. The CFA designation signifies expertise in investment analysis and portfolio management, while the CFP® focuses on comprehensive financial planning, including retirement, tax, estate, insurance planning, and charitable giving strategies. In prior roles, I have been quoted in major financial publications such as the Wall Street Journal and Bloomberg, which has further honed my expertise and perspective.

However, in each of my prior roles, something was always missing. I’ve always been competitive and strived to be the ‘best,’ which is a good recipe for success in the finance world. However, the personal connection was lacking. Reflecting on where my passion for investments began, it was the people, like my teacher and grandpa, who inspired me. I want more meaningful interactions in my career. Helping others with things that matter is rewarding and fuels my drive. My teacher and grandpa did it for me, and at Hevel Capital, we strive to be a trusted partner for others, enriching the lives of all stakeholders, not just clients.

Hevel Capital was two years in the making, born from my quest to find purpose in a field where I could truly make a difference. I find true fulfillment in helping others, and finance is the area where my expertise lies, making it a natural fit to start Hevel Capital. During this journey, I deeply reflected on my values, goals, and the impact I wanted to have. I envisioned a firm that not only provides expert financial advice but also operates with a heart for service, integrity, and personal connection.

'Hevel' is a reminder to value relationships and treat others as you want to be treated. This is the foundation of Hevel Capital and what the brand stands for. We are in the business of serving others through a relationship-driven business that helps clients achieve their dreams and goals through personalized and trusted financial advice. We want each client to have peace of mind knowing that they have a trusted financial partner so that they can spend more time focusing on what matters most to them.

Market Update: Good Times Keep Rolling, But Some Cracks in the Foundation

What’s Happening with Jobs?

There have been some mixed signals about jobs in the U.S. The latest jobs report shows that the U.S. unemployment rate has increased to 4.1% in June 2024, up from 3.6% in the prior-year period. This rise indicates a broad slowdown in the labor market. While 206,000 new jobs were added in June, this number is largely driven by 70,000 new government jobs and 82,000 jobs in healthcare. Sectors like retail and leisure saw little to no growth. A significant drop of 49,000 temporary workers suggests that companies are cutting back on flexible labor, a pattern often seen before economic downturns.

The Fed is closely monitoring these developments. The rising unemployment rate and other warning signs might lead to a rate cut in September. The Fed is likely to signal this potential cut during their upcoming meeting later this month. The debate is shifting from whether the job market is slowing to how significant the weakening will be. The Fed's response will likely balance between controlling inflation and addressing the risk of a deeper labor market downturn.

Despite concerns about rising unemployment and mixed job signals, the stock market remains strong because companies are still making good profits and investors remain hopeful about the future. The Federal Reserve's potential rate cuts and the extra money from previous government stimulus also help keep the market up along with the continued insatiable appetite for technology stocks and AI.

A Closer Look at the US Consumer

U.S. consumers are getting savvy, hunting for deals and promotions while keeping their finances in check, according to Barclays. Although rising credit issues and late payments are on the radar, they haven't yet slowed down spending significantly. The overall financial health of consumers is still good, with higher-income households doing well and lower-income ones adjusting their spending due to economic pressures.

Despite some financial challenges, many households are dipping into their savings to keep spending steady. The personal saving rate remains low, showing that consumers are willing to use their reserves to maintain their current lifestyle but could indicate problems if unemployment increases.

The Impact of the 2024 U.S. Election on Stock Markets

As we approach the 2024 U.S. presidential election, it's crucial to understand how the results might influence the stock market. Whether President Biden retains his office, another democratic nominee wins, or former President Trump returns, the election outcomes will shape economic policies and the performance of various industries.

According to Barclays, the most likely outcome of the election is a divided government, where one party controls the House of Representatives and the other controls the Senate. A divided government often leads to legislative gridlock, making it challenging to pass new laws, particularly those related to spending and taxes. Check out the table below to see how the two candidates compare on major economic policies.

The upcoming election will significantly impact the U.S. stock market and could create some volatility. A divided government is anticipated, potentially limiting major policy changes. Depending on who wins the presidency, there could be important shifts in tax rates, trade policies, and regulations. Investors need to stay informed and prepare for potential market volatility as the election approaches. A Biden victory could lead to tighter regulations and higher taxes, potentially causing market jitters, especially in technology and healthcare sectors. Conversely, a Trump win might result in deregulation and lower taxes, boosting market sentiment, particularly in energy and industrial sectors. Investors should be prepared for short-term fluctuations as the market adjusts to the potential policy changes following the election.

The US market has been strong, but mixed job reports, cautious consumer behavior, and election uncertainty highlight the need for caution. Remember to maintain a diversified portfolio, as relying heavily on U.S. tech stocks could be risky. Diversification is key to navigating these uncertain times.

Renting vs. Buying a Home: What Makes More Financial Sense in Today's Market?

Introduction

When it comes to the age-old question of whether to rent or buy a home, the answer isn't always straightforward. It depends on a multitude of factors, including market conditions, personal financial situations, and long-term goals. In most cases, particularly in today's market in cities such as San Diego and the Bay Area, renting tends to make more financial sense. However, this analysis will vary based on individual circumstances, and there are factors beyond financial considerations in the decision to buy or rent a home.

The Current Market Landscape

Given the current state of the housing market, high property prices, and interest rates, buying a primary home may not be the most financially sound decision for many. Let's dive into the reasons why renting might be more beneficial:

1. Upfront Costs: Buying a home requires significant upfront costs, including the down payment, closing costs, and moving expenses. These initial investments can be substantial, and many people may find it difficult to accumulate the necessary funds.

2. Maintenance and Repairs: Homeownership comes with ongoing costs for maintenance and repairs. These expenses can add up quickly and are often unpredictable, making renting a more stable financial option.

3. Property Taxes and Insurance: Homeowners must pay property taxes and homeowners insurance, which are additional expenses that renters do not have to worry about.

4. Opportunity Cost: The money used for a down payment could potentially be invested elsewhere, such as in the stock market, where it might earn a higher return. This opportunity cost is an important factor to consider when deciding whether to buy or rent.

Long-Term Considerations

While renting may be more financially sensible in the short term, there are situations where buying a home can make sense, particularly if you plan to stay in the same place for a long time.

1. Building Equity: When you buy a home, you build equity over time as you pay down your mortgage. This can be a form of forced savings, and the equity can be tapped into later through refinancing or selling the home.

2. Stability and Personal Satisfaction: Owning a home provides stability and a sense of accomplishment. Many people value the ability to personalize their living space and enjoy the stability of not having to deal with potential rent increases or lease terminations.

3. Tax Benefits: Homeowners can often deduct mortgage interest and property taxes on their federal income tax returns, which can provide significant savings.

Understanding the Limits of Mortgage Interest and Property Tax Deductions

When it comes to homeownership, one of the significant financial benefits is the ability to deduct mortgage interest and property taxes on your federal tax return. However, recent changes in tax law have placed limits on these deductions. Understanding these limits is crucial for homeowners who are planning their financial strategies.

The Tax Cuts and Jobs Act (TCJA) of 2017 brought significant changes to the mortgage interest deduction. Prior to the TCJA, homeowners could deduct interest on mortgage debt up to $1 million ($500,000 if married filing separately). This applied to both primary and secondary homes. However, for mortgages taken out after December 15, 2017, the TCJA capped the deduction at $750,000 of mortgage debt ($375,000 if married filing separately).

This means that if you took out a mortgage before December 15, 2017, you could still deduct interest on up to $1 million of mortgage debt. But for new mortgages, the limit is now $750,000. For many homeowners, particularly those in high-cost housing markets, this reduction can result in a significant decrease in the amount of interest that can be deducted.

However, this change is not permanent. The provisions of the TCJA, including the mortgage interest deduction cap, are set to expire after December 31, 2025. Unless new legislation is passed, the mortgage interest deduction limit will revert to $1 million starting in 2026. This potential change could benefit future homebuyers and those looking to refinance their existing mortgages after 2025.

In addition to the changes in the mortgage interest deduction, the TCJA also imposed a cap on the state and local tax (SALT) deduction. Before the TCJA, taxpayers could deduct an unlimited amount of state and local taxes, including property taxes. However, the TCJA capped the SALT deduction at $10,000 ($5,000 if married filing separately).

This cap includes all state and local taxes combined, such as property taxes, state income taxes, and local sales taxes. For taxpayers in states with high property taxes or high state income taxes, this cap can significantly reduce the amount of deductible expenses.

Similar to the mortgage interest deduction cap, the SALT deduction limit is set to expire after December 31, 2025. If Congress does not pass new legislation to extend or modify the TCJA provisions, the SALT deduction will revert to its previous state with no cap starting in 2026. This potential change could provide substantial tax relief to homeowners in high-tax states.

Maximize the Financial Benefits of Homeownership with These Tips

It's essential to understand that buying a home becomes more financially sound if you consider it your "forever home." In today’s market you are likely better off renting unless you plan to stay in your home for many years, oftentimes a decade plus depending on various assumptions.

Ways to Make Homeownership More Financially Sound:

1. Lower Interest Rates: If mortgage rates come down, refinancing your loan can reduce your monthly payments and overall interest costs.

2. Home Appreciation: If your home appreciates in value more than expected, your investment could yield a higher return.

3. Paying Down the Mortgage Faster: Making extra payments toward your mortgage principal can significantly reduce the amount of interest you pay over the life of the loan.

4. Higher Down Payment: A larger down payment reduces the amount you need to borrow, which can lower your monthly mortgage payments and the total interest paid.

Case Study: Rent vs. Buy Analysis

Let's consider a practical example to illustrate the financial differences between renting and buying a home. Please reach out to me if you would like access to the spreadsheet to personalize this analysis for yourself.

Conclusion: Renting is Often More Financially Sensible

In conclusion, while homeownership has its benefits, renting often makes more financial sense, especially in the current market conditions. The high upfront costs, ongoing expenses, and opportunity costs associated with buying a home can outweigh the potential benefits. However, if you have been saving for a long time and have a strong desire to own a home, it can still be a worthwhile goal, particularly if you plan to stay in the same place for a long time and can take advantage of potential home appreciation.

Remember, every individual’s financial situation is unique, and it's key to consider your personal circumstances, financial goals, and the current market conditions before making a decision. Consulting with a financial advisor can provide personalized advice and help you make the best choice for your situation.

Maximize Your Charitable Impact with Appreciated Assets

Appreciated assets represent a powerful tool for both investors and charitable organizations. Normally, selling such assets (e.g., stocks, mutual funds, real estate) incurs capital gains tax on the profit. However, donating appreciated assets to a qualified charitable organization provides a dual benefit: the donor can bypass capital gains tax, and the charity receives the full market value of the asset, enhancing the impact of the donation. This strategy not only amplifies the donor's philanthropic efforts but also offers substantial tax advantages, making it a compelling option for maximizing charitable contributions while optimizing tax savings.

 Tax Benefits of Donating Appreciated Assets

• Avoid Capital Gains Tax: When you donate appreciated assets, you avoid paying capital gains tax on the increase in value. For instance, if you purchased stock for $10,000 and it has appreciated to $50,000, donating it to a charity means you avoid paying tax on the $40,000 gain.

• Receive a Charitable Deduction: You can claim a charitable deduction for the fair market value of the donated asset at the time of the donation. In the above example, you would be eligible to deduct the full $50,000 from your taxable income, provided you itemize your deductions.

• Maximize Your Donation: Charities receive the full market value of the asset, which can be more beneficial than receiving cash, as they are exempt from capital gains tax.

 How This Strategy Works

• Identify Appreciated Assets: Review your investment portfolio to identify assets that have significantly appreciated in value.

• Choose a Qualified Charity: Ensure the charity you choose is a qualified 501(c)(3) organization to take advantage of the tax benefits.

• Transfer the Assets: Work with your financial advisor or the charity to transfer the ownership of the assets directly. This process typically involves filling out a form provided by your brokerage or custodian.

• Claim the Deduction: When filing your taxes, itemize your deductions to include the fair market value of the donated asset. Keep records of the transfer and the valuation of the asset for tax purposes.

 Example Scenario

Let’s consider a practical example. Suppose you own shares in a company that you purchased for $20,000, and its current value is $100,000. If you sold the shares, you would owe capital gains tax on the $80,000 gain. Assuming a federal capital gains tax rate of 24% and a state tax rate of 9.3%, you would pay $26,640 in taxes, leaving you with $73,360.

 However, if you donate the shares to a charity:

• You avoid the $26,640 capital gains tax.

• You can deduct the full $100,000 market value of the shares, potentially saving $33,300 in federal and state taxes.

In this scenario, you not only save $26,640 in capital gains tax but also receive a significant charitable deduction, amplifying the impact of your donation.

 Final Thoughts

In conclusion, understanding and utilizing appreciated assets for charitable donations can significantly enhance both your philanthropic impact and your financial benefits. By avoiding capital gains tax and receiving a charitable deduction for the full market value of the donated asset, you maximize the value of your contribution to the charity. This strategy not only supports the causes you care about but also provides substantial tax savings, making it a win-win for both donors and recipients. As you review your investment portfolio, consider the potential benefits of donating appreciated assets to optimize your charitable giving and make a more significant impact. Remember to consult with your financial advisor to ensure that this strategy aligns with your overall financial plan and charitable goals.

Disclosure

Hevel Capital is a registered investment adviser. Information presented in this newsletter is for educational purposes only and does not intend to serve as personalized investment advice. Investing involves risks, and individuals should consult with a qualified financial advisor before making any investment decisions. Hevel Capital does not guarantee the accuracy, completeness, or suitability of information presented in this newsletter. Past performance is not indicative of future results. Hevel Capital and its affiliates may hold positions in securities mentioned in this newsletter.