“Sell in May and go away” was once a nice sounding slogan that traders would use for the summer months. Since 1990, the S&P 500 had gained an average of just 2% during the May through October period compared to the 7% gain from November through April. However, 2023 has bucked that trend with a 4% rise already and 14% gain year to date. Here is a quick recap for your summer reading pleasure:
• The Federal Reserve raised interest rates 10 times since 2022 but paused those hikes after its June meeting. “Inflation pressures continue to run high, and the process of getting inflation back down to 2% has a long way to go,“ Jerome Powell said. The Fed telegraphed the potential for two more rate hikes in 2023 with the next one possible by the time you read this.
• The 2/10 spread, the difference in interest rates between 2 year Treasuries (currently yielding about 5%) and 10 year Treasuries (about 4% yield), hit the widest margin of -1.09% since 1981. This widely watched indicator suggests the economy could be tipping into a recession.
• Along those same lines, the Leading Economic Indicators have fallen for 14 straight months through May. Though not perfect, the 6-month decline of 4.3% in LEI has been a decent signal of softer economic activity on the horizon.
• However, inflation slowed to just 4% in May, the lowest rate in over two years and well below April’s 4.9% annual rise. The pullback was driven by tumbling gas prices, a much smaller rise in grocery prices than in previous months and less expensive furniture, air fares and appliances.
• Rising interest rates were cited in part for the issues that afflicted Silicon Valley Bank, Silvergate Capital, First Republic, Credit Suisse and Deutsche Bank last quarter. There have been 41 corporate debt defaults in the U.S. so far this year which is more than double the same period last year. Corporate bankruptcies such as Bed, Bath & Beyond and Christmas Tree Shops have risen to levels not seen since 2010. As such, the Fed may be feeling pressure on all sides to limit further increases.
• While a Russian coup attempt was quickly thwarted, the event put a spotlight on how one of the world’s nuclear powers could have the potential to upset the global economy. With a GDP roughly the size of Australia, Russia remains one of the biggest suppliers of energy to global markets.
• The United States avoided a self-inflicted wound by passing legislation that lifts the debt ceiling through 2025.
• The forward price-to-earnings ratio of the S&P 500 has risen to 19x, well above its 25-year average of 16.8x. The 10 largest stocks, which include the technological giants like Apple, Alphabet, Tesla, and Microsoft are trading 45% above their 25-year average P/E levels. However, the 490 other stocks that make up the S&P 500 trade at a much more reasonable valuation of 17.8x which is about 13% higher the 25-year average.
• The first half of 2023 has brought a resilient economy. Job openings and employee quit rates still remain elevated. The unemployment rate did rise to 3.7% in May but remains a historically low figure.
• The biggest bank stocks all passed the Fed’s annual stress test and are now able to increase dividend payouts to shareholders.
• Headwinds may arrive for the second half of the year. Some consumers are just now feeling the pain of higher costs. Insurance for cars and homes is expected to rise 9% this year. With mortgage rates exceeding 7%, some variable mortgages are resetting to higher payments for borrowers. Also, as part of the debt ceiling negotiation, student loan interest will start accumulating in September with payments due in October. With consumption making up 68% of GDP, a financially strapped consumer in the holiday season could hurt margins for many businesses in Q4.
• Rebalancing well-diversified portfolios could be more important than ever. Given higher interest rates, portfolios that leaned into high dividend paying stocks to produce income can now find yield in short term bonds as well. Within stocks, value could be found in mid-caps and small-caps, which are up just 4% compared to the S&P 500’s 14% return.
If you have any questions about your allocation and how recent events have affected your financial plan and account positioning, please do not hesitate to reach out to your advisor.
Summer Financial Planning
The summer usually lends itself to more downtime and we hope you are finding time to relax with your families. With the absence of tax or end-of-year deadlines, the summer months can provide time to address areas that you have been avoiding up until now. Here are a few ideas:
• As mentioned in our last newsletter, we have had great success with our new service offering that allow us to manage your employer sponsored retirement plan accounts including 401(k), 403(b), and 457 plans from companies such as Vanguard, Fidelity, TIAA CREF, Empower, Transamerica, Voya and many others. If you have one of these accounts that you would like us to oversee, please let us know.
• Review your estate planning documents if you have not already. Reach out to your advisor if you would like a referral to an estate planning attorney. Remember: Do not store your Will and other estate planning documents in a safe deposit box!!! Make sure they are available to your loved ones.
• The SECURE Act changed how your heirs will have to handle Required Minimum Distributions from inherited IRA’s. Previously, they could “stretch” their RMDs over their lifetimes. Now, those distributions generally must occur within 10 years of inheriting assets. If you have an heir that is in a high tax bracket, they will prefer to inherit your Roth IRA or non-retirement assets. On the other hand, a lower earning beneficiary will pay less tax when inheriting your Traditional IRA. Review your retirement account beneficiary designations with that in mind.
• If retired, review your tax return and distribution plan to ensure you are withdrawing your assets in a tax efficient manner.
• Review your college savings goals with updated tuition figures.
• Review your life and disability insurance policies or employer benefits. Do these reflect your current income and needs? Would it make sense to cancel policies that you put in place years ago? Are the beneficiaries up to date?
• If you plan to make charitable contributions before 12/31, consider gifting appreciated assets and/or setting up a donor advised fund for those assets. For those over 70 ½, ask us about making tax-free Qualified Charitable Distributions directly from your IRA!
• Last year we recommended investing in I-bonds at TreasuryDirect.gov due to their 9.62% interest rate. With inflation tempering, the I-bond interest rate is now only 4.3%. This falls below 3-month U.S. Treasuries at 5.30%. Thus, we would not recommend purchasing additional I-bonds at this time, and you may want to consider redeeming them after a 1 year holding period if short-term treasury rates remain elevated.
As always, if you would like to review your financial plan more broadly or have any questions about this report, please do not hesitate to reach out to your advisor.