4th Quarter of 2022 Economic & Market Commentary

4th Quarter of 2022 Economic & Market Commentary

| January 11, 2023
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The fourth quarter of 2022 saw a rebound in most asset classes, with the S&P 500 rising almost 8%, the Dow gaining 16%, and international stocks surging 17%. Stalling inflation figures finally gave hope to investors that the Federal Reserve won’t have to be as aggressive with raising rates in 2023. Nevertheless, the positive fourth quarter could not overcome the previous three quarters’ losses, leaving most asset classes negative in 2022. The fourth quarter of 2022 saw a rebound in most asset classes, with the S&P 500 rising almost 8%, the Dow gaining 16%, and international stocks surging 17%. Stalling inflation figures finally gave hope to investors that the Federal Reserve won’t have to be as aggressive with raising rates in 2023. Nevertheless, the positive fourth quarter could not overcome the previous three quarters’ losses, leaving most asset classes negative in 2022. 


  
What was unique about 2022 was how correlated the losses were. Typically, when stocks underperform, bonds provide income to stabilize a portfolio. However, rising interest rates make the bonds that you hold less valuable, and investors could not find safety in them this year. 2022 was only the third year since 1950 (72 years) when a 60% stock, 40% bond portfolio lost more than 15%: the other two years were 2008 and 1974. 


We will enter 2023 with several unprecedented circumstances that will make forecasting very difficult. The market expects the Federal Reserve to further raise interest rates as it continues to target 2% long run inflation rate. With CPI reading 7.1% in November and projections at 6.5% December, they have a way to go. 


A Mild Recession for 2023?


In a world where dramatic headlines get the most clicks, you won’t get much attention predicting slow growth or tepid economic pullback, but that might be our most likely outcome. Despite the news of layoffs and hiring freezes at many technology companies, the unemployment rate still stands at 3.7% with 1.7 job openings for every unemployed person (down from a 2:1 ratio earlier this year). Mortgage applications reached a 26-year low to end December which reflects the higher interest rates (6.6% on a 30-year mortgage) causing homeowners on a 2-3% mortgage to stay put. Nevertheless, housing inventories are also very low, leaving room for builders to increase supply. Even in the world of cryptocurrencies where the FTX bankruptcy could have led to a contagion effect where one institution’s issues spread to other areas, that has not occurred (yet). Thus, given that markets look ahead to future economic conditions, there is a case to be made that 2023’s second half could improve, and we could see that show up in the first half as the market anticipates recovery.


There will still be some headwinds for stocks to face in 2023 though. With consumer spending making up 68% of GDP, conditions including rising interest rates, slower job growth, the eventual restart of student loan payments, and persistent inflation will leave consumers with less discretionary income to spend. In fact, the U.S. savings rates fell to 2.4% in November, down from 7% before the pandemic. Credit card balances and auto loan delinquencies are slowly rising, further emphasizing this issue. 


Valuations have re-rated to help investors compensate for these risks.  In all cases, they are more reasonable than a year ago. The S&P 500 is right at its 25-year average in terms of valuation metrics. Bonds and Treasuries are at their lowest valuations in 20 years. International stocks outperformed United States stocks in 2022 but continue to trade at a discount compared to historical averages. The recommendation remains to stay diversified through these turbulent times and stick to your overall financial plan.


SECURE 2.0 Passes


The Setting Every Community Up for Retirement Enhancement Act of 2019 just got enhanced again in December of 2022. The general intent of the act was to amend the tax code in a way that makes it easier for Americans to save for retirement and/or incur lower penalties in times of need. While there were over fifty changes made, here are a few notable items:


• Required Minimum Distributions from 401(k)s and IRAs can now wait until age 73. In 2033, the age will increase to 75. 

• Catch up contributions for those over 50 will increase to at least $10,000 (from $6,500) starting in 2025. However, those earning over $145,000 will have to make Roth catch up contributions (starting in 2024) instead of pre-tax deferrals.

• Starting a 401(k) as a business became easier: 100% of start up costs will be credited back to the business.

• Solo 401(k) employee contributions can now be made after 12/31.

• If a 529 college savings plan has been established for 15 years, beneficiaries can now roll up to $35,000 into their Roth IRAs. This is not in addition to their annual contribution but a replacement for it. Over-saving to a 529 is becoming less and less of a concern.

There are many more items which we will cover in our third tax season webinar. If you sponsor a 401(k) or 403(b) for your business, you will receive further communication about how your plan will be administered moving forward. 


Tax Season Webinars


We invite you to visit fncadvisor.com/webinars to register for our four free webinars this winter and spring. Alex Oliver will be covering several topics that may be relevant for your financial plan. For friends and family that don’t work with us currently, you are welcome to share these webinars with them as an introduction to our general philosophies and core competencies. We appreciate the opportunity to help even if it is through these educational events. The topics and schedule include:


Investment Vision for 2023 - Thursday, February 2, Noon – 1PM EST


Cash Balance Plans for Small Businesses - Thursday, February 23, Noon – 1PM EST


Strategies for SECURE 2.0, MA’s Millionaire Tax, and the Expiring Tax Cuts and Jobs ActThursday, March 16, Noon – 1PM EST


Building Generational Wealth and Leaving a LegacyThursday, April 6, Noon – 1PM EST


Once registered, you will receive an email with the calendar event and meeting link. If you are unable to attend, you will receive an email 24 hours after the event with the recording. 


January Financial Planning Suggestions 


January is the time for setting New Year’s resolutions. While we can’t help with weight loss goals or healthy eating habits, we have many suggestions for your financial plan:


• The 401(k) maximum is $22,500, with a $7,500 catch up contribution for those over 50. Divide your maximum by your salary to find the percent you need to defer or divide your maximum by the number of payrolls you have (bi-weekly is 26 pay periods).

• Contribute $6,500 to a Roth IRA or backdoor Roth IRA. Add another $1,000 if over age 50.

• Contribute the maximum to your Health Savings Account: $3,850 for a self-only plan, $7,750 for a family plan. Add another $1,000 if over age 55. 

• Buy another I-bond at TreasuryDirect.gov. The annual calendar limit of $10,000 reset on January 1. The current interest rate is 6.89% for 6 months and will adjust on May 1. 

• T-Bills and money market fund yield 4.36% - put your cash to work! 

• Schedule a comprehensive review with your financial advisor. 

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