Will China Break the Supply Chain?

Please note: This update was prepared on Wednesday, November 30, 2022, prior to the market’s close.

Inflation concern went wild on Wall Street again this week as traders grappled with widespread protests in China over draconian COVID-19 lockdowns and the potential disruption to China’s exports of, well, everything. Stocks fell for three days running as investors worried about renewed global supply chain logjams once again. That said, one major obstacle for the movement of goods is gone—California’s main ports are no longer backed up at all.

Today, all eyes were on Federal Reserve Chair Jerome Powell’s afternoon speech. In his last address, Powell squashed any notion that the Fed would pivot from a policy to curb inflation to one more supportive of economic expansion. While Powell suggested a slower pace of interest-rate increases might be appropriate as soon as the Dec. 13–14 meeting, which made for a good day for stocks, even though it’s not the policy shift Wall Street has been hoping for.

Here’s what we’re watching and why:

• Congress is moving to head off a looming rail strike with legislation imposing a labor agreement on rail workers. A rail strike could wreak havoc on the nation’s supply chain just when it’s beginning to mend and have a potentially wrenching effect on the economy.
• Black Friday was booming as consumers shelled out a record $9.1 billion via their smartphones and computers, up 2.3% from 2021. Cyber Monday saw consumers spend an additional $11.3 billion online, up 5.8% from last year. Nearly 2 out of 3 Americans shopped in stores and online over the Thanksgiving weekend, suggesting consumers had been keeping their powder dry for months awaiting the bargain blowouts.
• Oil prices, which impact production costs broadly across the global economy (think fuel, fertilizer, chemicals, transportation, etc.), fell to an 11-month low this week after three consecutive weekly declines. Gas’ slide from $5 per gallon in June to today’s average of $3.50 will help ease inflationary pressure at the pump. Will oil maintain its downward trend? The OPEC+ oil cartel convenes on Sunday to discuss cutting production. Stay tuned.
• Presaging Powell’s comments this afternoon, Federal Reserve officials continued to beat the aggressive-rate-hike drum in public comments this week, citing strong consumer demand and labor market strength. St. Louis Fed President James Bullard said he sees keeping the fed funds rates in the 5% to 7% range into 2024, and that “markets are underpricing a little bit the risk” of the central bank maintaining a “more aggressive approach.” Meanwhile, New York Fed President John Williams warned that the persistently strong labor market and consumer demand “suggests a modestly higher path for policy relative to September.”

Chart of the Week: Shipping Costs Suggest Smooth Sailing

Portfolio Manager Jeff DeMaso 

China’s zero-COVID-19 policy and resulting protests have analysts worried that exports will be disrupted once more. As mentioned above, there are also concerns that a strike could disrupt rail traffic across the U.S. if the White House and Congress fail to enact emergency legislation preventing a widespread walkout.  

But what’s not getting nearly as much airtime is how much things have improved since the start of the year. One way to view this is by measuring traffic at the Los Angeles port. At the start of the year, more than 100 ships were backed up at sea waiting for a berth to unload. Today there are zero.

And shipping costs are coming down as the backlog clears. The Shanghai Containerized Freight Index, a gauge of shipping prices out of China, is at one-third its June level. The average price for shipping a 40-foot container fell to its lowest level in two years earlier this month.

Backlog cleared. Supply chain becoming unkinked. That translates into lower inflation—and should continue in the months and quarters ahead. Of course, you won’t see that in the headlines…because bad news sells.

Tax Moves to Make Posthaste

Holiday shopping and party planning mean time is growing short to make your year-end tax moves. While it can be difficult to focus on your finances during this hectic season, these steps can pay dividends in 2023 and beyond.

Maximize Opportunities for Tax-Deferred Growth

401(k)s, IRAs and other retirement accounts are a great way to keep your assets growing tax-deferred. Depending on your employer’s plan, you may be able to defer up to $20,500 in earnings by contributing to a 401(k) or 403(b) plan in 2022. If you will turn 50 before Dec. 31, 2022, and your plan allows it, you can contribute an additional $6,500.

For IRAs, the maximum contribution in 2022 is $6,000 (it increases to $6,500 in 2023), plus a $1,000 “catch-up contribution” for those who turn 50 during either calendar year. You must make 401(k) contributions by the end of the calendar year, but IRAs and some other types of tax-deferred retirement accounts allow you to contribute to your 2022 limit until Apr. 18, 2023.

Do it now and enjoy the benefits of tax deferral and compounded gains sooner rather than later.

Don’t Forget About Required Minimum Distributions (RMDs)

Once you’ve reached age 72, you are required to withdraw a minimum percentage from tax-deferred accounts by Dec. 31 each year. For non-Roth IRAs and 403(b) accounts, you calculate the RMDs separately for each account you own, but you can withdraw the total amount from one or from multiple accounts. It’s up to you.

Unlike IRAs, withdrawals must be taken separately from each 401(k) and 457(b) plan account. Roth IRA accounts are not subject to RMDs. If you forget to take your RMD from your retirement account, you will be assessed a penalty equal to 50% of the amount you should have withdrawn, in addition to your normal income taxes.

Reap the Benefits of Tax-Loss Harvesting

Losses in your portfolio have value, and given this year’s market volatility, some of the shares you own may be underwater. Selling a position below your purchase price isn’t fun, but those losses can be used to offset other gains and income in your portfolio—lowering your tax bill. Selling positions at a loss, waiting 31 days (as per the “wash-sale” rule) and then repurchasing your original position is called tax-loss harvesting. This is something we’ve engaged in on your behalf as a cost-saving aspect of your investment strategy all year, and we’ve again focused on it as December approaches.

Be Charitable

Feeling generous and want to reduce the tax value of your estate? You can give up to $16,000 (or $32,000 as a married couple) to as many people as you want this holiday season without gift-tax implications.

529 college savings plans are another great way to provide gifts to family members. You can even circumvent the annual $16,000 gift limit to fund higher learning by using a special rule called “super funding,” which allows you to contribute up to five times the annual tax-exempted gift limit (up to $80,000) at once without triggering your lifetime gift- or estate-tax exclusion. (You can only “super fund” once every five years.) For a married couple, that super funding could be as much as $160,000, which is certainly a great way to start a newborn on the road to a fully funded private school, college or graduate school education.

For much more year-end tax-saving advice, have a look at our special report, 2022 Year-End Thoughts for Your Portfolio and Personal Life, or just give us a call. We’re ready to help!

Podcast: All About the Crypto Crash

The headlines have been inescapable since crypto broker FTX went down in flames. But what actually happened with FTX? Will its failure take down the rest of the crypto sphere? And what, if anything, does it mean for your portfolio?

Portfolio Manager Jeff DeMaso and Senior Research Analyst Liz Laprade help sort out the mess and offer some lasting lessons from this slow-motion train wreck. Listen today!

Strategy Activity Update

Please see below for a summary of the trades we executed over the week through Thursday and our current tactical strategy allocations.

Dividend Income

Sell Cash

Buy iShares MSCI EAFE Growth ETF (EFG)

AIQ Tactical Defensive Growth

AIQ Tactical Multi-Asset Income

Sell Cash

Buy iShares Gold Trust (IAU)

AIQ Tactical High Income

No trades

Adviser in the Media

Last Friday, Portfolio Manager Adam Johnson appeared on Fox Business with prescient analysis about why the Black Friday “Gloom Crew” would be proved wrong. Earlier today, he guested on Cheddar News to set the table for Fed Chair Powell’s speech and dissect Elon Musk’s take on interest rates.

In our most recent Adviser Takeaways, Senior Research Analyst Liz Laprade looked at the market moves resulting from recent protests in China, while Manager of Financial Planning Andrew Busa explored how last-minute lawmaking on Capitol Hill may impact your retirement plan.

Looking Ahead

Next week, we’ll keep an eye on fresh data on manufacturing and the service sector, factory orders, and inflation and consumer sentiment, along with the latest developments on Capitol Hill and in China.

As always, please visit www.adviserinvestments.com for our timely and ongoing investment commentary. In the meantime, all of us at Adviser wish you a safe, sound and prosperous investment future.

About Adviser

Adviser is a full-service wealth management firm, offering investment management, financial and tax planning, managed individual bond portfolios, and 401(k) advisory services. We’ve been helping individuals, trusts, institutions and foundations since 1994. Adviser Investments and its subsidiaries have over 5,000 clients across the country and over $8 billion in assets under management. Our portfolios encompass actively managed funds, ETFs, socially responsible investments and tactical asset allocation strategies, and we’re experts on Fidelity and Vanguard mutual funds. We take pride in being The Adviser You Can Talk To. To see a full list of our awards and recognitions, click here, and for more information, please visit www.adviserinvestments.com or call 800-492-6868.