Adviser Outlook, First Quarter 2023 Quick Takes Losing stockA financial instrument giving the holder a proportion of the ownership and earnings of a company. market years are often followed by gains in the next BondA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. yieldsYield is a measure of the income on an investment in relation to the price. There are several ways to measure yield. The current yield of a security is the income over the past year (either dividends or coupon payments) divided by the current price. have more than doubled since the end of 2021, boosting return potential Congressional passage of Secure 2.0 brings significant changes to required minimum distributionA required minimum distribution is the amount of money that must be withdrawn each year from tax-deferred retirement accounts once the beneficiary reaches retirement age (72, according to IRS rules). and catch-up contribution rules, giving investors additional retirement planning flexibility For investors, 2022 was memorable for all the wrong reasons. Will 2023 bring a repeat? We don’t think so. Our measured optimism is supported by both historical perspective and facts on the ground. Amid geopolitical turmoil, a higher cost of living and sustained stock and bondA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. market losses, it may be difficult to face the new year with hope instead of caution. This feeling is reflected in consumer sentiment data, which is biased toward recent experience and landed squarely in “the dumps” (to use a technical term) for nearly all of 2022. And it’s no wonder. U.S. stocksA financial instrument giving the holder a proportion of the ownership and earnings of a company. slumped into a bear marketA period in which stock prices decline significantly from recent highs and remain below previous high marks for weeks or months. Generally, a decline of at least 20% in stock prices is considered the threshold marking the start of a bear market. and stayed there—the S&P 500 index returned -18.1% in 2022 (including dividendsA cash payment to investors who own stock in the company.) after touching -25.4% in early October. And to pour salt on investors’ wounds, the U.S. bond market had its worst calendar year on record, down 13.0%. StocksA financial instrument giving the holder a proportion of the ownership and earnings of a company. and bondsA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. tumbling at the same time is rare. Since 1976, using monthly data, the two asset classes have experienced simultaneous negative returns just 10 times over 552 rolling 12-month periods—that’s less than 2% of the time, and it had only happened twice before 2022. However, stock and bond returns were positive in the fourth quarter; the S&P 500 returned 7.6% and the Bloomberg U.S. Aggregate Bond Index advanced 1.9%. Foreign stocks were even stronger, with the MSCI EAFE index posting a 17.3% gain in Q4. We have a way to go to recover the S&P’s high set last January—and there’s always the possibility of a backslide— but gains are gains. To come full circle to one of our first points, sentiment is a contrarian indicator: Periods when consumers and investors are fearful, as they were in 2022’s final months, can be a precursor to market gains. Inflation, which split time in the news cycle with recession fears and Russia’s war on Ukraine, looks to have peaked last summer. Gas prices rose as high as $5 a gallon in mid-June and have since fallen back closer to $3 a gallon—pretty much where they were in fall 2021. And inflation’s pace, measured by year-over- year increases in consumer prices, slowed from 9.1% in June to 6.5% in December. If that trend continues, we could see inflation land somewhere between 3% and 4% by midyear 2023. (One upside to inflation, which we mentioned last quarter, is that Social Security recipients will start seeing a nearly 9% cost-of-living increase reflected in their benefit checks this month.) While falling energy prices are one component of inflation’s decline, the other part of the story is Federal Reserve policymakers’ ongoing efforts to bring it to heel. The central bank leapt into action in 2022, rapidly hiking the benchmark fed funds rate from near zero to a range of 4.25% to 4.50% at year-end. (A good part of bonds’ price declines and rising yields can be attributed to this shift in policy.) While the pace of their interest-rate hikes slowed in December, Fed Chair Jerome Powell and Co. have signaled their intent to stay on task until inflation is closer to their long-term target of 2%. Keeping interest rates higher for longer risksThe probability that an investment will decline in value in the short term, along with the magnitude of that decline. Stocks are often considered riskier than bonds because they have a higher probability of losing money, and they tend to lose more than bonds when they do decline. pushing the economy into a recession. We have more to say on recessionary indicators, portfolio positioning and 2023 financial planning considerations below, but first, let’s hit the history books for a look at periods when bad news led to good news in the stock market. The Negative-to-Positive Pattern 2022 was the 18th losing calendar year for the benchmark S&P 500 index since its inception in 1957 and its worst performance since the 2008 financial crisis. Historically, the index has had a 70% hit rate, posting gains in seven out of 10 calendar years. We looked at how the S&P performed after each of its 17 prior negative calendar years. As you can see in the chart below, not only did the index rebound in all but three of the following years, but the average return was 12%. And that’s not counting reinvested dividends. Note: Chart shows calendar years between 1958 and 2022 when the S&P 500 index declined in price and the performance of the index the following year. Sources: S&P Global, Adviser. In other words, bad years in the market are typically followed by good years. For those in retirement who are worried they don’t have time to recover from a down market, we’d encourage you to read our bear market case studies which may offer some reassurance. Recession Radar With the battle against inflation in full swing, investors have increasingly turned their attention to the prospect of a recession. Should that come to pass, it would arguably be the most widely predicted U.S. recession ever. But nothing is guaranteed, and the wisdom of the crowd doesn’t tell us when the recession might start (if indeed it does), how long it might last or how deep it might cut. The jobs picture has confused the issue. Rising unemployment is generally a harbinger of recession. With unemployment at just 3.5% and nearly two job openings for every jobseeker, that indicator doesn’t line up with a contracting economy. And with consumer balance sheets on solid footing as wages inch up, it’s possible we could spend our way past recession entirely. BondsA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. and other tells suggest a different story. For one, the bond market’s yieldYield is a measure of the income on an investment in relation to the price. There are several ways to measure yield. The current yield of a security is the income over the past year (either dividends or coupon payments) divided by the current price. curve is inverted (a clear indicator that investors are worried about the economy’s growth prospects). Additionally, the housing market is weak (existing home sales fell in 10 consecutive months through November and are down more than 35% year-over-year). A range of other forward-looking factors tracked by the Conference Board’s Leading Economic Index are also in decline. Note: Chart shows six-month percentage change in the Leading Economic Index from7/31/59 through 11/30/22 along with periods of recession. Sources: The Conference Board, National Bureau of Economic Research. So, let’s say we are destined for recession, however shallow or deep, sooner rather than later—what does that mean for stocks? Over the last 10 recessions, stocks fell an average of 3% (excluding dividends) from start to finish and were down an average of 11% at the midpoint. Have we already experienced a recessionary bear market? As noted earlier, the S&P 500 (not counting dividends) declined 19% in 2022 after reaching a nadir of 25% below its prior high during the year. That doesn’t mean it couldn’t fall further, but traders’ expectations for recession may already be priced into the market. Our Outlook A recession, however mild, seems increasingly likely—though it may already be priced into the market Bonds appear poised to pull their weight again in diversified portfolios Having a financial plan is more important than ever for understanding cash flow, managing riskThe probability that an investment will decline in value in the short term, along with the magnitude of that decline. Stocks are often considered riskier than bonds because they have a higher probability of losing money, and they tend to lose more than bonds when they do decline. and making the most of tax-advantaged accounts Planning for the Year Ahead We won’t know if we’re in recession until it’s well underway—the nature of the data behind the determination is backward looking. That’s one reason we don’t believe the fear of recession should drive our portfolio allocation decisions. Instead, history argues for staying with a diversified, all-weather strategy appropriate to your risk toleranceThe amount of loss an investor is willing to absorb in their investment portfolio. and long-term goals. Pulling on that diversificationA strategy for managing investment risk by investing in a mixture of different investments. Since different asset classes face different risks, even if one type of asset declines in value, others may not. thread, we know 2022 was a particularly disappointing year for anyone who saw their bond investments, normally a cushion to falling stock prices, decline in value. It’s natural to wonder if bonds have lost their effectiveness as diversifiers and risk-control vehicles. But remember, with a drop in price, bond yields rise. And a bond’s yield is a decent predictor of its returns over the next 10 years. With bonds now yielding north of 4%, they have become far more attractive than they were this time last year. In effect, this means that bonds are paying out more income each month—money you can spend or reinvest. Since bonds mature at par (or 100 cents on the dollar), you also know that so long as the issuer doesn’t default, the price of an individual bond or those held by a mutual fund or exchange-traded fundA type of security which allows investors to indirectly invest in an underlying basket of financial instruments (these may include stocks, bonds, commodities or other types of instruments). Shares in an ETF are publicly traded on an exchange, and the price of an ETF’s shares will fluctuate throughout the trading day (traditional mutual funds trade only once a day). For example, one popular ETF tracks the companies in the S&P 500, so buying a share of the ETF gets an investor exposure to all 500 companies in the index. will eventually recover. These are the contractual forces by which bonds have gotten their reputation as portfolio shock absorbers. Therefore, we continue to believe that now is not the time to abandon a well-built, balanced portfolio that includes fixed-income securities. And, from a planning perspective, while portfolio returns are often the default for measuring success, we think there are other critical components to ensuring that your overall financial plan will help you meet your objectives. First, understanding your cash flow underlies much of the planning process. This doesn’t mean you need to know where every single dollar ends up, but tracking your expenses over a one- to three-month period can give you a high-level grasp of how and what you’re spending. Second, it’s important to understand and manage the risks in your life. We recommend periodically reviewing your insurance coverage. Do you have appropriately sized life, disability and property/casualty policies? Third, leveraging tax-advantaged accounts is an important component of your long-term plan. You have until April 2023 to top off IRAs, Roth IRAs and health savings accounts for 2022. And starting in 2025, investors nearing retirement age can make additional catch-up contributions to their employer sponsored plans (as we note in our sidebar on Secure 2.0). Last, and perhaps most important of all, make sure your financial plan and portfolio are organized around your goals. An experienced wealth adviser should review the three main points we just mentioned to keep you on track. They’re here to serve as the quarterback of your financial life and ensure you are getting all the services you need. From tax and estate planning to investments and charitable giving strategies, we’re always just a phone call or email away. Please get in touch if you’d like to get started. Personal Finance Focus: All About Secure 2.0 THREE YEARS AFTER THE PASSAGE of the original Secure Act, Secure 2.0 was just signed into law by President Biden, ushering in a plethora of updates to the U.S. retirement system. Here are some of the key provisions: Required minimum distribution (RMD)A required minimum distribution is the amount of money that must be withdrawn each year from tax-deferred retirement accounts once the beneficiary reaches retirement age (72, according to IRS rules). age raised. Starting in 2023, the RMDA required minimum distribution is the amount of money that must be withdrawn each year from tax-deferred retirement accounts once the beneficiary reaches retirement age (72, according to IRS rules). age increases from 72 to 73, and in 2033 it will rise to 75. This allows retirees who don’t need the funds right away for living expenses to grow their nest egg longer and better manage their tax bill in retirement. Be sure to talk to your wealth adviser about whether delaying RMDs is right for you. In the meantime, if you do happen to skip an RMD, the fine will fall from 50% of the amount not withdrawn to 25% (and to as low as 10% if you correct the mistake quickly). Bigger catch-up contributions. Currently, anyone over age 50 can direct an extra $6,500 annually to their 401(k). But per Secure 2.0, anyone age 60 to 63 can sock away $10,000 in catch-up contributions beginning in 2025. What’s more, those catch-up amounts will be adjusted for inflation. One hitch: Beginning in 2024, high-income earners (with salaries over $145,000) must make catch-up contributions to a Roth 401(k) or Roth IRAA type of account in which funds can be saved and invested without being subject to tax until the account holder reaches retirement age. account—meaning you pay taxes right away instead of when the funds are withdrawn. More 401(k) matching options. Starting in 2024, if an employee is making student loan payments, their employer can choose to match those payments with contributions to the individual’s 401(k). Added 529 flexibility. Secure 2.0 permits rolloversThe process of transferring funds from one retirement account to another, typically without incurring a tax. from a 529 college savings plan into a Roth IRA if certain conditions are met. $35,000 appears to be the lifetime limit for such rollovers, the 529 must be established for at least 15 years, and beneficiaries of the 529 must move the money into their own Roth IRA. New RMD Ages wdt_ID If Your Birth Year Is... ...Your RMDs Must Be Taken At Age: 1 Before 1951 72 2 1951-1959 73 3 After 1960 75 There’s much more in Secure 2.0, including enhanced provisions for tapping into your retirement funds without penalty in an emergency, additional savings opportunities for business owners, and benefits for first responders and public servants. Please contact us if you’d like to find out more about what Secure 2.0 means for you. Company News Introducing Tim Clift WE ARE THRILLED to announce Tim Clift has joined Adviser as chief investment officer to head our investment strategy and research team. Tim joins us from the financial technology firm Envestnet, where he most recently served as chief investment strategist. “I am enormously excited to join Adviser to lead an already exceptional team,” he said. “I think you’ll see our strategy lineup evolve, as innovation in our industry has created more robust investment products and tools to complement our broader suite of services.” Tim brings a fresh perspective and rigorous investment acumen to portfolio construction at Adviser as we continue to expand the range of wealth management services available to our clients. Welcome to Adviser, Tim! This material is distributed for informational purposes only. The investment ideas and opinions contained herein should not be viewed as recommendations or personal investment advice or considered an offer to buy or sell specific securities. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed. Our statements and opinions are subject to change without notice and should be considered only as part of a diversified portfolio. You may request a free copy of the firm’s Form ADV Part 2, which describes, among other items, risk factors, strategies, affiliations, services offered and fees charged. Past performance is not an indication of future returns. Tax, legal and insurance information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice, or as advice on whether to buy or surrender any insurance products. 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