Adviser Outlook, Fourth Quarter 2022 Quick Takes Lessons learned from the Great Financial Crisis (2007–2009) show that investors with a plan in retirement can bounce back even while spending from their accounts during bear markets Despite recession fears, economic growth was positive in the third quarter—the first estimate of Q3 GDP came in at 2.6% An upside to inflation? Social Security recipients are getting a big raise After a stormy spring for investment markets, summer got off to a sunny start. As though a switch flipped with the changing seasons, stocks and bonds reversed direction in mid-June and rallied through mid-August. Unfortunately, a confluence of concerns clouded the horizon and the rally faded. U.S. stocks registered their third-worst September return in nearly 65 years—leaving the S&P 500 index down 4.9% for the third quarter and 23.9% lower year-to-date. Adding to investors’ (and our) frustrations, the bond market experienced its third consecutive quarterly decline. The Bloomberg U.S. Aggregate Bond index was down 14.6% through September—its worst intra-year decline since its 1976 inception by a long shot. In all, it’s made for a meager 2022 harvest—except for tax losses, which do have their value, though they’re unpleasant to watch growing. We know it’s been a tough year, and it’s natural to worry that things could get worse or that, somehow, it’s “different” this time. But is it? Different or Not? In some ways, yes, it is different. Global economies shut down two and a half years ago during the pandemic— an unprecedented exogenous event. As we’ve been learning the hard way, it’s far easier to halt the vastly interconnected and complicated machinery of the global economy than it is to bring it back online. One economic repercussion of the rebound from the pandemic has been high inflation, which peaked at 9.1% year-over-year in June—the highest in 40 years. It’s come down over the last two months, but it’s still running hotter than Federal Reserve policymakers or consumers want to see. The highest rate of inflation in four decades has resulted in the most aggressive Fed action since the 1980s, rattling Wall Street and Main Street. So far this year, the Fed has hiked its key lending rate five times, from a range of 0.00%–0.25% in March to 3.00%–3.25% in September. Expectations are that policymakers could continue hiking the fed funds rate into 2023. Consumer sentiment hit a four-decade low over the summer. Yes, consumers were more negative this summer than during the depths of the Great Financial Crisis, the bursting of the tech bubble, the COVID-19 lockdowns. We count that as at least one sign that things are different. The worry is that in pushing consumers and businesses to spend (or borrow) less and save more, reducing demand, the Fed slams the brakes too hard (raising the fed funds rate too high and/or too fast), throwing the U.S. economy into a recession. This wouldn’t be the first time the Fed’s actions caused a recession—that’s not different. What’s different is that despite the economy having retrenched slightly in the first half of the year, the unemployment rate remains at record lows. Workers are working and earning and spending. In short, today’s environment is different in some important ways. Then again, every recession and stock bear market is unique in its particulars—no two are alike. The only thing they all have in common is that they’ve ended and been followed by times of economic expansion and booming stock markets. Bearing Bear Markets in Retirement If you consider the timespan over which investors both save for retirement and then spend in retirement, it would defy the odds to not eventually encounter a bear market. Using the common definition that a 20% decline from a high denotes a bear market, the S&P 500 has been clawed about once every eight years since 1980. Over that same period, stocks have traded 20% or more below their most recent highs about a fifth of the time. As far as bear markets go, 2022’s has been unremarkable in its severity and duration to date. That’s cold comfort, we know, but it’s important to keep in mind as we set expectations and think ahead—especially if the unease of a down market is making you question the sustainability of your financial plan in retirement. Since this is such a critical and common concern, we looked back to the Great Financial Crisis, during which the S&P 500 fell more than 50% from its October 2007 peak, and the impact it had on two hypothetical retirees’ portfolios. In both scenarios, each of our investors retired at the market’s peak with a $1 million portfolio. The first investor had a moderate appetite for risk and allocated 60% of their assets to stocks and 40% to bonds. The second was more conservative, with 40% in stocks and 60% in bonds. Each began taking $3,500 a month in withdrawals (which adds up to a little more than 4% of the starting portfolio value per year) just as the stock market began what would be a 17-month slide. You can see how each fared in the charts above. The moderate-risk investor saw their portfolio fall in value to a low of $632,000, but as the stock market recovered and the economy expanded, they were made whole and regained their $1 million starting value by July 2013. (Had they adjusted withdrawals for inflation, they would have recovered by October 2013.) Remember, the investor also withdrew $245,000 over the nearly six-year period. As you might expect, the more conservative investor experienced a smaller drawdown, with their account value bottoming out at $740,000 in February 2009 before recovering to $1 million by September 2012. (Adjusting withdrawals for inflation extended recovery time by five months to February 2013.) Again, this was while taking $3,500 a month out of their account—a total of $210,000 over the five years. While it’s comforting to know a portfolio can climb back over time, enduring a bear market is never pleasant. But there are practical steps you can take to be sure your financial plan has the flexibility to wait out the worst of the storm. One of the first elements we prioritize in our planning process is making sure clients have an ample emergency fund before retiring. This helps avoid locking in losses during drawdowns if you’re faced with an unexpected expense. Second, if you are making withdrawals, we advise being tax-aware in your selling strategy. Tax-loss harvesting may help take some of the sting out of having to sell a position in a taxable account. Leave assets held in Roth and other retirement accounts for last because they can compound tax-free and give you the most bang for your buck when markets recover. Lastly, if these scenarios make your anxiety spike or you feel your investment timeline is less than the five to six years it took to recover from the last major bear market, talk to a financial adviser about changes that may reduce portfolio risk, recognizing of course that what goes down less will also rise less when sentiment and markets turn. Our Outlook The Federal Reserve’s aggressive inflation-curbing policy has contributed to the markets’ volatility as traders worry it will lead to a “hard landing” (i.e., recession) It may be counterintuitive, but some of the markets’ best days occur during the middle of bear markets—you don’t want to miss them Check in if you’re worried about your financial plan; we can adjust as needed Setting Expectations The September unemployment report boosted the Federal Reserve Bank of Atlanta’s forecast for GDP growth in the third quarter to 2.9%. Given the “good news is bad news” theme we’ve witnessed on Wall Street, it’ll be interesting to see how traders react when the first estimate of third-quarter economic growth is released later this month. We suspect, however, that day-to-day volatility will remain elevated until there are signs that inflation has truly peaked, taking pressure off of Fed policymakers to continue with their interest-rate hikes. Speaking of which, while high inflation gets a bad rap (for good reason), there are some benefits. Social Security payments are getting their largest cost-of-living adjustment in over 40 years. The Social Security Administration raised benefits by 8.7% for 2023, which will add an average of $146 to recipients’ monthly payouts. Another side effect of the efforts to combat inflation has been higher bond yields, especially among short-term bonds, where interest-rate risk is lowest. Six-month Treasury bonds were yielding 3.92% at the end of September, more than double the yield on a 30-year bond at the end of 2021. Cash is now generating modest income—Fidelity’s Government Cash Reserves money market fund was yielding 2.52% as the quarter ended. While cash funds maintain a stable value, bonds’ higher yields can make up for price declines over time, even in rising-interest-rate environments. These may all seem like silver linings to the storm clouds that are hanging over the markets. But there’s also a hidden lesson here. September’s volatility had many investors wishing they’d sought shelter, only to see stocks have their best two-day rally in more than two years as October began (quickly forgotten when markets turned down afterward). What this volatility tells us is that this bear market is behaving like any other in recent memory. During bear markets, stocks tend to move much more—both up and down—on any given day than in bull markets. In fact, the worst and best days in the stock market tend to cluster during bear markets. As you can see in the chart below, the 20 best days (triangles) and the 20 worst days (diamonds) in the stock market since 1990 occurred during the runup to and then bursting of the tech bubble (1997–2002), the Great Financial Crisis (2008–2009) and the COVID-19 panic (March 2020). Yes, there were also a few outliers, but you get the picture. Here’s why we think this happens: When stocks are down a lot, trader and investor emotions are on edge. When emotions are running high, the market is poised for big swings day to day. The fact that the best and worst days are clustered together is why you can’t let the bad days spook you out of the market—it would cause you to miss the best days. And you very much want to be there for those good days. As we’ve noted several times, bear markets are uncomfortable and the future is unknowable. But we’ve been here before. If there’s anything we can do to help you or your family weather this unpleasantness, please contact us. Everyone at Adviser has been working diligently to boost our service offerings and focus on putting clients in the best possible position to achieve their long-term goals. While the market has not been cooperative, we’re excited about what the future holds for our clients and our firm. More to come. Personal Finance Focus: RMDs for Inherited IRAs YOUR PERSONAL REQUIRED MINIMUM DISTRIBUTIONS (RMDs) are tricky enough, but now things have gotten increasingly complicated for those who’ve inherited retirement accounts. Non-spouse heirs of tax-deferred accounts (IRAs, 401(k)s, 403(b)s, etc.) were previously able to “stretch” RMDs out over their own lifetimes. Recent legislation eliminated this provision; now inherited IRA assets must be distributed in full to beneficiaries at ordinary income rates within 10 years of the original owner’s death. And if the beneficiary is a trust? The tax rate is even higher. One solution: Keep the trust as a beneficiary and convert the IRA to a Roth IRA—future distributions are then tax-free. As if that wasn’t a big enough change, earlier this year, the IRS threw an additional monkey wrench into the 10-year rule. If you are a noneligible designated beneficiary who inherits an IRA after RMDs were started by the decedent, you must immediately begin taking annual distributions based on your life expectancy (use the IRS’ Single Life Expectancy table) for years one through nine and empty the IRA by the end of year 10. Exceptions exist. The 10-year rule does not apply to those who are considered eligible designated beneficiaries (surviving spouses, children under 21 years old, disabled or chronically ill beneficiaries, or those within 10 years of age of the decedent). For some basics on RMDs, check out our handy infographic, 9 Need-to-Know RMD Facts. Company News Introducing Jill O’Connell We’re proud to announce we’ve hired Jill O’Connell as our chief human resources officer. Jill’s career includes leadership roles in human resources and talent acquisition and development at Fidelity Investments, Edelman Financial Engines and EF Hutton. “It’s exciting to be part of the team [CEO] Mario [Ramos] is building, and I’m looking forward to finding ways to sustain and strengthen the culture that Adviser has built as we continue to grow,” said O’Connell. Jill has hit the ground running with several new initiatives, including an Employee Rewards & Recognition Program, expanding our intranet (“The Hub”) for company news and info, and revamping company benefits, to name a few. As Adviser expands, having an experienced hand like Jill’s to help us smoothly integrate new employees while further developing our current team will be invaluable. 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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