Financial Markets and the Economy
Stock markets gained in the fourth quarter of 2022, but the S&P 500 was down 18.1% for the year. Globally, the MSCI EAFE was up 17.11% in the fourth quarter, while it was down 15.5% for the year. Small company indexes trailed larger companies and the Russell 2000 was up 6.2% for the quarter, but down 20.4% for 2022. Treasury yields rose as the 10-year U.S. treasury bond was yielding 3.9% at the end of December from 1.5% at the end of 2021. Bond indexes were significantly down with a 13% loss in price for 2022.
2022 was a double barrel hit to most investors. Stocks were down and bond prices were down significantly as well. A year when bonds and stocks go down this much at the same time is a rare occurrence. The “60/40” portfolio (60% stocks, 40% bonds), which is the widely used benchmark portfolio for retirement planning, was down nearly 15%(1). While the S&P 500 was down close to 20% for the year, the bond portion of the “60/40” was down in price 13% and caused the 60/40 portfolio to have its worst performance since the depression era. This was a shock to many investors who assumed that bonds would provide the cushion they normally do. While bond indexes were down in the 13% range, the 30-year treasury was down 29%, as the longer bond maturities declined more in price.
The drop in stock and bond prices was largely the result of the Federal Reserve raising the federal funds rate, which is used to affect the interest rate banks and other institutions lend to consumers and businesses. When inflation jumped post the pandemic, the Federal Reserve then embarked on raising interest rates, and tightening financial conditions, in an effort to slow demand for goods and services and hoping to reduce inflation. So far, it’s a mixed bag. Some prices have come down, but others have not. Notably, wage inflation has been sticky and although wages have grown nicely post pandemic, they are not up as much as inflation. This sets up more pressure for wages to rise and consequently, employers need to raise prices to offset that. This is how a wage-price spiral gets started. As we’ve noted before, this is the Federal Reserve’s main concern, and the pronouncements they have made is that unemployment rates need to rise and overall economic activity and corporate profits would decline, to achieve lower inflation. So far, these aren’t the headlines we are seeing. The Federal Reserve continues to publicly state their resolve to raise rates higher until there is strong evidence of a slowing economy and or significant declines in inflation measures.
We started 2022 with a view that rates would rise and that financial markets would need to adjust to a normalized rate structure. This adjustment process continues and is beginning to offer more investment choices than we have seen in some time. Our portfolios started 2022 generally positioned with very high-quality, very short-term maturity bonds which were relatively unscathed compared to the longer dated bonds that caused the bond indexes to be down over 13%. The equity portion of our portfolios performed as expected. The alternative investments also performed in line with expectations. While each family has a customized portfolio, portfolios did relatively well in a tough year. As we have said many times, a portfolio that can weather any storm is paramount to achieving long term goals.
There are a number of income and estate tax law changes that took effect at the turn of the year. Below are a few updates worth noting:
- Lifetime estate/gift/generation-skipping-tax exemption increased from $12,060,000 to $12,920,000 per person.
- Annual gift tax exclusion increased from $16,000 to $17,000.
- Required minimum distribution age increased to:
- Age 73 for those born from 1951 – 1959.
- Age 75 for those born 1960 or later.
- Starting in 2024, 529 balances may be rolled over to a Roth IRA account in the beneficiary’s name subject to the following conditions:
- The 529 account must have been open for 15 years.
- The amount rolled over is limited by the annual Roth contribution limit (currently $6,500/year) and a lifetime max of $35,000.
- The maximum qualified charitable distribution (QCD) amount will be indexed to inflation starting in 2024.
- The requirement for lifetime RMDs from Roth 401(k)s and 403(b)s will be eliminated after 2023.
- SIMPLE and SEP IRAs will be eligible for Roth contributions.
- Any “catch up” contributions to company-sponsored retirement plans for those with wages over $145k must now go into Roth account.
For those focused on reducing estate taxes and passing as much wealth as possible to future generations, the increased exemption amounts present planning opportunities worth discussing. Unless Congress acts, the exemption amount will be reduced closer to $6M per person starting in 2026 so we will be mindful of that as we consider planning between now and then.
As always planning should start with your high-level goals and objectives in mind and we’re here to help your family stay on course! Please do not hesitate to reach out as you have questions or concerns related to your portfolio, planning, or anything else.
Waypoint Capital Advisors
(1) Based on a portfolio of 60% MSCI ACWI Index and 40% Bloomberg US Aggregate Bond Index, rebalanced monthly.