In the fourth quarter of 2022, markets provided some welcomed relief for investors in what had been a challenging year for both equities and fixed income. Cooling inflation, strong consumer spending, and some surprising corporate earnings announcements helped rally markets in the first two months of the quarter. However, growing concerns around the Fed’s persistent interest rate policy and the drumbeat of recession fears dashed hopes of a Santa Claus rally with the markets fizzling as the year ended.
International stocks led the pack for the quarter, outperforming the S&P 500 by almost double digits. Fixed income, as measured by the Bloomberg US Aggregate Bond Index, showed some stability despite the Fed’s aggressive policy, ending the quarter in positive territory as well.
|Index||4Q22 (10/01/22-12/31/22)||1 Year (01/01/22-12/31/22)|
|S&P 500 Index||7.6%||-18.1%|
|Russell 2000 Index||6.2%||-20.4%|
|MSCI EAFE Index||17.3%||-14.5%|
|MSCI Emerging Markets Index||9.7%||-20.1%|
|Bloomberg US Aggregate Bond Index||1.9%||-13.0%|
Last year, markets became overwhelmed by an inflation trend not seen since the late 70’s, an abrupt policy response by the Fed, and geopolitical tensions triggered by Russia’s brutal invasion of the Ukraine. World stock and bond market indices suffered double-digit losses, historic stock/bond correlations broke down, and both asset classes uncharacteristically posted negative annual returns.
Amid these market conditions, we did observe a few trend reversals we have been anticipating that are worth noting. Value stocks have the edge in the long-term tug-of-war between growth and value, however, growth has been on an impressive streak for several years. Perhaps this has turned, as value stocks handily outperformed growth stocks in 2022, with the Russell 1000 Value Index down roughly a third of the decline in the Russell 1000 Growth Index.
In our last commentary, we discussed the impact of the recent rise in the US dollar over other global currencies, and its negative impact on US investor’s international equity returns. To quote, “Over time, we expect cyclical economic forces to gradually put pressure on the dollar, which would drive it down relative to other international currencies.” This is another trend reversal that might be in play with international developed stocks beating their U.S. domestic counterparts, due at least in part to a weakening US dollar.
And finally, many of the frothiest areas of the markets have had their comeuppance, as evidenced by the demise of the meme stock craze, Cathie Wood’s ARK Innovation fund implosion, and a drop in Bitcoin from over $60k to less than $20k. Even some tech darlings like Amazon, Tesla, and Facebook were down over 50% for the year. We view all these events to be healthy for long-term stability and will be factors in the market recovery process.
Turning the Page on 2022
After a disappointing year, we are cautiously optimistic about 2023, though we expect volatility to remain elevated. The resolution of some COVID-related supply chain issues and Fed action seem to be dampening the pace of inflation. The latest CPI numbers show a decline from a June high of 9.1% to 6.5%, and the commodity complex is mostly back to pre-COVID levels. The Fed has some work to do before declaring any kind of victory, but the recent trend is encouraging. Many economists, including Wharton’s Jeremy Seigel, think the Fed has already gone too far suggesting the rate hiking campaign may be nearing an end, which could provide a tailwind to the markets.
While corporate profits are projected to decline in the face of this stage of our economic cycle, we believe it is logical to assume that some of this is already priced into equity values. Keep in mind that the S&P 500 has not experienced two consecutive down years since the Dot-com bubble in the early 2000’s, and in fixed income (Bloomberg US Aggregate Bond Index), this is the first time this century that fixed income has had two negative years in a row. Further, bond yields are now more attractive than the near-zero levels from the start of 2022 – the 10-year Treasury started around 1.5% and ended the year at 3.75%. Shorter-term Treasuries experienced an even greater increase – 2-year Treasury started at 0.7% and ended around 4.4%. This will allow savers to see higher income going forward thus helping provide greater income and stability.
Secure Act 2.0
December was not a strong month for the markets, yet investors did get some positive news in the form of new legislation designed to further address the concerns of funding and saving for retirement – the Setting Every Community Up forRetirement Enhancement(SECURE) Act 2.0.
Earlier this year, the House of Representatives passed a follow-up bill to the SECURE Act of 2019 – the SECURE Act 2.0 – on a nearly unanimous vote. The Senate advanced two different pieces of similar legislation last summer, but did not officially pass the act until December 22, 2022, and then signed into law just before the New Year.
The SECURE Act and the SECURE Act 2.0 were designed to encourage more employers to offer retirement plans by lowering the cost in addition to reducing some of the risks. The SECURE Act 2.0 continues to build provisions to help employers and employees in saving for and funding retirement. The most important elements and timeline of the SECURE ACT 2.0 include:
- Required Minimum Distributions (RMDs)
- Starting January 1, 2023, the minimum age to start taking RMDs increases to 73 (prior age was 72). In 2033, the minimum age is pushed out to 75. If you turned 72 in 2022 or earlier, you would need to continue taking RMDs as previously required.
- Also starting this year, the penalty for failing to take an RMD will decrease to 25% of the RMD amount, down from 50%. Beginning in 2024, Roth 401(k) accounts will be exempt from the RMD requirements.
- Higher catch-up contributions
- On January 1, 2025, people ages 60 through 63 years old will be able to make catch-up contributions up to $10,000 annually to a workplace plan, and that amount will be indexed to inflation. Please note, if you earn more than $145,000 in the prior year, all catch-up contributions will need to be made to a Roth account with after-tax dollars.
- In 2024, catch-up contributions for people 50 and over will be indexed to inflation. The catch-up contribution currently stands at $1,000.
- Qualified charitable distributions (QCDs)
- Starting January 1, 2023, people who are 70 1/2 and older may designate a one-time gift up to $50,000 (adjusted for inflation) of their QCD to a charitable remainder trust (CRT), charitable remainder annuity trust (CRAT), or a charitable gift annuity. This amount will count toward an annual RMD.
- For employers
- Employers will have the option to match contributions to Roth accounts (after-tax). Prior to this Act, only pre-tax contributions were made.
- For employers starting new 401(k) or 403(b) plans in 2025 or after, this Act requires them to automatically enroll eligible employees starting at a 3% minimum contribution rate.
- In 2024, businesses can begin adding an emergency savings account option for non-highly compensated employees. This account would be treated like a Roth account. Contributions would be limited to $2,500 annually (and the first four withdrawals in a year would be tax and penalty-free. Contributions could also be eligible for an employer match.
- Also starting in 2024, employers will be able to match employee student loan payments with matching payments to a retirement account.
- 529 plans
- If 529 plan assets are held for at least 15 years, these assets can be rolled over to a Roth IRA for the beneficiary, subject to annual Roth contribution limit and lifetime cap of $35,000.
The SECURE Act 2.0 provides some meaningful changes to the retirement landscape, while many of them are simple, others are very complex. Whether you are a business owner or an individual, The SECURE 2.0 Act will most likely affect some aspect of your financial life. Throughout the year, we will be discussing the specific considerations that apply to your personal circumstances with you to assist you in planning accordingly.
Thank you for your continued confidence in our services.
– The Wealth Dimensions Team
The S&P 500® Index, or Standard & Poor’s 500 Index, is a market-capitalization-weighted index of 500 large publicly traded companies in
The Russell 3000® Index is a capitalization-weighted stock market index that seeks to be a benchmark of the entire U.S stock market.
The Russell 1000® Index measures the performance of the large-cap segment of the US equity universe. It is a subset of the Russell 3000® Index and includes approximately 1,000 of the largest securities based on a combination of their market cap and current index membership. The Russell 1000 represents approximately 93% of the US market.
The Russell 1000® Growth Index measures the performance of the large-cap growth segment of the US equity universe. It includes those Russell 1000 companies with relatively higher price-to-book ratios, higher analysts’ forecast for medium term growth and higher sales per share historical growth.
The Russell 1000® Value Index measures the performance of the large-cap value segment of the US equity universe. It includes those Russell 1000 companies with relatively lower price-to-book ratios, lower analysts’ forecast medium term growth and lower sales per share historical growth.
The Russell 2000® Index is a small-cap stock market index that makes up the smallest 2,000 stocks in the Russell 3000 Index.
The MSCI EAFE Index is an equity index which captures large and mid-cap representation across 21 Developed Markets countries around the world, excluding the US and Canada.
The MSCI Emerging Markets Index captures large and mid-cap representation across 24 Emerging Markets (EM) countries.
The Bloomberg Aggregate Bond Index or “the Agg” is a broad-based fixed-income index which broadly tracks the performance of the U.S. investment-grade government and corporate bonds.
For informational purposes only. Not intended as investment advice or a recommendation of any particular security or strategy. Information prepared from third-party sources is believed to be reliable though its accuracy is not guaranteed. Opinions expressed in this commentary reflect subjective judgments of the author based on conditions at the time of writing and are subject to change without notice. For more information about Wealth Dimensions, including our Form ADV Part 2A Brochure, please visit https://adviserinfo.sec.gov or contact us at 513-554-6000. Please be advised that this material is not intended as legal or tax advice. Accordingly, any tax information provided in this material is not intended and cannot be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer.