Update on the Markets:

Index	4th Quarter 2022	Full Year 2022
S & P 500 (Large US Stocks)	7.56%	(18.11%)
Russell 2000 (Small US Stocks)	6.23%	(20.44%)
FTSE All-World ex-US (International Stocks)	14.36%	(15.22%)
Barclays US Aggregate (Bonds)	1.87%	(13.01%)

January 2023

Key takeaways

► A year to forget

► Bonds look decent

► SECURE 2.0 Act of 2022

► Get paid

Good Riddance!

As the late Queen Elizabeth II noted the year 1992 as “annus horribilis” (marriage troubles for three out of her four children, humiliating press, a racy book, and a fire at Windsor Castle all added to the year’s troubles), 2022 was “annus horribilis” for investors with loads of troubles: highest inflation in 40 years, an aggressive Fed, the largest land war in Europe since 1945. Stocks had their worst year since 2008. Bonds fell. Crypto collapsed. The tech-heavy S & P 500 index fell over 18%. Jim Reid, the head of thematic research at Deutsche Bank, noted that years where both stocks and bonds fell in tandem were few and far between, which is one reason why last year’s brutal losses marked “the biggest outlier year in history,” Reid said, “2022 saw the worst combined total return for both stocks and bonds dating back to 1872.”

The bad news continued through the last trading day of the year as stocks ended on a down note, a sense of gloom and angst about an impending global recession in the air.

Worries Persist

The worst may yet come. The Fed raised rates aggressively last year, and it can take months for the effects to trickle into the economy. Inflation may be peaking, but it remains high, and the Fed’s resolve to fight it remains. Will it lead to a recession? How bad? Will corporate earnings hold up under intense inflationary pressure and a slowing economy? The stock market has yet to price in the prospect of lower earnings. The housing market is frozen. The conflict between Russia and Ukraine has no end in sight. China, the world’s second-largest economy, is struggling after relaxing COVID restrictions. However, the US labor market remains tight. US consumer spending may continue. Lower oil prices have alleviated prices at the pump. We may yet avoid a full-blown recession.

Bonds look decent

One of the most daunting challenges of 2022 was the decline in bonds – the worst year for bonds ever. Deutsche Bank Research said it was the worst year for government bonds since 1788! Almost all of the time, stocks and bonds move in opposite directions. In a strong economy, earnings go up, and stocks follow, while inflation leads to higher yields and subsequently hurt bonds (bond yields and prices move in opposite directions). The reverse usually occurs in a slowing economy, stocks fall, and bonds jump. Last year proved the exception, as falling bond prices didn’t augment the slide in stocks. As a result, it was a terrible year for balanced portfolios – the classic “60/40” portfolio (60% stocks + 40% bonds) – down around 17%.

An aggressive Fed bumped up yields by 4.25% – the most since 1980. It’s hard to believe, but the US 10-year yield started 2022 at around 1.50% and ended the year at about 3.85%. 10-year yields hit 4.20% in October.

But bonds are starting to look attractive, especially the 2-year Treasury at around 4.30%. 4.30% may not look great when inflation is more than double, but it sure beats the sub-2.00% yields we’ve witnessed lately, even negative yields in Europe. Meager yields were one justification for investors to put money into risky assets, like stocks, often called “TINA”: There Is No Alternative. Many stocks in the S & P 500 yielded more than the 10-year US Treasury. However, today the S & P 500 index yield is 1.80%, according to Slickcharts.com, while the 10-year US Treasury ended the year at 3.85%. And since the Fed signaled that it is not done raising rates, staying in shorter bonds may be the best bet for now.

SECURE Act 2.0

Almost forgotten in the run-up to the holidays was the passing of the SECURE Act 2.0. The SECURE 2.0 Act is intended to upgrade the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019. Congress passed it on December 23 as part of the Consolidated Appropriations Act of 2023. President Biden signed the legislation into law just six days later. The Act contains over 90 changes to various retirement plans. Here are a few:

• RMDs extended. The age at which required minimum distributions (RMDs) must begin has increased from 72 to 73 and will increase to 75 in 2033.
• RMD penalties reduced. The penalty for not taking an RMD has been lowered from 50% of the required amount not taken to 25%. And if the mistake is corrected in a timely manner, the penalty has been reduced from 25% to 10%
• Roth option for the employer match. Employees can now take employer matching and nonelective contributions on a Roth after-tax basis or pre-tax basis.
• Roth SIMPLE and SEP IRA. A Roth version of these two popular types of retirement plans is now available.
• Student loan payment match. Employers can make matching contributions on workers’ qualified student loan payments.
• Rollover from 529 plans to Roth IRAs. Beneficiaries of 529 college savings accounts can roll up to $35,000 of leftover funds to a Roth IRA tax and penalty-free over their lifetimes.
• Increased catch-up contributions. The catch-up contribution maximum for employees age 50+ is $7500 for 2023 and adjusted for inflation annually. Beginning in 2025, employees age 60 – 63 will have a higher catch-up limit – 50% more than the regular catch-up limit or $10,000 more, whichever is greater.

Get Paid
With the Fed remaining on its inflation watch, rising global tensions, and a possible recession, it’s wise to stay conservative. Yields are high enough now that holding cash and short-term bonds is a viable option. Diversified bond funds yield over 5.0%. Also, defensive, dividend-paying stocks look attractive. It’s all about getting paid while you wait. Historically, the market delivers positive returns after such an awful year, but stocks are still not cheap, perhaps just fairly valued. On a P/E basis, according to finasko.com, the average price/earnings (P/E) ratio for the S & P 500 index since 1981 is 22x. The index ended 2022 at 20x. The Nasdaq ended the year at 25.3x, according to macrotrends.net. I recommend erring on the side of safety. Later this year may be a better time to add to risk assets.

Please let me know if you have any questions or concerns.

Sincerely, 
Henry 

Henry Gorecki, CFP® 
HG Wealth Management LLC 
401 N Michigan Ave, Suite 1200
Chicago, IL  60611
312-723-5116