Ep 56: Four Ways The SECURE Act 2.0 Might Impact You

On This Episode

After being discussed in Congress for nearly a year and a half, the SECURE Act 2.0 passed in January. Listen to today’s episode to see what you need to know and learn four ways the new changes might impact you.

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PFG Private Wealth Management, LLC is an SEC Registered Investment Advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. The topics and information discussed during this podcast are not intended to provide tax or legal advice. Investments involve risk, and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed on this podcast. Past performance is not indicative of future performance. Insurance products and services are offered and sold through individually licensed and appointed insurance agents.

Here is a transcript of today’s episode:

Marc: Welcome into another edition of Retirement Planning Redefined with John and Nick from PFG Private Wealth. We’re going to tap into the SECURE Act 2.0, a couple of items you might want to be aware of if you’re not and four ways that it could impact you. They went ahead and got this passed at the very, very end of 2022, right before the Christmas break, and some more changes coming down the pike. A lot of changes really in the SECURE Act, but we’re going to touch on some of the bigger ones today. There’s a lot of little nuance, so if you definitely have questions around it, absolutely make sure you’re talking with your financial professional or reach out to John and Nick and have those chats with them at pfgprivatewealth.com. Nick, what’s going on buddy? How are you?

Nick: Doing pretty good. I can’t believe it’s already almost February.

Marc: Yeah, at the time we’re taping this, it’s like a day away. So we’ll be dropping this first week or so of Jan… or February, excuse me. Yeah, time is moving quickly, so, for sure. John, what’s going on with you, my friend?

John: Not too much. Doing all right. Looking forward to… Nick’s probably not looking forward to this, but the upcoming Super Bowl. Two good teams.

Marc: Yeah.

John: So looking forward to checking out those quarterbacks go at each other.

Marc: Yeah. Yeah, it was an interesting playoff season, for sure. So not the result I was looking for either, Nick, but all good. So…

Nick: Yeah.

Marc: It is what it is. But let’s talk about some of these changes, guys, because they did a ton of them, but I want to touch on some of the bigger ones and any other ones you feel are important you want to touch on as well. But like I said, right there before Christmas, literally like the Friday before Christmas, they went ahead and passed this as part of that omnibus bill, all sorts of stuff in there. And they went tinkering around with some more things. And the first one on the list that might affect most people is the RMDs, the age. They changed it again. So you can give us a little backstory if you’d like from how you want to go, with whatever angle you want to go in, but explain to us what they did.

Nick: Sure. So for many years, the RMD, or required minimum distribution age for pre-tax retirement accounts was 70 and a half. And at least… I was just personally excited when they got rid of the half year, because why in the world did they have it in the first place?

Marc: Right.

Nick: But so in early 2020, they pushed it back to age 72, so people picked up about a year and a half. And now, for anyone born between 1951 and 1958, the starting age is 73, so they bumped it back one more year, and for those born in 1959 or later, the age is 75. So from a standpoint of impact for people, there are… I would say, a big chunk of people out there are taking withdrawals from their retirement accounts, and the amount that they’re taking is pretty close to their RMD amount that would be required anyways. But for those that aren’t, it gives them more time to defer funds, let them continue to compound. And from our side of things, it kind of just lets us be a little bit more strategic on creating a liquidation order and helping clients figure out which accounts we should start taking withdrawals from when. And this just builds in more flexibility, which is nice.

Marc: Yeah. So overall, do you kind of like this concept of them pushing this back a little further? I mean, either way, to me, it feels like it works for them to get more tax revenue, right? Because either the accounts get bigger and they get more RMDs you have to pay taxes on, the government will get their share, or people are doing Roth conversions, they have more time to plan for something like that, for example, and they’re getting tax revenue that way. So either way, to me, it seems like it’s a win-win for them.

Nick: Yeah. And realistically, yeah, I think just in general, people don’t like to be told what to do. So anytime, from looking at it from a client standpoint, just to know that there’s flexibility, because I can say that I’ve had more than one and probably more than 10 clients be unhappy when they realize that requirement distributions are a thing to only realize that they were taking the money out anyway. So it’s just literally the psychological impact of choosing to do it versus being forced to do it.

Marc: Okay. All right. So that was one big change that they did. John, let’s talk a little bit about the special catch-up contribution. Give us a quick breakdown on normal catch-up contributions, something that happens all the time. They change the numbers from year to year, what it is, but then also this new little wrinkle they added, and let’s get your thoughts on that.

John: So normal retirement contributions are what the normal limits are for 401k. Whether you’re going to make a contribution or not to it, you do max out. And what is the current [inaudible 00:04:43]

Marc: 22,500, I think.

John: … up as well.

Nick: Yeah.

Marc: Yeah. Yeah, I think it’s 22,500 for the current-

John: Yeah, so 22,500 is kind of normal. Catch-up provision is once you’re over the age of 50, you’re able to actually do an additional amount, which they consider, hey, catching up for basically your retirement. So for 2023 it’s going to be 7,500, which is a nice jump from last year. What makes it even better is anyone between the ages 60 and 63, starting in 2025 can be up to about $10,000. So that is really significant. And why that is, we found a lot of people, when they get into their fifties, they’re kind of in their highest income earning years. So it really comes up quite a bit where it’s like, hey, I want to save more money, but I’m really limited in what I could do. So this is really going to help people defer more for retirement, which ultimately in the long run helps them overall have a larger nest egg and more retirement income.

Marc: Yeah. And so it’s interesting what they did that. So yeah, they moved it on, they added this extra four year thing. So again, what’s your thoughts on that? It doesn’t kick in until 2025, but do you think that’s a useful tool to add even more room for people to sock away?

John: Yeah. I think anything that encourages people to save is definitely a positive for retirement.

Marc: Yeah. So what’s your thoughts on that, Nick?

Nick: Yeah. I mean, again, it’s one of those things where when you add in flexibility and the ability for people to kind of adapt, especially knowing how many 401k plans allow for Roth contributions now. So even if it’s from the perspective of, hey, maybe they don’t want to add more pre-tax money, but they want to take advantage and use some of that buffer for Roth funds, it’s just nice to have the flexibility and ability to be able to put in more funds.

Marc: Yeah. Okay. An interesting one that caught a lot of people off guard, guys, especially a lot of advisors, was the 529 to Roth transfer option. So let’s talk a little bit about that. That’s been a kind of nice little wrinkle. People have been pretty surprised by this.

Nick: Yeah, this is interesting from a perspective… So for those that aren’t super familiar with 529 plans, they are essentially education accounts, and there are funding restrictions. And one of the, in theory, downsides on 529 plans previously were the way and the timing of when you had to use the funds. And so essentially, using funds in the years that costs are incurred, there were some ability to be able to transfer funds from one person to another. But now, essentially what they’re doing is they’re kind of reducing the quote, unquote risk of overfunding a 529 plan, and they’re letting people essentially use 529 funds to make Roth contributions when they start working. So as a reminder for people, to be able to contribute to a Roth IRA, there has to be earned income. So when there’s earned income, you can contribute up to a hundred percent up to of the earned income, up to the maximum amount. And then there are income limitations and restrictions on how much you make versus how much you can put in. To be honest, realistically, this is probably going to be something that is much more tiered towards higher income earners. Definitely the kind of, maybe there’s grandparents that have a significant amount of money and they can overfund a 529 plan for a grandkid, and it can be a way to essentially start to kind of build in some future wealth transfer, which is cool, to be able to have a creative way to be able to do that. Most likely, that’s how I see it playing out overall. So it’s just nice to have that flexibility. And I was pretty surprised as well that it was something that they came up with to integrate into the plan.

Marc: Yeah. So if you wind up not using it, maybe you got the one kid that doesn’t use it or you’re going to give it to the other kid or you don’t have a second kid, it just gives you options. I mean, other people still looking at different ways to fund for college, but it’s nice to have that extra wrinkle in there. So a lot of people have been fairly pleased and surprised by that one. John, any thoughts on that from yourself since you’ve got a couple of little ones?

John: Yeah. Yeah, I think I like this. Because one of the things that I’ve always thought about is let’s kind of take off the table overfunding, but what if they don’t use it at all? What if they decide to go a different route from traditional college or what if they get a ton of these grants and things like that? So I think it’s a nice feature. Kind of puts a little peace of mind where it’s like, hey, if they don’t end up using it and you try to just pull it out, you get hit with these taxes and penalties on the growth. So I think it puts my mind at ease a little bit more knowing, hey, if I contribute to this, that it’ll still be going to them and they’ll still be able to benefit even if they don’t use it for school.

Marc: Yeah, definitely. All right. So let’s talk a little bit about the other changes kind of addressing, I guess, maybe students if you will. And there’s a lot of changes that they did, guys, to just, I think in general, company-sponsored plans, a lot of little nuances. Again, you may want to talk with your financial professional to see. They did some little things like moving, I think, Roth options right now, so matching contributions can go to a Roth, and lots of little stuff. So you may want to have those conversations. But let’s talk about the changes to the company 401k match, especially for younger folks. I think this was maybe to address the whole student loan debacle and all the conversation that’s going on about to forgive, not to forgive, whatever the case is. So explain a little bit what they’ve done with this. Whoever wants to take this one.

John: Yeah, I’ll start with it. So yeah, I definitely agree with you there, Mark, on kind of throwing this in there to help with what we have going on with the student loan issue there. But this is pretty cool in my opinion. I got a younger sister-in-law, and she’s got… law student, hefty amount of student loans. So we were talking about some different things and we talked about helped her out with picking some stuff in her employer plan. And it came up to this, and this exact conversation came where she said, hey, I’m paying such a big amount on my student loans. I don’t have any extra really to save for retirement. So this is a great way, in my opinion, to try to… That way they can get something going to the retirement account because, as you know, Nick and I do planning for people, there is sometimes a shortfall and the earlier you can start the better. So I think this is definitely a great way to get people to at least get the money into the retirement accounts, and ultimately, when they have the cash flow, they start to see what their match is doing and growing, I could see them starting to contribute themselves a little bit more as well.

Marc: Yeah. What’s your take on it, Nick?

Nick: The student loan burden is so significant for so many people, and that’s separate… The whole validity of it and does it make sense and all that kind of stuff, I think, is a separate conversation. And so the reality is that there are a ton of people living with that, and so anything that can be done to provide some sort of options and flexibility and encourage employers to assist with that, I think, is a big deal. Because ultimately so many employers, they are looking to have these sorts of certain certifications, certain underlying education requirements, all that kind of stuff.

Marc: Right.

Nick: So they’re a participant in kind of the machine, so to speak. So to me, it makes sense to integrate some kind of creative thinking into it.

Marc: Okay. Well, so that’s some of the major changes. Anything else I missed, guys, you want to bring up? I know like with the RMDs, little things like they reduced the penalty, which was a pretty hefty penalty even though a lot of times I don’t think they enforced it. Any other little items that you want to share?

John: No, I think these are the main ones that are good. And like you say, always if people have any questions, definitely reach out to us. And as we’re meeting with clients, if something pertains to them, we always bring up kind of what makes sense for them.

Marc: Yeah, okay. All right. Well, there you go. So some major items there that they updated when it came to the SECURE Act 2.0. There’s no really big gotchas, it doesn’t seem, like there was with the first one with the removal of the Stretch IRA, for example. That one seemed to be annoying for a lot of advisors and stuff like that. Any big gotchas here that you feel like that’s make it a real concern? Or for the most part overall some decent changes?

Nick: Not that I’ve seen so far.

Marc: Yeah. Okay. Yeah, you never know, right? I mean, they still got, I mean, what is this, 10 years on some of this stuff? Some of the stuff starts in ’23, some of it ’24, some of it ’25, some of it 2033. So they got a while to roll some of this stuff out, so we’ll see how it all plays out. But if you’ve got questions, again, make sure you reach out to the guys, have a conversation. Don’t forget to subscribe to us on Apple, Google, Spotify, all that good jazz. And you can find all of that information at pfgprivatewealth.com. That’s pfgprivatewealth.com. Guys, thanks for hanging out with me. As always, appreciate your time for John and Nick. I’m Mark. We’ll see you next time here on Retirement Planning Redefined.

Global Markets Trade Higher to Start 2023

Monthly Market Summary

The S&P 500 Index returned +6.3% in January, underperforming the Russell 2000 Index’s +9.8% return. 2022’s underperforming sectors were the top performers in January, while defensive sectors posted negative returns.
Corporate investment grade bonds generated a +5.2% total return, outperforming corporate high yield bonds’ +3.7% total return. The positive bond returns occurred as Treasury yields declined across most of the yield curve.
International stocks outperformed for a third consecutive month as the U.S. dollar weakened. The MSCI EAFE Index of developed market stocks returned +9.0%, in line with the MSCI Emerging Market Index’s +9.1% return.

Fourth Quarter GDP Growth Slows but Remains Positive

The U.S. economy grew at a +2.9% annual rate in the fourth quarter of 2022, down from the third quarter’s +3.2% annual rate. The growth was largely driven by a resilient consumer, inventory restocking, and increased government spending, while businesses cut back their spending on equipment and the housing market remained weak. While GDP growth was positive for a second consecutive quarter, the pace of economic growth slowed as the year ended. The U.S. economy grew +1% year-over-year compared to the same quarter a year ago, a slowdown from the +5.7% year-over-year growth rate recorded in the fourth quarter of 2021.

The slowdown signals a return to a more normal pace of growth after 2021’s strong growth. Looking ahead to 2023, the U.S. economy is forecasted to slow as the cumulative effect of higher interest rates takes hold. Economists are concerned the Federal Reserve’s efforts to curb inflation could trigger further spending cutbacks and job losses and tip the U.S. into a recession.

Financial Conditions Loosen in Anticipation of 2023 Interest Rate Cuts

Financial conditions, which refer to the ease and cost of obtaining capital, loosened in January. The catalyst was the market’s anticipation of possible interest rate cuts in late 2023 due to a slowdown in economic activity. Treasury yields declined, corporate bond spreads tightened, and mortgage rates declined another -0.40%. Lower stock and bond market volatility, which reduces the level of perceived risk and encourages more investment activity, added to the loosening of financial conditions.

The Federal Reserve has expressed concern about the potential for loose financial conditions to undercut its efforts to bring inflation down. When financial conditions are loose, people are more willing to take risks and borrow money, which can lead to higher spending and demand for goods and services. This increased demand could drive up prices, keeping inflation elevated and forcing the Federal Reserve to tighten further. Policymakers will keep a close eye on financial conditions as 2023 progresses.

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The information and opinions expressed herein are solely those of PFG Private Wealth Management, LLC (PFG), are provided for informational purposes only and are not intended as recommendations to buy or sell a security, nor as an offer to buy or sell a security. Recipients of the information provided herein should consult with their financial advisor before purchasing or selling a security.

The information and opinions provided herein are provided as general market commentary only, and do not consider the specific investment objectives, financial situation or particular needs of any one client. The information in this report is not intended to be used as the primary basis of investment decisions, and because of individual client objectives, should not be construed as advice designed to meet the particular investment needs of any investor.

The comments may not be relied upon as recommendations, investment advice or an indication of trading intent. PFG is not soliciting any action based on this document. Investors should consult with their financial adviser before making any investment decisions. There is no guarantee that any future event discussed herein will come to pass. The data used in this publication may have been obtained from a variety of sources including U.S. Federal Reserve, FactSet, Bloomberg, Bank of America Merrill Lynch, iShares, Vanguard and State Street, which we believe to be reliable, but PFG cannot be held responsible for the accuracy of data used herein. Any use of graphs, text or other material from this report by the recipient must acknowledge MarketDesk Research as the source. Past performance does not guarantee or indicate future results. Investing involves risk, including the possible loss of principal and fluctuation of value. PFG disclaims responsibility for updating information. In addition, PFG disclaims responsibility for third-party content, including information accessed through hyperlinks.

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Ep 55: How Bonds Work: What Retirees Need To Know

On This Episode

Too many folks misunderstand bonds, how they work, and what role they play in a proper financial plan. We’ll address some of those bond related issues on today’s show.

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Here is a transcript of today’s episode:

Marc Killian: Welcome into another edition of the podcast, Retirement Planning – Redefined with John and Nick from PFG Private Wealth. And it’s time to talk about bonds and really what you need to know and how they actually work. And there’s a lot of conversation around that, obviously in ’22, certainly to the fact that nothing seems like a good idea as far as things go. And when the market is weird, often we run to bonds for the safety aspect, but there’s some things going on there too. So, let’s talk about how they actually work, what role they might play in a proper financial structure and how maybe this here lately, it’s been a bit of a different show in that regard. So guys, welcome in. Nick, what’s going on buddy? How are you?

Nick McDevitt: Pretty good, pretty good. Staying busy.

Marc Killian: Yeah, that’s good. Very good. John, and you? How are you doing?

John Teixiera: Doing all right.

Marc Killian: Yeah?

John Teixiera: Hanging in there.

Marc Killian: How’s the bond market? A little rough.

John Teixiera: Little rough if you’ve owned some already. Could be good if you’re buying some new ones.

Marc Killian: Yeah, right. And that’s the difference, right?

John Teixiera: It depends where you’re at.

Marc Killian: Depends where you’re at. So yeah, we’re going to talk about that a little bit. First thing I want people to understand is that the bond market is actually way bigger than the stock market. A lot of people don’t know that. That’s just an interesting little tidbit, but it is a lot bigger.

John Teixiera: Yeah. Yeah, a lot of people aren’t aware of that, but-

Marc Killian: There’s a whole lot more stuff in there. Right?

John Teixiera: Yeah.

Marc Killian: But let’s go into the misunderstandings, right? So first off, just why don’t you guys give us the basic gist of how a bond works, for folks who just might not know?

John Teixiera: Yeah. So, to break it down to its simplest form, a bond is basically loaning your money to a public institution or private entity. So, you’re basically saying, “Hey, I’m going to give you my money.” And for that, the company typically provides some type of interest rate for that period of time where they have your money. And as far as obligations go from that company or public institution, there’s a promise to pay you back. And that promise is only as good as the paying ability of that company. So, I think that’s bonds in a nutshell, if you try to break it down to its simplest form.

Marc Killian: Yeah, you’re loaning the company money, right? You’re lending them money versus as a stockholder you’re buying a piece.

John Teixiera: Correct.

Marc Killian: Yeah. Okay. Nick, what’s the difference between a bond and a bond fund? So, like an individual bond and a bond fund? Because most of us wind up with bond funds and we’re maybe not totally sure what it is we have, we just say, “Oh, I have some bonds.” But what they really have is a bond fund.

Nick McDevitt: Yeah. The reality is the difference as far as how it affects a typical investor is the important part to understand. So, with bond prices and interest rates having an inverse relationship, so again, if interest rates go up, bond prices go down, then the issue that somebody that has invested in a bond fund has is it’s a pool of bonds. And so, you’re relying upon the manager of that bond fund to manage the buying and selling of those bonds while trying to protect the value of your account and gaining interest. So, sometimes the easiest way to guide people through this, and obviously we’ve been having this conversation quite a bit lately with people, especially with how we’ve invested in fixed income in the last few years, is that if you own an individual bond, you have the ability to hold it until maturity. And when you hold it until maturity, you then receive the par value back. And this might be a little bit too much detail, but we’ll try to give people a good understanding of this. So, oftentimes people get confused with the difference between the initial issue of a bond and then when it trades in the secondary market. So, when a company initially issues the bond, that’s when they are receiving the loan basically, or the money from whoever purchases that bond initially. So, when they sell the bond, the bond sells for $1,000, there’s a promise to pay that the company issues with the bond as well as, “Hey, in the meantime we’re going to pay you an interest or a coupon.” So, let’s just say it’s 3%. So, company A, we’ll call them Apple, Apple issues a bond in 2020 for five years and they’re going to pay 2% over those five years. And as long as whoever holds that bond at the end of that five years, no matter what they paid for it, they’re going to get $1,000 back. That’s the promise.

Marc Killian: Okay.

Nick McDevitt: So, we’ll say John bought that bond initially, but two years into it he decides, “Hey, I no longer want this bond, I’m going to go ahead and sell it.” So, because of the market situation and what’s going on in the market, that bond in the secondary market, because interest rates have gone up, even though he paid 1,000, he can only sell it for 900, because that 2% coupon rate isn’t competitive.

Marc Killian: Right. Yeah.

Nick McDevitt: So, let’s say he sold it to me and I bought it for 900. So, I got a discount like, “Hey, I’m only getting 2% so I’m not going to pay less, so I’m going to get a discount.” And now my goal is I’m going to hold that bond until the end of that total five year period and I’m going to collect that 2%, but I’m also going to get the extra $100 on top, which makes my return, my overall return, my total return higher. So, the difference is that when people, as an individual, when they own those bonds individually, they have more control over holding that into maturity and essentially getting their par value back while collecting their interests in the meantime versus when it’s in a bond fund, that performance is strictly going to take place dependent upon how it gets managed. And we know obviously it’s confusing and it’s always a tricky spot of trying to help people understand and giving what might be too much information. But with this, I think a lot of times it’s the more you know, the better it is to try to understand it.

Marc Killian: Yeah. And we’re going to talk a little bit more about some normal things that we’re used to thinking about or hearing and how it messes us up a little bit. And John mentioned earlier, he is like, “Yeah, if you’re getting into a bond right now, higher interest rates, they look a little bit more appealing than someone who bought maybe a year ago, as the rates were down lower.” And to your point, you said the inverse reaction. I was always taught, an easy way to remember it is when rates are high, bonds die. So, little rhyme, helps you remember it. So, when rates are high, bonds die, because the value. Right? So, they have that inverse reaction. That’s just a good way to think about it. So, John, a lot of people consider them to be the safer, conservative part. I want to jump to the standard 60/40 for just lack of a better term. Right? We’ve grown up with this thing of when the market’s rough go to bonds, right? As you get older, go to bonds, because it’s a safer option and we feel as though it’s that safe, conservative part of the portfolio. Do you agree with that approach normally? And what’s your take on it this year when it’s also having a lot of trouble?

John Teixiera: Yeah, normally I’d say that you’re correct. Yeah, normally that is how it works. This year it’s a little different obviously with the Federal Reserve really trying to hedge against inflation. So, they have been aggressively raising the rates. So, that’s where you’re starting to see these bond values drop drastically. And I don’t know the exact number, but I think year-to-date we’re almost negative 10 to 15% in the [inaudible 00:07:35] bond index.

Marc Killian: Yeah. It was close to 15, last I checked.

John Teixiera: Yeah. That’s actually what’s happening in people’s portfolios where if the market was down, they have at least a bond portion that’s level or maybe down a little bit or up a little bit. But right now it’s like, hey, you’re getting two sides of it where they’re both getting hammered. This is where it’s important, and Nick mentioned, how can you mitigate that risk? And you can do it, it’s just a matter of structuring the portfolio and getting the right type of investments to understand, “Hey, in this type of environment, this is where I want to be.” So, it really comes down to, again, this is your investment plan. Like, “Hey, what’s your investment plan to mitigate this type of environment and how do you take some of this risk out of your portfolio?”

Marc Killian: Yeah. Nick, back to you, and the question I asked you a minute ago, people say, “Well, individual bonds themselves may not still be a bad option right now in this current bond environment, but it’s the bond funds that tend to be taking a bit more of an issue.” And to your point, you mentioned, actually maybe it was John who mentioned them being a pooled investment, but either way, right? And that bond fund manager, whereas an individual bond may still be an okay option. So, that’s really where you need to talk with your advisor or have an advisor to find out if you’re thinking about bonds, what’s the right avenue to go? Am I on track there or is that incorrect?

Nick McDevitt: Yeah. To a certain extent, for sure. And another thing that happens, one of the things that we’ve integrated into clients’ portfolios, and we did it a few years back, was bond ladders. So, exchange traded funds that hold bond ladders that mature at a set maturity date, so that way we can still use a pool of investment that’s a little bit more efficient to buy and sell, and we know when the maturity data is going to be, so we can act accordingly and adjust accordingly. So, there’s always this give and take, but using instruments like that, using individual bonds, are absolutely ways to take a little bit more control in the space and have less of a negative impact on the overall value of your portfolio.

John Teixiera: Yeah. And to jump in with what Nick’s saying there-

Nick McDevitt: Sure.

John Teixiera: … I think it comes down to ownership. When you have a bond fund, you don’t actually own those bonds, the fund does, you own a piece of the fund, but when you’re talking about individual bonds or this basket of bonds, that’s where you technically have ownership of that. So, you can control when it’s bought or sold.

Marc Killian: Okay. Yeah, that’s great information. Thanks so much for sharing that. So, guys, anything else that I might have missed on the bond, what we need to know area? Either one of you, feel free to jump in with something.

Nick McDevitt: I think from the perspective of overall for investors and just understanding in general the space that we’re in, one thing that we’ve done even recently is we’ve started to add in some shorter term CDs for clients, because that helps them get a decent rate of return because those rates of returns have gone up and it lets them stay a little bit more flexible with where we expect rates to go, which we still expect some increase on them in the next six to 12 months, where they can then stabilize a little bit. But just like anything else, it’s important to have … Different aspects of your investments have different jobs, and bonds and fixed income still play a necessary role. And realistically for people that are retired or are going to be retiring soon, a lot of the pressure on portfolios for the last 10 years has been all on the stock market because you really couldn’t get any returns on the fixed income side. So, now at least, hey, we can get four to 5% a lot easier on fixed income, which will help to generate returns and income for people, which it makes it a little bit easier for us to get a little bit more conservative in portfolios, which has been much more difficult over the last 10 years. So, there’s a little bit of a silver lining in here and as we adapt to a new normal like we always do, there will be positive to it. But when you’re in the midst of it and going through it, like we have this year, it can be difficult.

Marc Killian: Yeah, no, and that’s why I wanted to talk about it because again, we were taught this traditionalism and if you’re doing things on your own, you’re thinking, “Hey, I’ll just jump over to bonds, while the market’s been so rough this year after,” to your point, “the market being fantastic for the last 10, 12 years.” And it may or may not be a good move. Right? So, that’s just why, understand the basics, or maybe a little bit more than the basics, and then make sure that you’re having a conversation with an advisor. Bring somebody into the fold, especially if you don’t know what you’re dealing with, because there’s a lot out there in the bond arena. So, good stuff. Thanks for sharing on that, guys, I appreciate it. Again folks, if you’ve got questions and need help, jump on over to the website, book some time with them, reach out to them, let them know you’ve got some questions around bonds and how it works or what you’re thinking about doing, or strategy, conversation, questions, whatever that might be. And get some time with the guys at pfgprivatewealth.com. That’s pfgprivatewealth.com. A lot of good tools, tips and resources. You can send a message into the podcast. Like I said, you can schedule time to talk with the guys. Lots of good stuff there. So, pfgprivatewealth.com. And we’ll wrap it up with an email question again this week here on the podcast, Hoover wants to jump in on this, totally fine. Wendy had a question. She says, “Guys, our 401(k) plan at work now has a Roth option for available future contributions. Should I take advantage of that?” I’m curious too, guys, because actually my wife, they just offered that to her actually. She just got the paperwork I think about three days ago. So, what’s your thoughts on 401(k) Roth options?

Nick McDevitt: The annoying answer is it depends. The reality is that most likely it does make sense to take advantage of it. Some people cannot make contributions to regular Roth IRA accounts because the income is too high. So, this is their only way to be able to make contributions. Our feeling in general is that the more options you have from income sources in retirement, the better. So, especially if you don’t have any Roth funds built up or if your pre-tax funds are substantially more than your Roth funds, it’s a good idea to integrate that. And so, one thing that people have done to just start it, so as an example, let’s say that somebody’s contributing 10% of their income and maybe their company matches 4%. Okay? So, the match that a company puts in is always pre-tax. So, in reality, if they’re doing 10 and they get a 4% match, 14% of their income is going into pre-tax money. So, maybe you say, “Hey, out of my 10 I’m going to make it 4% Roth to match the match that they’re getting. The other 6% is pre-tax, and now it’s like 10 and four.” That could be a good place to start. And then maybe build it up where some people say, “Hey, each year when I get a raise, I bump up my contribution by a percent or 2% and try to build it up to make it match, until you’re maxing out.” But absolutely, building that up to build up some Roth funds for yourself is a good idea.

Marc Killian: Yeah. The limits, so if you think about a traditional Roth IRA, there’s earnings limits, right? You can only make a certain amount, I think it’s 144,000 for individuals, 214, somewhere in that neighborhood, I think, for married couples. And they change it all the time, but I think that’s ’22. But with a Roth 401(k) at work, there is no income limit. So, if she makes more than that, for example, she could still put money in.

Nick McDevitt: Exactly. Yeah. But you don’t have to deal with that income limitation anymore, which is great.

Marc Killian: And it’s a newer piece too, John, right? Not every company has this option yet, so they’re starting to come on more and more though.

John Teixiera: Yeah. Yeah, it is a newer piece. I’d say the majority of companies we run across now do have them.

Marc Killian: Okay, good.

John Teixiera: But I’d say we do run across some that still don’t offer it, but it’s catching on pretty quick because a lot of people do like that option.

Marc Killian: Yeah, for sure. So, I think definitely to answer the question, just make sure that you’re double checking, check the various different limitations. If you don’t have a professional you can bounce those questions off, certainly, hopefully the guys gave you some thoughts there. But you can always just call, reach out, and get a little bit more in-depth if you have some of those Roth 401(k) questions versus a Roth IRA, and those questions too, as well. But reach out to the guys, don’t forget to subscribe to the podcast, Apple, Google, Spotify, all that good stuff. It’s Retirement Planning – Redefined with John and Nick, and you can find them online at pfgprivatewealth.com. Guys, thanks for your time. As always, appreciate, have a good close out to the holiday season as that’s upon us, and we’ll see you guys next time here on Retirement Planning – Redefined.

Ep 54: Warning Signs: How To Spot Problems In Your Financial Life

On This Episode

Just like the lights on your dashboard can indicate if something is wrong with your car (like low tire pressure or leaking oil), there are indicators in your financial life that might point out that you have a problem that needs to be addressed.

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Here is a transcript of today’s episode:

Marc: Welcome in to another edition of the podcast. Thanks for tuning in to Retirement Planning Redefined with John and Nick here from PFG Private Wealth to talk with me about some warning signs, how to spot problems in our financial life. The years winding down, getting into the new year. It’s maybe a good time to have the radar out looking for things that we are doing maybe incorrectly that we can improve. If you got a warning light on your car, you’re probably going to take it in for service. So maybe the same thing financially speaking. What’s going on guys? John, how you doing my friend?

John: Hanging in there, getting ready for the holiday season.

Marc: That’s right.

John: Thanksgiving is next week, right? So yeah.

Marc: Yeah.

John: Doing all right.

Marc: The time we’re taping this, yeah it’s upon us. Nick, how about you my friend?

Nick: Rough couple weeks for Bill’s fans, but besides that, doing pretty good.

Marc: Overall though they’re still pretty stout, so.

Nick: Yeah.

Marc:

Yeah. But it happens. It happens. Well,

John: Well the Bills kind of do this every year where they kind of, last year they did it too. They like a two or three games stretch where they just kind of lost focus.

Marc: Yeah. Yeah, yeah. They’re still young too, right? So be a lot too.

Nick: Still painful.

Marc: It is painful. This is true. Hey man. Lions, that’s all I’m going to say. Every time. Although two weeks in a row and we beat the Packers. I’ll take that any day of the week so.

Nick: We play you guys on Thanksgiving.

Marc: Oh well, I’m sure it’ll be a slaughter then. Poor Lions.

Nick: Let’s hope so. Let’s hope so.

Marc: The poor Lions. I just have no faith anymore after 30 years. Well anyway, let’s get into warning sign, right? There’s a warning sign right there that maybe I should move on. But let’s talk about a couple different things. Yeah, this is a pretty big one, this first one actually. So many people are getting ready, as they get ready for retirement, maybe they come in to see an advisor for the first time and they truly have no idea what it costs to fund their lifestyle. That’s kind of a big red flag. And I think many people come in to see folks like yourself the first time. They also kind of undershoot that number. Right. Oh, it’ll only take us three grand to fund our lifestyle. And you start digging in, you’re like, no. So they have no idea.

Nick: Yeah. Yeah. Usually the most painful process of the planning process is digging into the expenses and figuring out what that looks like.

Marc: Right.

Nick: The thing that we try to really emphasize and harp on with people is that it’s one thing to being able to, because there are a lot of people that say, Hey, I save X amount of my money. We’ve got some savings in the bank. And then we don’t pay attention really. And we carry some debt here and there, but we’re usually able to pay it off at a certain point and stuff like that. And it’s like, okay. So from a lifestyle standpoint, as they’re working, it’s not a huge factor. The problem is that when we don’t know what that is and we carry it over into retirement, not understanding what’s being spent and then it makes it really hard to create a plan and to figure out, hey, when you’re going to be able to comfortably retire, things like that. So just so many other things, taking inventory, understanding what numbers we’re dealing with and then trying to make adjustments from there is really important. Because we joke with people, we’re not the money police, but it is important for us to get a good understanding of where things are going from a money perspective so that we can help you plan for the future.

Marc: Yeah, definitely. And you got to have a good grasp on what it truly costs and most of us just wind up not doing that. So again, the big warning sign, if you truly don’t know what that is. John, maybe another warning sign is focusing on that magic number. Right. We’ve heard it for years and most people kind of do the million dollar thing and just use that because it’s easy. But that might be a warning sign. Why are you so hyper focused on a specific number if it maybe takes less or more?

John: Yeah. That’s 100% accurate. And I think that, I forget what company it was that came out with that commercial. What’s your number and what’s your nest egg number or your goal? And I think people got fixated on that. And it’s not necessarily what is your goal from a nest egg standpoint. It really should be what is your goal from an income standpoint so you can fund your lifestyle and how long can that income realistically last? So when we do planning, it’s a matter of hey, like Nick said, we look at, hey, what’s your lifestyle? How do we make sure you continue that and where are the assets? Where’s the money coming from to produce that income going into retirement? Because you can build up as much as you want, but if it’s not giving you income that you feel comfortable with, you’re going to not really hit your goals and stuff you want to do into retirement.

Marc: Yeah, yeah. You have a million dollars, right, and then you find out that 700,000 would’ve done it and you worked three years too long or you need $2 million and you stop too soon.

John: And things to consider, and actually we’re in an interesting time period now with this, is that the interest rate environment and also inflation kind of determines what your lifestyle is going to be because your nest egg could be with interest rates going up, it actually helps you a little bit more from an income standpoint. But with inflation happening, it’s kind of deteriorating your spending power.

Marc: Yeah. Yeah.

John: So long story short, there’s a lot of factors that go into this, which is why it’s so important to do planning versus hey I need to get to a million dollars because what does that even mean from an income standpoint?

Marc: Yeah, exactly. And the eight and a half, yeah I don’t care what the government official number is, but use your wallet when you go to the store and various things. It’s a lot more than that in many aspects of life to that inflation conversation. So it might be the official number, but I don’t know, I think milk’s like 50%, so milk’s a whole lot more. All right, mental image guys of what your parents did. It’s as easy for a lot of people. I’m a Gen Xer, so my dad wasn’t retired long, but I think back on it and I’m like, I don’t think he did any retirement planning. So it kind of worked out so great. I mean I could see people doing that, right? Well my parents really did very little and they seemed to be fine, so I’ll be fine. That’s not really the best idea to go off of because I don’t know how his financial life was completely different than what mine is 35 years ago.

Nick: Yeah. And the reality is, is that that generation, for the most part between their focus was with their parents coming out of great depression, things like that, it was paid down your debt. It was a much less expensive, even adjusted for a lot of different variances of inflation. Less expensive to own a home and they paid off their debt, they had social security, they had pensions and very much lived within their means. Lifestyle and consumption weren’t really kind of the name of the game back then. And so it’s just very different. So they went from having a certainty of income via their pension and social security to now people have to save money in a 401ks, need to learn how to generate income from that. We just went through a 10, 12 year period where as John just kind of referenced good luck getting any sort of return on any sort of fixed or conservative type of investment. And so it was just much more difficult. And that doesn’t even factor in the longevity aspect that we have to deal with. How much more expensive healthcare is.

Marc: Right. Yeah.

Nick: All these different things.

Marc: Yeah. No, it’s easy to do, right, especially if you’re doing the procrastination thing, you can kind of talk yourself into anything, but probably not the wisest thing to do. And again, that’s the whole point of the podcast is how to spot some of these warning signs in our financial life. Getting worked up about the current events? Man, I get this one too. How do you not, right? I mean at the time we’re taping this, it’s even crazier. I mean we’ve got all sorts of things, the market volatility, the election cycle being over, but still problematic. Bonds are down because of the interest rates. We’ve got still conflict thing. It’s hard not to let current events affect how you feel about your portfolio, but that’s also dangerous time for jumping in and just saying, well I’m going to make a change because I feel like I have to versus making sure that you have the right strategy.

John: Yeah, the media doesn’t do us any favors.

Marc: Oh gosh, no. Yeah.

John: With how they portray things and definitely,

Marc: It’s the sky is falling [inaudible 00:08:16].

John: The sky’s always falling. I think they obviously realized that negative media kind of grabs more eyes and more clicks. So that’s what they focus on. This is really where you want to always go back to the plan. And if you don’t have a plan, highly recommend you get one. So I’ll use COVID as an example. That one month period where the market was dropping significantly, the fastest drop potentially ever over that three week span, when Nick and I were doing quite a bit was when we were doing reviews with clients, we would look at the plan and say, hi, how does this affect your plan? Are you still on track? And when they would see that they were still good, the fear kind of went out, like okay, I kind of took that punch and I’m still doing okay. And then it helped them make better decisions and not having any knee jerk reactions. And I’ll say, I’m having the kind of same experience here. We’re doing reviews, obviously a lot of stuff going on, markets volatile. And we look at the plan and the plan still looks solid. People are like, okay, that’s good to know. I’m glad to hear that I’m still on track and this hasn’t affected my lifestyle going into retirement.

Marc: Yeah.

John: I think that’s what most people want to know is, hey, is all this stuff going to affect me? And if it does, how do I adjust to that?

Marc: Well people are kind of pleasantly surprised to find out it’s not been as bad as they thought. But it also depends on how your allocation was set up. It depends on how you were weighted your portfolio. Because 21, right, these two years back to back are pretty interesting, right? 21 was majorly up, 22 is all over the map and down. Right. Anywhere between 15 and 30% depending on the indices. And so there’s like, there’s just kind of this wide spectrum there and if you were heavily weighted in tech, then you’re taking a bigger beating than someone who wasn’t, right? So that’s all part of the game. It’s all part of how you’re strategizing and that’s why you’ve got to get these things done, working with a professional to help you through it. Last one, financial warning sign, the nursing home, long term care conversation, however you want to put it, kind of doing that. Well, almost like the parent thing, well it wasn’t a big deal. It probably won’t be for me or we’ll take care of each other or the kids will pitch in or that kind of thing. It’s just going to kind of naturally work itself out. It’s probably a big warning sign. Somebody mentioned longevity earlier in this conversation, right? That’s going to add to it.

Nick: Yeah. This is as far as the cost of healthcare in retirement, including whether it’s assisted living or nursing home facility care, it’s a really tricky one because obviously those costs have gone up substantially. It’s become more and more difficult for those that want to try to use insurance to help with it. Whether it’s a traditional long-term care or some sort of hybrid policy that’s become kind of a cesspool of space where it’s very difficult to find something. So it is difficult, but just like anything else, factoring it into the plan and understanding that hey, these expenses may be coming down the road and just making decisions, whether it’s with legal documents and or how you save your money to just try to plan for as many scenarios as possible is really important.

Marc: Yeah, definitely. You can’t just put your head in the sand. We are living longer, the costs continue to go up. They’re typically outpacing normal inflation. I hate to even think of what some of the numbers might be right now. So just don’t put this stuff off. Make sure that you’re thinking about these, looking and identifying these potential warning signs moving into a new year, especially moving into the new year. Take some action, start getting some things done. That’s going to do it for the main section of the podcast. We’ll finish off with an email question that has come in as well. And of course if you’ve got questions, need some help, stop by the website, pfgprivatewealth.com. You can find a lot of good tools, tips, resources, you can subscribe to the podcast, all that good stuff at pfgprivatewealth.com. And we’ll finish off with a question from a Charlotte who says, “Guys, I’m 60 years old and I’d love to retire and I think I can, but it seems like of course everyone I know waits till 65, 66, somewhere in that neighborhood. Is early retirement a bad idea?”

John: Yeah. Charlotte, I think one thing you got to realize is you want to look at your own situation. So whether it’s good or bad isn’t depending on somebody else, it’s really up to you. We’re talking about the nest egg and the income and lifestyle and the question really comes down to does your income sources going into retirement and nest egg allow you to retire at 60 to maintain your lifestyle till when the planning ends, whether that’s age 90, 95, or 100.

Marc: And she thinks she can, so why not? Instead of think, right, how about no? Right.

John: Correct. Yeah. If you think you can do it and you’ve done a plan that looks solid, definitely you don’t want to miss out on some fun years, especially earlier in your 60s when you can do more stuff.

Marc: Yeah. But if you just think or how certain are you, right? So do you have a plan or is this something you’re back of the napkin kind of thing? Are you kind of guessing this out? And I think the other piece in this, John maybe is did she take into account, hopefully she did the five year gap before she can get Medicare?

John: Yeah, that is the biggest thing. And that’s why we see a lot of people that hold off on retirement til 65 for that.

Marc: Yeah.

John: So when you’re doing your planning Charlotte, you want to make sure that you’re budgeting for independent plan, whether it’s through a specific company or the marketplace, whatever it is, you want to budget that into it and make sure you’re getting good insurance coverage because you never know what’s going to happen.

Marc: Yeah. Is early retirement a bad idea? Probably. I mean, no, it’s not a bad idea. It’s a bad idea if you don’t have a plan and can’t do it. Right. If you’ve got everything you need, then it’s a great idea. So that’s the importance of a plan. That’s the importance of strategizing. And that is why we do the podcast. So if you need some help, it is Retirement Planning Redefined. Reach out to John and Nick and the team at PFG Private Wealth at pfgprivatewealth.com and we’ll catch you next time here on the podcast. Don’t forget to subscribe on Apple, Google, Spotify, all that good stuff. And we’ll see you next time. For John and Nick, I’m your host, Marc. We’ll talk to you next time.

4Q 2022 Recap & 1Q 2023 Outlook

Recapping A Challenging 2022

Markets faced several challenges in 2022, including high inflation, historic central bank policy, the war in Ukraine, and Covid lockdowns in China. Inflation was a major factor in the markets throughout the year, with the headline consumer price index reaching a 40-year high of 9.1% in June. High inflation prompted the Federal Reserve and its global central bank peers to aggressively raise interest rates, which caused stocks and bonds to trade lower. There was no place to hide as central banks rapidly tightened monetary policy. Figure 1 shows the S&P 500 returned -19.4% in 2022, its worst annual return since 2008, and Figure 5 shows the Bloomberg U.S. Bond Aggregate produced its worst total return since 1976. This letter reviews the fourth quarter, recaps a difficult 2022, and discusses what the market will be focused on in 2023.

Putting 2022’s Interest Rate Hikes Into Perspective

The main story of 2022 was the reversal of monetary policy from extraordinarily accommodative levels during the Covid-19 pandemic. Figure 2 shows the speed and size of interest rate increases as central banks worked to bring inflation under control. The chart tracks the cumulative percentage of interest rate increases and decreases by global central banks during rolling three-month periods since 1995. For example, the 68% at the end of November 2022 indicates that central banks across the globe raised interest rates by a total of 68% from September to November. In contrast, the total amount of interest rate cuts during that same period was only 4%. As the data shows, 2022 was the quickest, largest, and most imbalanced global tightening cycle since the late 1990s.

The pace of interest rate increases is forecasted to slow during 2023. Central banks continue to hint that they are approaching the end of their interest rate hike cycle, citing concerns that further tightening could push the economy into recession. In addition, data suggests price pressures are easing. While the year-over-year headline consumer price index rose by 7.1% in November 2022, which is still high compared to historical levels, it was down from the 9.1% rate seen in June 2022. As inflation and central bank policy return to normal, a new uncertainty is emerging – the unknown effects of 2022’s rate hikes.

Markets Wait for the Lagged Effect of Higher Interest Rates to Show Up in Economic Data

The Federal Reserve’s interest rate hikes occurred in 2022, but the full impact of its restrictive measures has not yet been fully felt in the real economy. While the U.S. economy contracted during the first half of 2022, it expanded at a robust +3.2% annualized pace during the third quarter. Consumer spending remained strong throughout most of 2022 despite high inflation, and the U.S. labor market added more than 4 million jobs through the end of November. The data indicates the U.S. economy has withstood tightening thus far, but the real test will come in 2023 as the cumulative impact of higher interest rates becomes clearer.

While a recession is not a foregone conclusion, it is possible the economy could be tested in 2023. An index of leading economic indicators shows the U.S. economy is already starting to slow as the impact of higher interest rates takes hold. Figure 3 graphs the month-over-month change in The Conference Board’s Leading Economic Index, which tracks ten economic components that tend to precede changes in the overall economy. Included in the components are the average weekly hours worked by manufacturing workers, new home building permits, and the volume of new orders for capital goods, such as equipment, vehicles, and machinery. The chart reveals that the Leading Economic Index has decreased every month since March 2022, an indication the economy is slowing after a period of strong growth during the pandemic recovery.

Equity Valuations Are More Attractive, But Corporate Earnings Are An Open Question

Whereas inflation and central bank policy were the primary drivers of markets in 2022, economic data and corporate fundamentals are expected to play a larger role in determining the market’s direction in 2023. Figure 4 tracks two important S&P 500 metrics. The top chart tracks the next 12-month price-to-earnings ratio, which divides the S&P 500’s projected next 12-month earnings by its current price. It shows valuation multiples expanded during the pandemic as interest rates were cut to near 0% before reversing lower during 2022 as rising interest rates weighed on company valuations.

While current valuations are at a more attractive starting point today than at the beginning of 2022, corporate earnings are an open question entering 2023 with the potential for an earnings reset as the economy slows. The bottom chart in Figure 4 tracks the S&P 500’s trailing 12-month earnings growth, showing the jump in corporate earnings during the pandemic. Despite expectations for an economic slowdown, Wall Street analysts still forecast single-digit earnings growth for the S&P 500 in 2023. The positive earnings growth forecast is encouraging, but it creates a risk for the market. If actual earnings growth falls short of the forecast, stock prices could decline as markets price in lower actual earnings.

Equity Market Recap – Stocks Trade Higher in 4Q’22

Stocks traded lower during December but still ended the fourth quarter higher. The S&P 500 Index of large cap stocks returned +7.6% during the fourth quarter, outperforming the Russell 2000 Index’s +6.2% return. The Dow Jones Index, which includes large companies such as Visa, Caterpillar, Nike, and Boeing, was the top performer, returning +15.9%, while the Nasdaq 100 Index of technology and other growth-style stocks produced a -0.1% return during the fourth quarter.

Energy was the top performing S&P 500 sector during the fourth quarter, followed by the cyclical sector trio of Industrials, Materials, and Financials. Defensive sectors, including Health Care, Consumer Staples, and Utilities, were middle of the pack performers. Growth-style sectors, including Technology, Communication Services, and Consumer Discretionary, and interest-rate sensitive Real Estate underperformed as higher interest rates continued to weigh on valuation multiples.

International stocks outperformed U.S. stocks during the fourth quarter. The MSCI EAFE Index of developed market stocks returned +17.7% during the fourth quarter, while the MSCI Emerging Market Index returned +10.3%. A weaker U.S. dollar boosted the returns of international stocks, with U.S. dollar weakness driven by a shrinking monetary policy gap as other central banks catch up with the Federal Reserve’s aggressive policy. Separately, China’s decision to relax its Covid-zero restrictions raised the prospect of stronger global growth as one of the world’s biggest economies reopens.

Bond Market Recap – The Great 2022 Yield Reset

The bond market experienced a significant resetting of interest rates during 2022, with yields steadily rising as the Federal Reserve pushed through large interest rate hikes. Despite posting positive returns during the fourth quarter, bonds produced significant losses during 2022 as central banks raised interest rates at a rapid pace. The top chart in Figure 5 shows the Bloomberg U.S. Bond Aggregate produced a -13% total return during 2022, its biggest negative total return since tracking began in 1976. The bottom two charts in Figure 5 examine the current state of the credit market after 2022’s rate hikes. The middle chart shows the 10-year Treasury yield sits at its highest level since 2007. Yields are now higher across most credit classes, and investors can earn a yield of around 4% to 5% on a portfolio of high-quality bonds, such as U.S. Treasury bonds and investment grade corporate bonds, without locking up capital for long periods of time. In the corporate credit market, the bottom chart shows the high-yield corporate bond spread, which is the extra yield investors demand to loan to lower quality borrowers, is in line with its median since 1999.

The starting point for bonds, both in terms of yield and credit spreads, is now more compelling than it has been in a long time. However, there is still the potential for continued volatility in the bond market. There is still significant uncertainty regarding how high the Fed will need to raise interest rates and how long it will need to keep interest rates at restrictive levels to bring inflation down to normal levels. There is a risk that inflation could remain above the Fed’s 2% target, leading to an extended tightening cycle. At the same time, the economy is likely to start feeling the effects of 2022’s rate hikes in 2023, which could make bonds more attractive. The crosscurrents of uncertain central bank policy and a volatile global economy could keep interest rate volatility elevated and test bond investors’ nerves again during 2023.

2023 Outlook – Turning the Page on 2022’s Historic Tightening Cycle

2023 brings the next phase of the tightening cycle where the lagged effects of tighter monetary policy will be felt. It has the potential to be a year of two halves. In the first half, the focus is likely to shift from the number of future interest rate hikes to how much those interest rate hikes will slow the economy. Some data, such as the housing market, indicate that tighter monetary policy is being transmitted into the economy at a rapid pace. Home sales are slowing, and homebuilder confidence weakened every month during 2022 and now sits at its lowest level since 2012. At the same time, consumers continue to spend, and employers continue to add jobs. There is still a wide range of possible outcomes, and the unique nature of the pandemic followed by rapid interest rate cuts and hikes makes the path forward less certain.

The second half has the potential to be different depending on how severe the slowdown is in early 2023. Markets are based on forward-looking decisions, and investors will be watching closely for signs that the economy has bottomed and is recovering. Plus, Figure 1 contains an encouraging historical trend. The chart shows there have only been two instances of consecutive negative S&P 500 return years since 1950, in 1973-1974 and 2000-2002. This does not necessarily mean the S&P 500 will produce a positive return in 2023 or trade higher in a straight line from here, because it may not. However, it does provide helpful historical context in a volatile environment.

Wishing you and your family happiness and health in the New Year! We look forward to serving you another year.

Important Notices & Disclaimer

PFG Private Wealth Management, LLC is a registered investment advisor.