Market Monitor: The New Year Begins
While the equity markets, as measured by the S&P 500 index, were up in the third quarter, December was a disappointment from the gains seen in October and November. 2022 was an extremely volatile year for markets, with a war in Ukraine, runaway inflation, Fed actions, and an election all contributing to the headline moves.
Looking at recent data:
- 12-month CPI was 6.5% in December. That marks the sixth straight month inflation has declined since the 9.5% peak in June.
- The December non-farm payroll number was 223,000. The unemployment rate fell to 3.5% as the job markets remain strong, though we see more stories of layoffs recently, especially in tech.
- Three-month wage growth averaged 4.1%. The number includes revisions to prior months. This compares favorably to the 5.8% growth seen before revisions and seems to indicate a more normal rate.
What Does All of That Data Add Up To?
While somewhat of an overstatement, it seems that the only data the market has been interested in are the minutia of Fed policy changes and looking for clues for when the Fed will pause interest rate hikes and ultimately start to reduce rates. As opinions and interpretations of Fed comments changed last year, the markets moved rapidly.
That same formula for volatility still exists today. Remember, though, there is both good and bad volatility. Inflation is trending in a completely different direction than a year ago, and at some point, the Fed will stop further tightening, which has the potential to bring the good upward days we all like. At the same time, the Fed has a big challenge in tightening the economy enough to bring inflation to “normal” but not tightening so much to bring the economy into a recession (whatever your definition of a recession is). For much of 2022, the bad news was good news for the markets, as bad news pointed to a slowing economy and, thus, slowing inflation. Of course, that sentiment can only last so long. At some point, bad news will actually be bad news.
Markets as of 1/23/23:
- The S&P was down 18.11% in 2022 and is up 4.78% YTD
- MSCI EAFE (International index) was down 14.45% in 2022 and is up 7.85% YTD
- The Barclays US Aggregate Bond Index was down 13.01% in 2022 and is up 2.66% YTD
The Smart Investor
The ongoing strength of the labor market is providing some hope that if 2023 does see a recession, it will be mild. However, predictions are that growth will slow from its already low levels. As a result, the path of the markets is likely to remain volatile, with observers and investors still playing “watch the Fed.”
What should investors focus on? The same thing as every year: your own goals. There’s no substitute for having a plan, no matter what stage you are in. The SECURE 2.0 act has made meaningful improvements to the ability of just about everyone to save for retirement or conserve retirement savings. Updating your plan to take advantage of the new opportunities makes sense. There are some tactical things you may want to think about:
- 401(k) limits increased. Think through when you’ll contribute. If you normally use a bonus for this, you may want to consider a different approach
- The age for required mandatory distributions (RMD) increased – consider taking advantage of the additional year to lower account values through a Roth conversion
- Your RMD amounts for this year are likely considerably lower than last; adjust your distributions if you can afford to do so
- Ongoing volatility means diversification is even more important
If you are kicking off 2023 with financial New Year’s resolutions and want to talk about it, we are here to support you.
The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities that represent the stock market in general. The Bloomberg Barclays US Aggregate Bond Index is a broad base, market capitalization-weighted bond market index representing intermediate-term investment-grade bonds traded in the United States and is used for measuring the performance of the US bond market. Indexes are unmanaged and do not incur management fees, costs, or expenses. It is not possible to invest directly in an index. The MSCI EAFE Index is a stock market index that is designed to measure the equity market performance of developed markets outside of the U.S. & Canada. It is maintained by MSCI Inc., a provider of investment decision support tools; the EAFE acronym stands for Europe, Australasia and Far East.
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