No Room for Surprises

Aoifinn Devitt – Chief Investment Officer

Markets have digested a volley of information in the past week.  This ranged from a surprising – and still not fully resolved – Mid-term Election result, to better-than-expected inflation data, to mixed messaging from Fed officials over the weekend about the future pace of monetary policy.

To this was then added the fall from grace of FTX, the crypto-exchange which had been positioned as a mainstream way to access crypto as well as a solid “picks and shovels” crypto-infrastructure trade. The intriguing, and unlikely, villain (Sam Bankman-Fried) at the center, as well as the known names in his orbit (Larry David and Tom Brady among others), made for a gripping tale of “how the mighty have fallen”.  When the drama fades, though, it is clear that the repercussions of this incident will likely undermine confidence in the entire digital asset space and could have contagion beyond it.

Last Friday saw bond markets closed for Veteran’s Day, and it is timely, as year-end nears, to take stock of where we were 12 months ago.  Then, the markets were only starting to fray at the edges, the interest rate raising cycle had not yet begun, markets were wrestling with the spread of the Omicron Covid variant, and Holiday parties were in jeopardy.  The debate still raged as to whether inflation was transitory or had sticky elements, and Russia had not yet invaded Ukraine.  Supply chain constraints were in place due to Covid, but we had not seen the massive interruption of commodity and energy prices that the Russian invasion precipitated.  It is remarkable how far markets have come, and how much has been digested – and normalized – in terms of market-moving news flow since then.

Source: Morningstar as of 11/15/2022

As we look to year-end, it is clear that the tolerance for surprise is very low in markets.  That might explain why the reaction to the election results (signifying no mass rejection of current policy and no desire for upheaval) was relatively sanguine.  Markets responded well to news of a thawing of diplomatic relations between China and the US as well as with Europe, evidenced by the meeting in Bali of Presidents Xi and Biden and evidence of a joint commitment to avoid another Cold War style relapse into tensions.  Today’s news of an escalation of Russia missile strikes in Ukraine were a wake-up call for those for whom that conflict had receded into background noise, and markets, somewhat predictably, rejected risk as a reaction to that surprise.

On the inflation front, it is now safe to say “the jury is out”.  Early indications of it moderating (inflation rose at an annual 7.7% rate in October, down from 8.2% in September and 0.4% on a month-on-month basis) were met with a surge in US indices, which saw their biggest daily gains since the Spring of 2020 (the NASDAQ rose 7.4%, the S&P 500 was up 5.5% and the Dow added 3.7%).  Similar moves accompanied positive trends in Chinese economic openness and willingness to relax some Covid restrictions, especially with respect to travel.  The Fed, of course, cautioned about markets getting too far ahead of themselves in expecting a pivot or a deceleration of Fed policy, but markets are clearly firmly pointed in one direction at this stage.  That direction is Hope, however fragile.

© 2022 Advisory services offered by Moneta Group Investment Advisors, LLC, (“MGIA”) an investment adviser registered with the Securities and Exchange Commission (“SEC”). MGIA is a wholly owned subsidiary of Moneta Group, LLC. Registration as an investment advisor does not imply a certain level of skill or training. The information contained herein is for informational purposes only, is not intended to be comprehensive or exclusive, and is based on materials deemed reliable, but the accuracy of which has not been verified.

Trademarks and copyrights of materials referenced herein are the property of their respective owners. Index returns reflect total return, assuming reinvestment of dividends and interest. The returns do not reflect the effect of taxes and/or fees that an investor would incur. Examples contained herein are for illustrative purposes only based on generic assumptions. Given the dynamic nature of the subject matter and the environment in which this communication was written, the information contained herein is subject to change. This is not an offer to sell or buy securities, nor does it represent any specific recommendation. You should consult with an appropriately credentialed professional before making any financial, investment, tax or legal decision. An index is an unmanaged portfolio of specified securities and does not reflect any initial or ongoing expenses nor can it be invested in directly. Past performance is not indicative of future returns. All investments are subject to a risk of loss. Diversification and strategic asset allocation do not assure profit or protect against loss in declining markets. These materials do not take into consideration your personal circumstances, financial or otherwise.

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If I Die, Will a Will Take Care of My Family?

I often hear individuals, both young and old, reference how they don’t need to worry about estate planning or who they’ve selected as beneficiaries because they’ve executed a Will.

Let’s set the record straight. A Will is a very important estate planning technique that most individuals and families should have, especially those with young children, however it’s not a complete plan.  In addition to a Will, a complete estate plan should include:

• Financial and Healthcare Powers of Attorney. This will select individuals to make decisions on your behalf should you be living but unable to handle your personal affairs.
• Possibly a Revocable Trust. This can be very useful if you have young beneficiaries, would like more protection for your heirs or more complicated arrangements.  An example?  Perhaps you’d like your child to have access to their inheritance for a starter home, but not to purchase a Lamborghini or quit their job to become a world traveler.  A trust is not necessary in all cases, and more advanced trusts may be a good idea for some.

The final estate planning technique I want to address is beneficiary designations.

This is often the simplest, and most overlooked, way to ensure your assets go where you want! In most states, you have the ability to add a beneficiary on almost every asset you own – your investment accounts, 401(k)s, life insurance policies, your home… even your cars! A Will may outline who should receive your assets, however it will not avoid probate which can be costly and take a long time to settle.  Instead, we recommend ensuring your beneficiaries are updated, so the asset will pass directly to the outlined person or entity, however be careful not to name minors directly as beneficiaries if you can help it. If you have minor beneficiaries, work with your estate planning attorney to figure out the best way to leave your assets to them.

Final word of caution.  CHECK THESE!

I can’t tell you how many times we have new clients come on board who have their parents or siblings listed on 401(k)s they started before they were married or had children.  Even if your Will states you want your assets to pass to your kids, if an old 401(k) has your estranged sibling listed, it’s theirs!!

If you have more financial questions, don’t hesitate to ask your Family CFO.  We do more so you can too.

© 2022 Moneta Group Investment Advisors, LLC. All rights reserved. These materials were prepared for informational purposes only based on materials deemed reliable, but the accuracy of which has not been verified. Examples contained herein are for illustrative purposes only based on generic assumptions. This is not an offer to sell or buy securities, nor does it represent any specific recommendation.  You should consult with an appropriately credentialed professional before making any financial, investment, tax or legal decision. Past performance is not indicative of future returns. These materials do not take into consideration your personal circumstances, financial or otherwise.

The post If I Die, Will a Will Take Care of My Family? appeared first on Moneta Group.

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Many Investors Have Lost Money in 2022. But Selling Losing Stocks Before Year-End May Reduce Your Taxes

By Ryan Martin and Lauren Hunt, Senior Advisors

Investors know the drop in stock prices for many companies and funds in 2022 has hurt their portfolios. Even historically stellar investments have tumbled this year. For example, Apple Inc., which reached a 52-week high of $182.94 on January 4, had lost nearly $30 per share by the end of October.

While no investor likes to lose money, there is a way to take advantage of these losses to reduce 2022 (and possibly future) taxes.

By selling one or more investments that have lost money, an investor can potentially reduce their taxes. Often referred to as ‘tax loss harvesting,’ this tool can be applied to any losses that occur from money invested in a taxable brokerage account. Unfortunately, losses from investments that are held within tax-deferred accounts, such as 401(k) retirement or Individual Retirement Accounts, cannot be used. Capital losses will offset capital gains and if there are no gains to offset, the losses will offset up to $3,000 per year in ordinary income.  Losses that exceed gains (and after the $3,000 ordinary income offset) are carried forward on your tax return and they can/will offset future capital gains.

There are some Internal Revenue Service rules governing this practice to ensure investors don’t illegally avoid paying taxes. For example, an individual can’t sell a stock one day to capture a loss and buy back the same stock at a much lower price the next day. However, they can reinvest the money from the sale into a different stock or stock fund that meets their investment needs and asset-allocation strategy.  This avoids sitting on the sidelines for 30 days, which is the timeline in place to avoid running afoul of the IRS ‘wash sale’ rules.

Here’s a good example of how tax loss harvesting can benefit an individual investor:

A person has invested $60,000 in Large Cap Growth Fund “A.” The fund has lost $10,000 this year and is now worth only $50,000. This investor could consider selling the entire fund and take a loss of $10,000.

If that occurs, the $50,000 could be reinvested into Large Cap Growth Fund “B.”  This fund is a similar option since it invests largely in large-cap growth companies such as Microsoft, Amazon and Netflix. However, by placing the money in a different fund which is not substantially identical, the IRS wash sale rules are not called into question. Meanwhile, this strategy enables the reinvested money to work for the investor in case the market quickly moves up.

Here’s where the tax savings comes in. Assuming the loss of $10,000 directly offsets $10,000 of long-term capital gains, a person would likely save between $1,500 and $2,000 on their federal income taxes (and possibly more if also subject to net investment income taxes). Of course, each investor’s situation will be different depending on their specific tax return and capital gain income tax rates.

Benefits of Working with Moneta’s Team of Advisors

Before any sale occurs, we work with each investor to ensure selling a stock or fund is the right strategy. While every situation is different, we generally look for capital loss opportunities of significance, so we are not constantly trading in and out of funds.  Depending on the size of a person’s portfolio, a rule of thumb might target losses in excess of $1,000-$2,000 and/or 5% or more on a percentage basis.

We realize many investors may be concerned about moving money from a particular company or fund that has generated significant returns over many years. That’s where we rely on Moneta’s investment manager due diligence. They will evaluate the choice of funds and reinvest money into a fund that is similar but not substantially identical to the one where the sale has occurred. And, if the investor prefers to be in their original investment, our team will work with them to consider placing some or all of the money back into that investment 31 days after the sale.

While tax loss harvesting can be done at any time, it is something folks often consider near the end of a calendar year as part of an overall tax planning strategy. To learn more, please contact us at rmartin@monetagroup.com or lhunt@monetagroup.com. We offer a free consultation to discuss how a comprehensive tax planning and asset allocation strategy can enable your wealth to grow.

 

© 2022 Advisory services offered by Moneta Group Investment Advisors, LLC, (“MGIA”) an investment adviser registered with the Securities and Exchange Commission (“SEC”). MGIA is a wholly owned subsidiary of Moneta Group, LLC. Registration as an investment advisor does not imply a certain level of skill or training. The information contained herein is for informational purposes only, is not intended to be comprehensive or exclusive, and is based on materials deemed reliable, but the accuracy of which has not been verified. Trademarks and copyrights of materials referenced herein are the property of their respective owners. Examples contained herein are for illustrative purposes only based on generic assumptions. Given the dynamic nature of the subject matter and the environment in which this communication was written, the information contained herein is subject to change. This is not an offer to sell or buy securities, nor does it represent any specific recommendation. You should consult with an appropriately credentialed professional before making any financial, investment, tax or legal decision. Past performance is not indicative of future returns. All investments are subject to a risk of loss. Diversification and strategic asset allocation do not assure profit or protect against loss in declining markets. These materials do not take into consideration your personal circumstances, financial or otherwise.

 

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Five Simple Year-End Tax Planning Moves for 2022 Tax Year.

Lauren Hunt, Senior Advisor

With year-end quickly approaching, taxpayers still have several weeks left to plan a strategy that could provide meaningful tax savings. Here are five ideas that may work for you:

Increase Your 401(k) Contributions

For the 2022 tax year, the maximum deferral contribution to a 401(k) retirement plan is $20,500 for individuals under age 50. Individuals ages 50 and above can make a “catch-up” contribution of an extra $6,500, for a total of $27,000. By making voluntary contributions to a traditional 401(k) plan, whereby reducing your taxable income, the more money you contribute, the lower your tax bill will be for the current year. Consider increasing your contribution elections during the remaining months of the year and review your elections again in January to spread out your contributions next year. The 2023 maximum 401(k) contribution deferrals are $22,500 for those under age 50 and $30,000 above age 50.

Charitable Contributions

Many retirees who contribute to their favorite charitable, non-profit organizations don’t receive a tax benefit since their standard deduction exceeds any itemized deductions. Account owners who are 70.5 and older in 2022 could benefit by using their IRA as the source of their giving via a strategy called a Qualified Charitable Distribution (QCD).

While you do not receive an itemized tax deduction for a QCD, the distribution itself is not taxed. Lowering top-level income could lead to other benefits, such as lowering Medicare premium surcharges and reducing the taxable amount of Social Security income. Keep in mind that the distribution must be taken directly from your IRA and distributed to the charity for the amount to be excluded from income. Account owners can donate up to $100,000 per year from their IRA, and the QCD amount counts toward your annual required minimum distribution so long as certain criteria is met.

For example, a person who turned 70 in January with a required minimum distribution of $10,000 chooses to donate $5,000 from their IRA to their local United Way or another qualified charitable organization after the person has reached age 70.5 during the year. Instead of reporting income of $10,000 for the year, the taxable reported distribution amount will now be lowered to $5,000.

Just be sure to make your charitable contributions by December 31 as there’s no grace period if you make them after year-end.

Tax-Loss Harvesting

When the price of stocks and mutual funds in a taxable brokerage account declines below their cost basis, you can sell them before the end of the year to capture the loss and, at the same time, exchange them into a similar, but not substantially identical, investment to maintain market participation. By doing this, you capture those losses on paper so they are reported on your tax return.

Because so many stocks have dropped in value during 2022 – including many losing 10 percent or more – it may be the right time to take advantage of this option. To the extent realized losses exceed realized gains, net realized losses can offset up to $3,000 of ordinary income with any remainder resulting in a loss carryforward to be used in future years.

Converting Individual Retirement Account Savings into a Roth IRA

Depending on your income, it could be wise to convert a traditional IRA into a Roth IRA. While you must pay ordinary income taxes today on dollars converted, the money inside a Roth IRA benefits from income tax-free accumulation indefinitely. In general, the more time you have to allow for the funds to compound income tax-free within the Roth IRA, the more compelling a Roth IRA conversion becomes.

Start Getting Organized

Employers and other entities must send copies of 1099s and W-2s to recipients by January 31. Start gathering your current tax year’s tax payments and any documentation you have for tax credits and deductions. If you start gathering your tax-related documents now, you’ll be set for a stress-free tax day.

We recommend consulting with an appropriately credentialed professional before making any financial or tax-planning related decision

© 2022 Advisory services offered by Moneta Group Investment Advisors, LLC, (“MGIA”) an investment adviser registered with the Securities and Exchange Commission (“SEC”). MGIA is a wholly owned subsidiary of Moneta Group, LLC. Registration as an investment advisor does not imply a certain level of skill or training.

The information contained herein is for informational purposes only, is not intended to be comprehensive or exclusive, and is based on materials deemed reliable, but the accuracy of which has not been verified.

Trademarks and copyrights of materials referenced herein are the property of their respective owners. Examples contained herein are for illustrative purposes only based on generic assumptions. Given the dynamic nature of the subject matter and the environment in which this communication was written, the information contained herein is subject to change. This is not an offer to sell or buy securities, nor does it represent any specific recommendation. You should consult with an appropriately credentialed professional before making any financial, investment, tax or legal decision. Past performance is not indicative of future returns. All investments are subject to a risk of loss. Diversification and strategic asset allocation do not assure profit or protect against loss in declining markets. These materials do not take into consideration your personal circumstances, financial or otherwise.

 

The post Five Simple Year-End Tax Planning Moves for 2022 Tax Year. appeared first on Moneta Group.

source https://monetagroup.com/blog/five-simple-year-end-tax-planning-moves-for-2022-tax-year/

Jobs Matter, But Not in the Usual Way, This Election Day

Aoifinn Devitt – Chief Investment Officer

As the mid-term elections approached the usual partisan chatter focused on issues surrounding the economy – namely inflation, government spending, interest rates, and house prices, and there was not a lot of mention of jobs.  Maybe it is because unemployment is still hovering near all-time lows of 3%, and the recent jobs number (261,000 jobs added) highlighted a still tight labor market, albeit with a little less pressure in terms of the rate.  The participation rate is still low – particularly for the over 50 cohort, which may explain some of the buoyancy, but whatever the reason, it is clear that, so far, the evidence of a slowdown in parts of the economy is not yet being seen in employment numbers.

It might have seemed like a different picture or mood last week, when headcount cuts from Tech titans, namely, newly-privatized Twitter, made the headlines.  While the case of Twitter was directly related to its purchase by Elon Musk, other companies announcing retrenchment spoke of excessive growth, over-exuberance in their expansion and strength of the economy, and the need to batten down in the face of a potential recession.

But jobs matter because it is one of the metrics that the US Federal Reserve is focusing on to detect pricing pressures throughout the economy as it monitors pricing conditions to see that its aggressive tightening is having an effect. As Chairman Jerome Powell announced the fourth 75 bps rate rise last week, he rebuffed expectations of a pivot as “premature.”  This resolve was in contrast to some more dovish statements by other central banks around the world (e.g. the Bank of England is likely to watch the effect on mortgage holders more than market expectations in its trajectory) and as such will contribute to a dollar that is stronger for longer.

Jobs also matter to consumer sentiment.  Although recent market volatility indicates wavering investor conviction, consumer sentiment remains flat, most likely due to the jobs side of the equation, and some relief in some parts of the inflation spectrum – e.g. in the price of food and energy, which did show some slackening in the recent data.

Markets have been reasonably sanguine, given the political backdrop, but as my colleague Chris Kamykowski noted in his piece Midterms, often there is a positive upswing in markets in the aftermath of elections as some uncertainty is removed. This year, that trend could face some underlying headwinds, as bonds compete for attention with equity yields (the US 10-year Treasury yield remains above 4% while the lowest quality investment grade bonds are yielding over 5%) and investors worry about earnings and valuations. This is evidenced in the mixed performance of markets set out below:

Source: Morningstar as of 11/9/2022

We are publishing this the morning after Election Day, and although not all results are coming in, it is clear that it was not the Republican sweep that pundits had been expecting and that a strong turn out from the under 30 age group shored up support for Democrats in key districts.  While the outcome reveals a closely divided electorate, the relatively smooth process of voting and, seemingly, a lack of interrogation of the integrity of the election (so far) should be stabilizing, which we believe markets will appreciate.  The next few months will see how policy evolves in response.

 

© 2022 Advisory services offered by Moneta Group Investment Advisors, LLC, (“MGIA”) an investment adviser registered with the Securities and Exchange Commission (“SEC”). MGIA is a wholly owned subsidiary of Moneta Group, LLC. Registration as an investment advisor does not imply a certain level of skill or training. The information contained herein is for informational purposes only, is not intended to be comprehensive or exclusive, and is based on materials deemed reliable, but the accuracy of which has not been verified.

Trademarks and copyrights of materials referenced herein are the property of their respective owners. Index returns reflect total return, assuming reinvestment of dividends and interest. The returns do not reflect the effect of taxes and/or fees that an investor would incur. Examples contained herein are for illustrative purposes only based on generic assumptions. Given the dynamic nature of the subject matter and the environment in which this communication was written, the information contained herein is subject to change. This is not an offer to sell or buy securities, nor does it represent any specific recommendation. You should consult with an appropriately credentialed professional before making any financial, investment, tax or legal decision. An index is an unmanaged portfolio of specified securities and does not reflect any initial or ongoing expenses nor can it be invested in directly. Past performance is not indicative of future returns. All investments are subject to a risk of loss. Diversification and strategic asset allocation do not assure profit or protect against loss in declining markets. These materials do not take into consideration your personal circumstances, financial or otherwise.

 

The post Jobs Matter, But Not in the Usual Way, This Election Day appeared first on Moneta Group.

source https://monetagroup.com/blog/jobs-matter-but-not-in-the-usual-way-this-election-day/

The Big Push—Setting Yourself Up for Retirement Success While You Still Have Time

James Chalmers – Senior Advisor

Some people are planners; others are procrastinators. Some are one-thing-at-a-timers, and some are a combination, depending on the topic. Retirement, though, is an area for which planning is not just nice, but necessary. Though it may feel too far in the future to reasonably plan for, once you reach your 40s or 50s, it’s critical to start putting pen to paper. A recent study showed a majority of workers (76%) have some form of retirement strategy, but only 33% have it written down—which can be a key determinant in your level of long-term success at reaching your retirement goals.

We refer to this phase of life—when some of life’s big expenses, like college tuition or a home remodel, may be behind you, and retirement is likely the next big milestone—as the big push. This is the time during which you can and should make some major determinations about and plans for your financial future to give yourself the highest probability of meeting your retirement goals. If you discover your current status or plan won’t lead to your preferred destination—maybe you haven’t quite hit your savings goal, or you’re unsure how to factor tax considerations into your future financial picture—you still have time to pivot to improve your likely outcome. Wait too long, though, and some of your goals may no longer be achievable—you just may not have time to correct course.

Trying to map the right road to retirement is inarguably a daunting task—which is likely why many people fail to get into the weeds, preferring to take a guess at how much income they’ll need in retirement to support and maintain their lifestyle. A better approach is starting with the current state of your personal balance sheet—what assets and liabilities you have and what your future income stream is likely to look like so you can determine what your available savings will be.  From there, it’s worth envisioning some basic outlines of your retirement goals—like at what age you’d like to retire, whether you intend to continue any part-time work thereafter, what sources of income you anticipate, and so on. Equally critical is starting to get your arms around your anticipated expenses, including tax considerations and factoring in inflation.

These considerations are just the start of crafting a sufficiently robust, comprehensive plan. Maybe you plan to leave a legacy for children or grandchildren, or you already know you’d like to be able to fund future generations’ educations. Any added complexities can make developing a coherent plan more challenging—and, importantly, can make adjusting it as circumstances change, which they inevitably will, trickier.

Living in the “there’s an app for that” era, this seems fertile ground for a technological solution—likely there’s an algorithm that can take your current financial status, account for all the variables, apply the necessary probabilities, and produce a (seemingly) failsafe plan to achieve the desired outcome. And there are undoubtedly many tools that can help with the outlines of a plan. But relying solely on calculators or apps may be insufficient in the long run because things change all the time. Goals can change. Or life may require you take a detour—possibly to pay for unanticipated expenses, whether health, or education, or something else-related. When that happens, it can be challenging to determine how best to adjust the plan.

Then, too, consider that retirement planning can be a bit like setting a reading goal. You can determine you’d like to read a certain number of books or pages in a year. You can calculate how much time you need to spend in your armchair curled up with your Dostoevsky daily. But if Crime and Punishment decorates your nightstand all year—which isn’t necessarily just a matter of discipline, but also of myriad responsibilities and options competing for your time and attention—you won’t hit your goal, no matter how well-intentioned you started the year.

So, too, with financial planning—calculating it, defining it, even writing it down may not be enough. Which is why the help of an advisor can be critical to your probability of long-term success. The best advisors spend their professional time thinking continually about retirement planning from all angles. They are immersed in the landscape, the latest developments, the risks, the possibilities, the probabilities—and they keep track of when and how any of these factors shift, which they do, often and rapidly. Consider: the tax and accounting regulatory environments, estate considerations, investing options, the investing backdrop (including the domestic political and geopolitical environments), interest rates, inflation, etc.—all shift daily. For most individuals, finding the time in their daily diaries to keep up with everything required to ensure the financial plan stays on track is challenging, if not nearly impossible. But for advisors, helping make sense of all these considerations is their primary task—not 19^th on a list of 20 things to do.

If you’re amid the big push—then now is the time to start planning, while you still have an opportunity to make any necessary adjustments. Critically, engaging an experienced, top-notch advisor can help improve your results by helping you objectively assess your current status, make a sound, prudent plan, and hold you accountable to that plan, while helping you adjust as needed along the way and looking out for your best interest. Regardless of where you want to end up, step one in the big push is ensuring the task doesn’t overwhelm you to the point you procrastinate too long. In other words, step one is identifying the right advisor.

© 2022 Moneta Group Investment Advisors, LLC.  All rights reserved. These materials were prepared for informational purposes only based on materials deemed reliable, but the accuracy of which has not been verified. Trademarks and copyrights of materials referenced herein are the property of their respective owners. Index and/or Style returns reflect total return, assuming reinvestment of dividends and interest. The returns do not reflect the effect of taxes and/or fees that an investor would incur. Examples contained herein are for illustrative purposes only based on generic assumptions. Given the dynamic nature of the subject matter and the environment in which this communication was written, the information contained herein is subject to change. This is not an offer to sell or buy securities, nor does it represent any specific recommendation. You should consult with an appropriately credentialed professional before making any financial, investment, tax or legal decision. You cannot invest directly in an index. Past performance is not indicative of future returns. All investments are subject to a risk of loss. Diversification and strategic asset allocation do not assure profit or protect against loss in declining markets. These materials do not take into consideration your personal circumstances, financial or otherwise.

The post The Big Push—Setting Yourself Up for Retirement Success While You Still Have Time appeared first on Moneta Group.

source https://monetagroup.com/blog/the-big-push-setting-yourself-up-for-retirement-success-while-you-still-have-time/

Volatility Higher as Fed Focused on Inflation

Chris Kamykowski CFA®, CFP® | Head of Investment Strategy & Research
Tim Side | Research Analyst 

Macro Overview

The US Federal Reserve was at the heart of the storyline over the quarter as it communicated its commitment to tightening monetary policy to help wrest control of spiraling inflation. While lower than June levels, inflation concerns remained at the forefront of investors’ minds as September saw an 8.2% year-over-year increase in the Consumer Price Index (CPI). Despite potential for negative economic impact, the Federal Reserve raised the target federal funds rate range by 75 basis points in July and another 75 basis points in September. As of September 30th, the effective federal funds rate was 3.08%, a sharp increase from 0.08% at the beginning of the year. The Fed’s median expectations for the terminal federal funds rate by year-end rose to 4.375%, indicating additional rate hikes are likely this year. While the “transitory” language has all but disappeared from Fed communications, the market’s forward expectations for inflation remain stable.

The Fed feels it has some room to tighten aggressively given the overall strength in the labor market, which ended the quarter with an unemployment rate of 3.5%. While not quite keeping pace with inflation, wages continued to improve, as median wages grew 6.3% year-over-year.

Recession fears in the United States remain elevated, although investor attention was largely on Europe, where the energy crisis has created potentially dire prospects for economic growth. The US’s relative economic strength, aided by an aggressive monetary policy, sent the US dollar to 20-year highs relative to other currencies. The euro and British pound made headlines in July and September respectively for near parity with the dollar (euro briefly fell below) as the European Central Bank and Bank of England faced the balancing act of tighter monetary policy while seeking to ease financial conditions for some of the more challenged countries.

Asset Class Performance

After a brief respite in July, Treasury yields continued their march higher, putting pressure on fixed income assets and driving the Bloomberg Aggregate Bond Index lower (-4.8%) over the quarter. High yield credit outperformed Treasuries and the Bloomberg Aggregate Index due to its shorter duration profile and risk-on rally in July. Meanwhile, US REITs fell over the third quarter with no sector able to avoid the impact of rising rates, a slowing housing market and lower outlook for earnings. Additionally, infrastructure was unable to provide downside protection versus other risk assets this quarter; key to this was rising rates and concerns over slower economic growth. MLPs were the best performing asset class, as strong cash flows and disciplined management teams helped push the Alerian MLP Index 8.1% higher.

Equity markets generally underperformed fixed income, while within equities, the US outperformed non-US equities, primarily due to a strengthening dollar. China was one of the worst performing countries as Covid and regulatory uncertainty drove the MSCI China NR Index more than 20% lower. China’s poor performance weighed heavily on emerging market equities, as the country makes up roughly one-third of the MSCI Emerging Markets Index.

Energy and consumer discretionary were the only positive sectors in the S&P 500 Index as the index fell 4.9% over the quarter. Communication services was the worst performing sector in the index, falling 12%.

Final Thoughts

2022 is quickly coming to an end, something most investors likely welcome given the total, and unique, carnage experienced across equity and fixed income markets. Luckily, as we write, October has provided yet another bear-market rally with risk-markets significantly higher, removing some of the sting of a difficult third quarter and year. That said, uncertainty still remains as US voters head to election polls, the Fed navigates just when to “pivot” in the face of persistent inflation, recession probabilities continue to trend higher and a diplomatic solution to the war in Ukraine appears unlikely. This all makes for a dour outlook overall; however, for all the doom and gloom, valuations across markets largely reflect this, especially in equity markets. Although we do not think that timing the market is a sustainable, wealth-creating approach, long-term investors may do well to be thoughtfully “greedy” when others and markets are fearful, potentially providing a foundation for attractive future long-term returns for a diversified multi-asset portfolio.

 

Definitions & Disclosure

Alerian MLP Index: The Alerian MLP Index is a capped, float-adjusted, capitalization-weighted index, whose constituents earn the majority of their cash flow from midstream activities involving energy commodities.
Bloomberg US Aggregate: The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market.
Bloomberg High Yield: The Bloomberg Barclays US Corporate High Yield Bond Index measures the USD-denominated, high yield, fixed-rate corporate bond market.
Bloomberg US Treasury: The Bloomberg Barclays US Treasury Index measures US dollar-denominated, fixed-rate, nominal debt issued by the US Treasury.
Consumer Price Index (CPI): The Consumer Price Index is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.
FTSE Nareit Equity REITs: The FTSE Nareit All Equity REITs Index is a free-float adjusted, market capitalization-weighted index of U.S. equity REITs. Constituents of the index include all tax-qualified REITs with more than 50 percent of total assets in qualifying real estate assets other than mortgages secured by real property.
MSCI EAFE: 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.
MSCI Emerging Markets: The MSCI Emerging Markets Index captures large and mid-cap representation across 27 Emerging Markets (EM) countries.
Russell 2000: The Russell 2000 Index is a small-cap stock market index of the smallest 2,000 stocks in the Russell 3000 Index.
S&P 500: The S&P 500 Index is a free-float capitalization-weighted index of the prices of approximately 500 large-cap common stocks actively traded in the United States.
S&P Global Infrastructure: The S&P Global Infrastructure Index provides liquid and tradable exposure to 75 companies from around the world that represent the listed infrastructure universe. The index has balanced weights across three distinct infrastructure clusters: Utilities, Transportation, and Energy.
Federal funds (effective): The Fed funds rate from the Federal Reserve Bank of New York, which is updated the following morning, is available before the release of the H.15 fed funds rate which is updated the following afternoon. It can be found in the section “Interest Rates Updated Before FRB Publication”. As of March 1, 2016, the daily effective federal funds rate (EFFR) is a volume-weighted median of transaction-level data collected from depository institutions in the Report of Selected Money Market Rates (FR 2420). Prior to March 1, 2016, the EFFR was a volume-weighted mean of rates on brokered trades. All calendar days are included in monthly averages. Annualized using 360-day year or bank interest.
Unemployment Rate: The unemployment rate represents the number of unemployed as a percentage of the labor force. Labor force data are restricted to people 16 years of age and older, who currently reside in 1 of the 50 states or the District of Columbia, who do not reside in institutions (e.g., penal and mental facilities, homes for the aged), and who are not on active duty in the Armed Forces.
Wage Growth: The Atlanta Fed’s Wage Growth Tracker is a measure of the wage growth of individuals. It is constructed using microdata from the Current Population Survey (CPS), and is the median percent change in the hourly wage of individuals observed 12 months apart.
Probability of U.S. Recession: This model uses the difference between 10-year and 3-month Treasury rates to estimate the probability of a recession in the United States 12 months ahead.

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