Marketpoint: Annus Horribilis (Horrible Year)
Inflation. War. Supply chains. COVID. The Fed. Interest-rate hikes. A “soft” versus “hard” landing. Investors have been ruminating over these broad yet interconnected topics for all of 2022. Markets slid and whipsawed at even the slightest signals derived from the cacophony of policymakers, thought leaders, corporate earnings reports, and economic data releases. The regrettably clear fact is that it was a difficult year for stock and bond investors and even more so for cryptocurrency holders. The major equity indices finished the year firmly in the red, and between October 2021-2022 bond investors experienced the worst twelve months in the asset class’s history. Yet, for as bad as 2022 felt, the big picture is more positive.
Looking back at the final quarter of the year, marginal improvements in inflation and changes in geopolitics led to relief rallies in October and November. Americans headed to the polls in early November, and the results produced a divided government with Republicans winning the House of Representatives. While divided leadership in Washington can cause gridlock, markets tend to react favorably to this more stagnant form of government as it produces less fiscal policy uncertainty and more predictability for future corporate earnings. On the international front, China began a slow and turbulent end to its “zero-COVID” policy, which is positive news for supply chains, production capacity, and overall growth in the world’s second-largest economy.
Reflecting on how the world has changed since 2020, Americans have successfully navigated a global pandemic, embraced technology that creates efficiency and flexibility, and increased wages for lower-income individuals. Wealthy Americans who owned property and held investments have also benefited. Home prices increased 30% on average over the past two years. The S&P 500 climbed 19% and the MSCI All Country Index rose 7% since January 1, 2020. Consumer net worth is around $145T, compared with pre-pandemic levels of $115T. While inflation eroded some of the gains, there is no question that Americans have grown their wealth since the start of this decade.
Day to day, Americans are beginning to feel some relief. Monthly inflation reports in the final three months of 2022 showed much-welcomed reductions in the year-over-year pace of price increases that have hit Americans—particularly those in low- and middle-income brackets—hard. Several factors that contributed to the rapid rise of inflation have reversed. Commodities that soared on the Russian invasion of Ukraine are trading at levels near or below their pre-invasion levels. Gas and airline prices dropped 34% and 16%, respectively, from 2022 highs. Corn, the main energy ingredient in livestock feed and fuel ethanol production in the U.S., declined nearly 20% from the nine-year high it reached in April. Lumber is trading for a quarter of what it had been approximately 18 months ago, and natural gas prices are roughly flat for the year. 
Despite silver linings, investors will feel little solace until they are confident that the markets have stabilized. Investors should be prepared for continued volatility in the near term as central banks “wait and see” on improving inflation trends before declaring their fight finished. The Federal Reserve (the Fed) finished its historic year of interest-rate hikes by raising the federal funds benchmark rate by 0.75% and 0.5% in November and December, respectively, bringing it to a 15-year high at a range between 4.25% and 4.50%. Chairman Jerome Powell sent a clear signal following the December rate hike that the Fed’s fight against inflation was not over and that the central bank would continue to raise rates to a target level of 5.1% in early 2023. The news of continued hikes dampened the early and mid-quarter rallies, and stocks fell again in the final weeks of the year as investors became more fearful that continued aggressive monetary policy could tip the economy into a recession.
Recession fears are weighing on investors’ minds. In July 2022, the yield curve inverted for the first time in 15 years. Yield curve inversions, defined as when rates for two-year U.S. Treasury notes rise above those of the 10-year notes, have preceded every recession since the 1960s. Generally, there is an 18-month lag between the inversion and the start of the recession, so we anticipate downward pressure on earnings and consumer spending in the coming year. In fact, we are beginning to see signs of softening. Existing-home sales fell 7.7% in November, marking the 10th consecutive month of declining sales, as mortgage rates have nearly doubled since the start of the year due to the Fed’s tightening. Since housing-related purchases account for 15% to 18% of GDP, we can expect this decline to ripple through the economy.
Stock performance and the economy’s health are not always correlated, making it difficult to invest and why we advise staying invested regardless of the economic backdrop. Counter to what many would expect, market returns were positive in seven of the last 15 recessions. On average, the U.S. stock market takes five to eight months to find a floor during recessions and tends to bottom five months before the end of recessions. If earnings fall, stocks may decline since profitability is a key component of how much investors are willing to pay for a stock. On the flip side, valuations look relatively attractive based on long-term averages after a volatile 2022. The S&P 500 is trading at 17.5x next twelve months’ earnings vs. the prior 10-year average of 18.4x. In other words, the market may have already factored in a decline in earnings.
Source: Bloomberg and The National Bureau of Economic Research (NBER). NBER defines a recession as the period between the peak and trough of economic activity. Recession duration and S&P performance during that period reflect market activity using the peak-to-trough standard.
We are actively taking steps to protect clients in the short term while positioning them to benefit from an eventual market recovery. In the equity portion of client portfolios, we are continuing the work we began in late 2021 to make strategic changes based on inflationary and recessionary concerns while also maintaining an exposure to growth-oriented names whose valuations are more reasonable now than they have been in quite some time. On the fixed-income side, the improved interest-rate environment that we are in provides attractive opportunities for high-quality bonds, as well as cash-equivalent vehicles that are yielding more than they have in over a decade.
We are humble enough to know that we can't precisely predict when the market will bounce back or how long a recovery will take. However, we do know that bear markets and recessions, while scary, are essential parts of the normal market and economic cycles. Through our investment management and financial guidance, we aim to prepare you for a variety of market outcomes by building a well-balanced portfolio that includes sufficient cash to meet your short-term spending needs, allowing you to stay invested for the long term. Please reach out to our team if you would like to schedule a time to talk about your questions, concerns, or updates in your financial situation.
New in 2023: Updated Contribution Limits, Gifting Amounts, and SECURE Act 2.0
As we close the books on 2022 and look forward to a new year, there are several changes to the federal tax code, including increases to retirement contributions and gifting amounts that will take effect in 2023. A summary of the Internal Revenue Service’s key figures is below:
SECURE Act 2.0 – New Changes to the Retirement Savings System
Just as the clock ran out on 2022, Congress made significant changes to retirement savings rules and programs when it passed the SECURE Act 2.0 as part of the fiscal year 2023 Appropriations bill. We are still examining the announced changes and plan to publish our own analysis on our blog in the coming several weeks. In the meantime, here are the top changes that clients should be aware of:
- The age for starting required minimum distributions (RMD) is now 73. If you are turning age 72 in 2023, you will not have an RMD until 2024. The bill also states that the RMD starting age will rise to 75 by 2033.
- Catch-up contributions for savers over 50 are now indexed to inflation, with the number increasing each year based on cost-of-living adjustments. Beginning in 2025, workers age 60 to 63 with most employer-sponsored plans will be able to contribute an additional $10,000 per year toward retirement
- The $100,000 qualified charitable distribution (QCD) limit will be indexed for inflation beginning this year.
- Beneficiaries of 529 plans that contain unused qualified education expense funds will be able to roll over a lifetime limit of $35,000 to a Roth IRA, subject to certain requirements and restrictions that will be outlined in our upcoming analysis.
- There is now a 100% tax credit for small businesses that create retirement plans.
Social Security – Cost of Living Adjustment (COLA)
In October, The Social Security Administration announced an 8.7% increase in social security benefits starting in 2023. This is the largest increase since 1981 and the fourth-highest increase in history. Social Security recipients will be notified via mail regarding their new benefit amount, or they can log in to their account via www.ssa.gov/myaccount for more information.
RECOMMENDED READING: THE PSYCHOLOGY OF MONEY, BY MORGAN HOUSEL
If reading more books is on your New Year’s resolutions list, we recommend The Psychology of Money, by behavioral finance expert Morgan Housel. This best-selling book is a worthwhile read for anyone who wants to know more about how and why we make a wealth of financial decisions.
Divided into 20 easy-to-read chapters, this book takes a deep dive into topics that include personal finance, compound interest, investing, risk-taking, and long-term planning. He explains why social comparison can cause people to overspend and how to build and retain wealth by redefining what’s “enough” for you and your family and by saving in lieu of spending. “No matter how much you earn, you will never build wealth unless you can put a lid on how much fun you can have with your money right now, today,” he writes. Financial freedom – and the freedom to spend your time exactly the way you want to – is priceless.
While not a new concept, he offers a fresh take on how time in the market beats timing the market. He also advocates making less risky financial decisions if they give you and your family peace of mind and allow you to sleep more soundly. He devotes the last portion of the book to sharing his family’s own approach to personal finances, from saving to investing, but ties back to the first chapter of the book by noting “to each their own” and that people’s financial decisions are deeply rooted in their personal life experiences.
Housel, a partner at Collaborative Fund, is a former Wall Street Journal and Motley Fool columnist. His writing is both entertaining and lively, as well as credible. If you are interested in reading The Psychology of Money, please let us know and we will send you a copy.
NEW TEAM MEMBER: HAYDEN PORTER
We are excited to welcome a new team member to Obermeyer Wood. Hayden Porter joins us as Client Advisor based out of our Denver office. He will manage client relationships and assist with the firm’s financial planning efforts.
Hayden has spent his career working in financial services, high-net-worth wealth management, and financial planning. Most recently, he worked in financial consulting for Kroll in its property tax division. He is a graduate of Colorado State University, where he earned his BA in Health and Human Sciences with a minor in Business. Hayden holds Series 66 and 63 licenses and is a qualified investment advisor representative (IAR).
We are thrilled to announce Brooke Gais’ promotion to Client Advisor and designation as a CERTIFIED FINANCIAL PLANNER™ (CFP®).
Brooke has worked tirelessly to serve our clients since joining the firm two years ago. Her certification as a CFP® will help her bring additional expertise to the financial planning process for our clients. Please join us in congratulating Brooke on her new role and CFP® status.
OBERMEYER WOOD RECOGNIZED
We are proud to share that Obermeyer Wood was named one of the nation’s top RIA firms by Forbes and SHOOK Research. Obermeyer Wood’s team was No. 21 in the U.S. and was the only firm in Colorado to crack the top 50. Forbes and SHOOK Research used interviews and questionnaires to glean the quantitative and qualitative data needed to name the top 100 Registered Investment Advisors in America.
“To be honored as one of the nation’s top RIA firms is a true reflection of our firm’s intense focus on our clients and the work that we do to help them preserve and grow their wealth through a variety of market environments,” said Wally Obermeyer, Obermeyer Wood’s president and co-founder. To read more about this award and to view the complete ranking, please visit the News section of our website.
INTRODUCING THE RADAR
A new electronic newsletter highlighting business and financial news of note has begun landing in our clients’ inboxes every Friday. Called The Radar, each email contains a selection of headlines and summaries of news from global and U.S. markets, Washington policymakers, and individual equities. We welcome your feedback on The Radar and look forward to sharing more in 2023.
 Bloomberg U.S. Agg annual returns and intra-year declines
 Evercore ISI
 Evercore ISI
 U.S. Energy Information Administration
 U.S. Bureau of Labor Statistics
 The Federal Reserve Bank, Transcript of Chair Powell’s Press Conference December 14, 2022
 Create table from NBER recessions vs. S&P 500 returns
 Schroders, “How do US stocks and earnings usually perform during a recession?”