December, 2022
A Choppy Week
Some mega-cap technology companies were under pressure last week on weak earnings and tepid fourth-quarter guidance. They reported multiple headwinds, including declining advertising revenues, loose expense control, and a slowdown in cloud growth.
Meanwhile, positive earnings surprises from “old economy” companies powered markets higher. This market bifurcation was evident in the divergence in the performance of the Dow Industrials and the Nasdaq. The S&P 500 posted a substantial gain despite its disproportionate weighting of mega-cap stocks, which helped illustrate the power of the rally. Momentum accelerated into Friday, aided by an easing in inflation and a solid third-quarter Gross Domestic Product (GDP) report.
Labor May Be Key
After two straight quarters of negative economic growth, the initial estimate of the third quarter’s GDP came in at a solid 2.6%, exceeding economists’ 2.3% estimate. The surprising economic performance was largely attributable to an increase in exports, which narrowed the trade deficit, a development that may not repeat going forward.1
Particularly encouraging was the personal consumption expenditure price index, a report used by the Fed to track inflation. It increased 4.2%, well below the 7.3% jump from a quarter ago.2
Last week’s job data supported a reoccurring theme – the labor market is cooling from a position of strength. According to the October JOLTS (Job Openings and Labor Turnover Survey) report, there are still more jobs than Americans looking – now at a 1.7 openings/available worker from 2 to 1 earlier this year. Nonetheless, this remains elevated compared to the pre-pandemic average of 0.6 to 1. Postings on Indeed also continue to be robust, hovering 49% above their pre-pandemic norm.
The quits rate fell slightly from 2.7% to 2.6%, suggesting that employees are growing less confident in being able to find alternate jobs. This was particularly true in interest-rate sensitive industries such as real estate (+0.3% m/m).
Shifting to the November Jobs report, it was strong at surface level – payroll employment surpassed expectations (+263K vs. +200K consensus) as did average hourly earnings (+0.6 vs. +0.3% m/m consensus) with the unemployment rate unchanged at 3.7%. Beneath the surface, we saw the second consecutive monthly decline in household employment and a fall in temporary workers, both flashing signs of weakness.
Though these monthly reports can be volatile and labor market turning points are difficult to capture, it does appear that tightening is having an impact on job creation and pay gains. This should keep the Fed on track for a 50 bps hike next week, a welcome reprieve from 75 bps. The recent increases in layoffs and continuing unemployment claims portend weaker jobs reports next year, which may lead the Fed to halt hikes altogether in the first quarter of 2023.
Investors will be looking for more “bad news” on the labor market (especially wages) to gain conviction that inflation is cooling. For investors, U.S. yields may need to shift higher in the short-term to reflect a Fed that is still moving. Uncertainty necessitates a cautious approach to equities, but an environment of easing inflation and resilient growth could support more stability in equity markets.3
New Retirement Contribution Limits for 2023
The Internal Revenue Service (IRS) has released new limits for certain retirement accounts for the coming year. After months of high inflation and financial uncertainty, some of these cost-of-living-based adjustments have reached near-record levels.
Keep in mind that this update is for informational purposes only, so please consult with an accounting or tax professional before making any changes to your 2023 tax strategy. You can also contact your financial professional, who may be able to provide you with information about the pending changes.
Individual Retirement Accounts (IRAs)
Traditional IRA contribution limits are up $500 in 2023 to $6,500. Catch-up contributions for those over age 50 remain at $1,000, bringing the total limit to $7,500.
Remember, once you reach age 72, you must begin taking required minimum distributions from a Traditional IRA in most circumstances. Withdrawals are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty.
Roth IRAs
The income phase-out range for Roth IRA contributions increases to $138,000-$153,000 for single filers and heads of household, a $9,000 increase. For married couples filing jointly, phase-out will be $218,000 to $228,000, a $14,000 increase. Married individuals filing separately see their phase-out range remain at $0-10,000.
To qualify for the tax-free and penalty-free withdrawal of earnings, Roth 401(k) distributions must meet a five-year holding requirement and occur after age 59½. Tax-free and penalty-free withdrawal can also be taken under certain other circumstances, such as the owner's death.
Workplace Retirement Accounts
Those with 401(k), 403(b), 457 plans, and similar accounts will see a $2,000 increase for 2023, the limit rising to $22,500. Those aged 50 and older will now have the ability to contribute an extra $7,500, bringing their total limit to $30,000.
Once you reach age 72 you must begin taking required minimum distributions from your 401(k) or other defined-contribution plans in most circumstances. Withdrawals are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty.
SIMPLE Accounts
A $1,500 increase in limits for 2023 gives individuals contributing to this incentive match plan a $15,500 stop light.
Much like a traditional IRA, once you reach age 72, you must begin taking required minimum distributions from a SIMPLE account in most circumstances. Withdrawals are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty.
As a reminder, this article is for informational purposes only. Consult with an accounting or tax professional before making any changes to your 2023 tax strategy.
"Here Come the Forecasters"
There's a great story about economist Kenneth Arrow when he was a weather officer during WWII. Arrow's team was tasked with producing long-range weather forecasts. Through their study, the researchers concluded that the forecasts were no more accurate than random guessing. But when they voiced their concerns to their superiors, they received the following response:
"The commanding general is well aware that the forecasts are no good. However, he needs them for planning purposes." The general’s perspective offers a great parallel to the investing industry’s annual tradition of providing market forecasts for the year ahead that’s now underway for 2023.
But before we consider the predictions for next year, it might be wise to review how the forecasters have fared this year as a cautionary tale.
Sam Ro, a market commentator, made it easy for us by compiling the 2022 predictions from 14 notable “market experts.” Here's the summary of their predictions:
The 14 experts' 2022 S&P 500 year-end price predictions ranged from 4,400 to 5,300, with ten of the 14 predicting the market would end the year at 5,000 or higher.
With the S&P hovering around 4,000, these experts are currently 0-for-14 with one month remaining.
Not so good.
Though, as the market rally continues into December, some may be inclined to say, "There's still time."
For those who feel that way, it should be noted that many of these so-called market experts or their respective firms have revised their predictions (some several times) throughout the year rendering their initial year-end estimates moot even if a potential Santa Claus rally ultimately proves them "correct."
Many who offered mid-year revisions cited unexpected developments—such as the war in Ukraine, the Fed, interest rates, or inflation—as the reasons for the change.
In other words, they had no idea what was going to happen. To be fair, not knowing what the future holds is not a failure because nobody does. If we’re honest with ourselves, we don’t know how the rest of our day will pan out, much less the next year.
But forecasters don’t seem to think this is the case. The only way anyone can gather the confidence to offer a prediction is to believe they have some knowledge of the future (an oxymoron) that others don’t have.
Since it’s obvious that knowledge of the future doesn’t exist, then it’s intuitive that no matter how much data or research we consider, there is no way to guarantee an accurate forecast which should tell us all we need to know about the value of forecasting.
But that’s just one opinion, so for good measure, here are what some of history's greatest investors have said about forecasting:
Warren Buffett:
"We've long felt that the only value of stock forecasters is to make fortune tellers look good. Even now, Charlie and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children."
John Templeton:
"In all my 60 years in the stock market, I never found anyone whose opinion of what the stock market would do next week or next month was worth heeding."
Peter Lynch:
"You never can predict the economy. You can't predict the stock market."
In closing, your financial plan is not dependent on your financial advisor, or anyone else, correctly predicting the future. Instead, we believe it’s much more prudent to prepare for a wide variety of possibilities making forecasting entirely unnecessary.
This being the case, we would encourage you to disregard anything the pundits have to offer as this annual forecasting charade continues.
Stay the course.
What Can You Learn From Bamboo?
Everyone looks for the miracle moment – the moment when success happens.
We are drawn to these moments because we want to know the secret. We want to know the ingredient that we are missing. The ingredient that makes the recipe.
The problem is … there is no miracle moment. If you want to understand success, you can’t focus on what’s visible.
Results are simply one more step in a long chain of steps that led to that moment.
Nature offers a great example with bamboo, which takes up to 5 years to develop its roots. For years, to the outside observer, no visible progress has been made. Meanwhile, the bamboo grows below the surface, developing its roots and storing energy. Then, all at once, it starts to grow. Years of stored energy result in exponential growth, sometimes reaching over 50 feet in a matter of weeks.
That’s how results happen. Slowly and then all at once.
Everyone wants the results. No one wants the process that leads to them. That's boring.
There are two main lessons to take away:
Not all progress is visible.
Don’t beat yourself up when things aren’t visible. One workout won't make you fit, but it is better than no workout. A small deposit in your bank account today won’t get you to your goal, but it moves you closer. The daily grind is part of the process.
Consistently doing boring things well leads to extreme outperformance.
Most of the time, we know what we need to do. The problem is because we don't immediately see the results, we stop. It's as if we tell ourselves, "I ate healthily and went to the gym all week, and I'm still not as fit as I want, so what's the point?"
You have to be smart enough to know you're making progress without any obvious signs of progress.
Rome wasn’t built in a day, but it was built one brick at a time.
Article sourced from Farnam Street Blog Newsletter - November 7, 2022