Be Grateful

I hope everyone enjoyed Halloween! My son dressed up as a dragon and went trick-or-treating for the first time. Someone asked me if he knew what it all meant? I remember thinking, I don’t even know why people trick-or-treat or dress up for Halloween! If you are like me, maybe you will enjoy learning the concept of trick-or-treating has roots dating back to 1000 A.D. when the church designated November 2 as All Souls’ Day, a time for honoring the dead. In a practice known as “souling,” poor people would visit the houses of wealthier families and receive pastries called soul cakes to pray for the souls of the homeowners’ dead relatives. In Scotland and Ireland, young people took part in a tradition called guising, when they dressed up in costumes and accepted offerings from various households. Rather than pledging to pray for the dead, they would sing a song, recite a poem, tell a joke or perform another sort of trick before collecting their treat. Next year, you will be equipped to answer the question if someone asks why we celebrate Halloween. My guise to all of you this month is a wonderful newsletter. It won’t bring back any of your dead relatives, but I assure you will prefer it over listening to me sing. Enjoy!

Trick - it’s ski season here in Denver with Arapahoe Basin opening. Heading into October, investors prepared for a dreadful month as it seemed as though the stock market was flying down a mountain. 

Treat - the stock market hopped on the high-speed quad chairlift to head up the mountain and witnessed one of the best Octobers in decades. The stock market is notorious for playing games on investors. October is officially in the rear-view mirror as we enter the final two months of the year. As we wrap up 2022, let’s look at the things we have in our lives that make them so special. English writer and philosopher Aldous Huxley wrote, “Man has an almost infinite capacity for taking things for granted.” I don’t disagree, but we can break the status quo. For those who consider themselves successful, did you have access to opportunities and resources others may not have? Were you at the right place at the right time? If so, acknowledge that others may have been fighting a constant headwind or bad luck may have flipped their world upside down. November is a month I’d encourage you to be grateful and lend a helping hand to those in need.

In the World of Wealth Management, I’m Grateful For…

The Stock Market

Even though it’s been a rough year for the stock market, I’m grateful the S&P 500 is up over 475% from the lows in March of 2009. After two months of stock market losses in August and September, some were baffled when the market indexes soared in October, and the Dow Jones Industrial Average had its best month since January 1976. When things look their darkest, the stock market proves resilient almost incessantly. In fact, these are the circumstances experienced investors seek to capitalize on. On average, historical drawdowns (i.e., losses) of 25% or more have delivered returns of 27% over the next year, with longer investment periods proving even more compelling. Timing the market bottom is difficult, and I’m not calling for one, but I will confidently assert that patient, disciplined investors will be rewarded.

Next week, we will see the results of the midterm elections. If you put politics aside, some of you may be happy to learn the stock market has experienced solid returns after the midterm elections.  

Furthermore, history and polling both suggest the most likely outcome in two weeks will be a Republican win in the House of Representatives and possibly also in the Senate, leaving a divided government. The general rule of thumb, as far as the market is concerned, is that gridlock is good. It means fewer sudden policy changes and less risk to individual sectors, such as health care or energy from one party or the other's political priorities.

The stock market looks forward and rebounds before the economy, which looks backward. I’ve written the stock market rebounds when the news goes from horrible to less horrible. By the time the media shifts to a sanguine tone, the market is well off its lows, and you can’t make up for that lost performance.

A Brighter Future for Bonds

The bond market just experienced its worst year on record, but that only means we can be thankful for the prospect of higher future returns. A collapse of the bond market is a natural consequence of expansionary fiscal and monetary policies, which continued despite a blazing hot post-COVID recovery. Higher economic growth and inflation led to higher interest rates, and since interest rates and bond prices have an inverse relationship, bond prices ultimately suffered. 

But the Fed has taken unprecedented steps to control inflation, and inflation pressures are expected to wane. When the delta (i.e., the rate of growth) of inflation and economic growth is at its precipice, bondholders will reap the rewards. When interest rates peak, investors own bonds with elevated interest rates, and they will receive those higher payments until they sell or the bond matures, as long as it doesn’t default. 

The best predictor of bond returns is the yield to maturity. Today, those yields are north of 4% for 10-year Treasury Bonds compared to only around half a percent in the middle of 2020. Yes, it was a painful trip to get here, but bondholders can look forward to better days ahead. 

Tax Planning

There have been countless developments in the tax code, and the landscape has provided options for many individuals. I’m grateful for the opportunity to help my clients with tax planning as we head into the end of the year. 

And Lend a Helping Hand To…

International Markets

International economies continue to see economic challenges. Protectionism, the pandemic, geopolitical issues, and supply chain dynamics have weighed on global growth. Renewed lockdowns in China due to COVID and less market-friendly rhetoric have crushed emerging markets and halted growth. In Ukraine, exports have lowered global food prices by 15% since March. But that could change as recent escalations prompted Russia to suspend its participation in a deal that allowed Ukraine to export its grain. A move that has far-reaching implications on the global food shortage and inflation. 

Furthermore, an aggressive Federal Reserve in the U.S. has been a tailwind for the dollar, which has appreciated over 16% against a basket of currencies. Even though many international indexes have outperformed the U.S. stock market in their local currencies, most lag the U.S. stock markets when converted back to dollars. 

Going forward, depressed currency values provide a solid tailwind for growth, and lower starting valuations could galvanize outperformance over the coming years. 

The Federal Reserve

Hopefully, the market will lend the Federal Reserve a helping hand this year. We all know they could use one. The Fed is in a tough place, and it’s tough to envision a scenario where they can succeed. The Fed had to play catch up after failing to act in 2021 when inflation rates eclipsed 5%. Leaving the punchbowl out for too long allowed the economy to overheat and inflationary pressures to build. The Fed would inevitably be forced to play catch up and tighten monetary policy at an uncomfortable rate, but before the Fed could put a lid on growth, Russia invaded Ukraine, and the supply shocks rippled through the global economy. The Fed had completely lost control at this point and was forced to tighten monetary policy at a rate we haven’t seen since the Volker days in the 1980s. 

It’s tough not to feel sorry for the Fed. A large portion of the inflationary pressures cannot be controlled by the Fed as they have a limited set of tools to get the job done. In my opinion, the only way for them to control inflation is to cause a recession. And this is where the job is tricky. They must thread the needle and slow growth enough to control pricing pressures but without sending the economy into a nosedive. 

Further complicating this process, monetary policy works like water in the shower of an old hotel. Sometimes you continue to increase the temperature, only to be scalded minutes later. Fed policy operates with a lag - usually around 18 months. Given the level of monetary tightening that has taken place, should the Fed continue to tighten or wait to see if current measures will get the job done? If they tighten too much, it could be 18 months before we discover they have caused irreversible damage. If they stop and wait, inflation could spiral out of control, and it will have been one of the greatest policy mistakes of our lifetime. It appears the Fed is in a lose-lose situation.

During hiking cycles, investors underestimate increases in the Federal Funds Rate, even though the Fed has stayed true to its guidance. In the past three hiking cycles, the Fed has come within 1% of their terminal rate projection in the Dot Plot before tapping the brakes. Before the Federal Reserve hikes rates tomorrow (November 2, 2022), the Federal Funds Rate is at 3.25%, leaving room for two large rate increases before the Fed is near the 4.5% terminal rate target in the Dot Plot. It’s almost certain the Fed will announce another super-hike of 0.75% during tomorrow’s press conference from Jerome Powell. Investors will sift through Powell’s comments for signals of a softer approach. My guess is we will see a dovish pivot in December, with a smaller hike of 0.50% to get the Fed to its goal of 4.50%. Economists are predicting continued hikes in 2023 before the Fed hits the brakes, but I wouldn’t be surprised to see the Fed pause to see how the economy digests tighter monetary policy.

This Thanksgiving, economists can be thankful they are not in Jerome Powell’s shoes. 

What Happened Last Month?

Last week, we received news that the U.S. economy grew 2.6% last quarter, snapping the streak of negative GDP. Net exports provided a solid boost, and spending on services also grew, albeit at a slower pace. Meanwhile, residential investment fell at a 26.4% annual rate in the third quarter, and business spending also detracted from growth. A positive quarter is good news, but we urge clients to proceed with caution. 

It’s worth pointing out that the negative GDP readings from the first and second quarters this year were due to the inflation drag on the economy. Nominal GDP growth (i.e., GDP before subtracting inflation) continued at a solid pace. These developments show us that growth is slowing, which was inevitable after putting the economy on steroids post-pandemic, but the economy is still on a constructive trajectory. We may enter a recession in the next 12 months, but it’s untenable to assume we will see another financial crisis like the one we encountered from 2007 to 2009.

Inflation is everywhere. As prices for shelter, food, and medical care sweltered, core inflation, which excludes food and energy, accelerated to 6.6% annually, the largest 12-month increase since August 1982. Social Security beneficiaries received an 8.7% cost-of-living adjustment (COLA), the largest since 1982!

Inflation numbers were even higher in the Eurozone. Yesterday, European Union’s statistics agency said consumer prices in October were up 10.7%, the fastest rate of increase since records began in 1997. However, national records go back further, and Germany’s measure of inflation was the highest since December 1951 (WSJ).

During China’s recent 20th Party Congress, former President Hu was forcibly escorted out of the meeting in an overt power play by Xi to consolidate power and remind the people he is in charge. A concentrated rule in China presents a number of problems for the United States and other countries around the world. In itself, the move was subtle, but Xi’s evident authoritarian rule has far-reaching implications for the global supply chain, technological advancements, and continued inflation pressures. The war in Ukraine should serve as a reminder of the interconnectedness of the global economy, and threats to Taiwan could lead to similar repercussions.

New retirement plan limits were announced last month. The employee contribution limit for 401(k) and similar workplace plans will jump $2,000 to $22,500 for 2023, the largest increase ever in terms of dollars and percentage, according to benefits provider Milliman. The amount taxpayers can contribute to an individual retirement account will be $6,500 for 2023, up from $6,000. The limit hasn’t changed since 2019. The 401(k) catch-up contribution amount allowed if you are 50 or older will rise $1,000 to $7,500 for 2023. The catch-up contribution limit for individual retirement accounts, which isn’t subject to inflation adjustments, remains at $1,000.

Noble Wealth Pro Tip of the Month

New REtirement Limits

New retirement plan limits were announced last month. Make sure you take advantage of these historic increases in the savings limits. The employee contribution limit for 401(k) and similar workplace plans will jump $2,000 to $22,500 for 2023, the largest increase ever in terms of dollars and percentage, according to benefits provider Milliman. The amount taxpayers can contribute to an individual retirement account will be $6,500 for 2023, up from $6,000. The limit hasn’t changed since 2019. The 401(k) catch-up contribution amount allowed if you are 50 or older will rise $1,000 to $7,500 for 2023. The catch-up contribution limit for individual retirement accounts, which isn’t subject to inflation adjustments, remains at $1,000.

A Goal Without a Plan Is Just a Wish

Be proactive with your financial planning. I apologize for the rudimentary advice, but seemingly trivial strategies can compound future benefits, and little mistakes become significant detractors of future wealth. 

Pension or Lump Sum?

For the roughly 15% of private workers that receive a pension (US Bureau of Labor Statistics) and are near retirement, the steep rise in interest rates may present you with an opportunity to increase your benefits and retire early. Who wouldn’t want that? If you fall into this category, contact your human resources department and find out if you can use 2021’s rate assumptions for your lump sum payment. Those electing their retirement benefits may consider the lump sum option instead of the pension to capitalize on outdated interest rate assumptions used to calculate the lump sum amount. 

Fun Facts

• LET’S WAIT: Less than 1 in 5 Americans (19%) surveyed in April 2022 believe it’s a “good time” to buy a home in today’s market (Fannie Mae).

• EMBRACE TECHNOLOGY: Market automation, including automated trading, has reduced trading costs for investors by 50% over the past ten years and resulted in 30% more savings in Americans’ retirement accounts over their lifetimes. Without market automation, an investor earning $70,000 a year would have to work 2½ years longer to reach the same retirement savings goal (Modern Markets Initiative).

• IT’S NOT ALWAYS BAD: Between 2/04/1994 and 2/01/1995, the S&P 500 gained 3.0% while the Fed raised interest rates seven times. 4 of the seven rate hikes were at least 0.50%, a total increase of 3% for all seven rate hikes. That took the Fed’s target short-term rate from 3.0% to 6.0% (BTN Research).

• MAYBE, MAYBE NOT: 37 states do not tax Social Security benefits, while the other 13 states may or may not tax Social Security benefits dependent on other facts, e.g., an individual’s total income (USA Today).

• AGE OF BENCHMARKING - In 2022, 11% of Americans aged 55–59, 32% of those aged 60–64, 70% of those aged 65–69, and 83% of those aged 70–74 are retired (Gallup).

• CONSIDERING A NEW CAREER? For those considering or re-considering their career options, “nurse practitioner” is projected to experience a 45.7% growth rate in the next 9 years –the fastest employment growth of all occupations –as healthcare facilities increasingly use team-based models to provide patient care that would otherwise be provided by a doctor (U.S. Bureau of Labor Statistics).

• CLIMATE: The Inflation Reduction Act injects $369 billion over the next decade into climate and energy programs, spending that is forecasted to reduce US greenhouse gas emissions by 42% below our 2005 levels by 2030 (Senate).

• AUDITS: The Inflation Reduction Act includes $80 billion in the next decade for the IRS and is projected to result in $124 billion of new tax revenues. The money will be used to hire 87,000 new IRS employees by 2031, increase enforcement efforts, and upgrade the agency’s technology and taxpayer services (Senate).

• MEDICARE: Medicare beneficiaries will pay slightly lower Part B premiums of $164.90 in 2023 (from $170.10 in 2022) as the Centers for Medicare & Medicaid Services partly reverses the sizable increases it put in place for 2022 in an effort to build reserves for expenses related to a new Alzheimer’s drug (CMS.gov).

• COLA ADJUSTMENT: The annual increase applied to Social Security retirement benefits will be 8.7% as of 1/01/2023. The Social Security “cost-of-living” adjustment has been over 10% just twice in history: 14.3% in 1980 and 11.2% in 1981 (Department of Labor). The news is welcomed by many beneficiaries. Of those beneficiaries receiving at least half of their income from Social Security, 37% are men, and 42% are women, while 12% of men and 15% of women rely on it for 90% or more of their income (Social Security Administration).

• YOU CAN TRUST ME: A global survey found that trust in the financial services industry has increased since 2020, but only 53% of individuals trust financial advisors, and only 56% trust investment management firms (CFA Institute).

• YOU PROMISED: The “aggregate funded ratio” of state and local pension plans across America is 77.9% (i.e., the pension plans’ assets divided by the present value of the pension plans’ liabilities). Since 2001, the ratio has been as high as 95.1% (2001), as low as 62.4% (2009), and was at 84.8% in 2021 (Equable Institute).

• A BAD YEAR - The S&P 500 has ended in the green on 43.5% of the trading days so far in 2022, which is the lowest since 1974 (LPL Financial, 10/19/2022).

• FILTER OUT THE NOISE - Over the last 50 years (1972-2021), despite the near “every-other-day” volatility (53/47 split between up and down trading days) in the US stock market, the S&P 500 generated an 11.1% annual return (BTN Research).

• WORKERS NEEDED: The Social Security Administration estimates it needs a “worker-to-beneficiary” ratio of 2.8 for the system to function on a “pay-as-you-go” basis. The ratio was 3.3 in 2005 but has slipped to 2.8 in 2021 and is forecasted to be just 2.1 workers per beneficiary by 2040 (Social Security).

• BUY THE DIP? It is the worst year for buying the stock-market dip since the 1930s. Instead of rebounding after a tumble, stocks have continued to fall, burning investors who stepped in to buy shares on sale (Dow Jones Market Data, 9/26/22).

• IT WASN’T ALWAYS THIS GOOD: The average home price in the United States increased 8.1% per year for the ten years ending 5/31/2022, but that included an 18.3% increase in price for the one year ending 5/31/2022. In the previous decade, American home prices increased just 1.4% per year for the ten years ending 5/31/2012 (Federal Housing).

What We’re Enjoying

Noble Wealth co-hosted the first annual Tequila, Tacos, and Tennis event at Gates Tennis Center and it was a blast! An amazing group came to play, and the weather was terrific. Thanks to everyone who attended the event. We look forward to seeing you again next year🎾

Enjoy the rest of your month!