Year End Planning

The holidays are a busy time of year. Shopping, family events, holiday parties and more may dot your calendar. But we strongly suggest that you carve out some time for year-end financial planning so that you will be better positioned as the New Year begins.

5 smart planning moves for year-end:

1. Harvest your losses and reduce your income taxes.  You have until December 31 to harvest any tax losses and/or offset any capital gains.
2. It’s time to take your RMD. If you are 72 years or older, an annual required minimum distribution (RMD) is required from most retirement accounts.
3. Maximize retirement contributions.
4. Consider a conversion of your traditional IRA to a Roth IRA.
5. Charitable giving. Whether it is cash, stocks or bonds, you can donate to your favorite charity by December 31, potentially offsetting any income. Consider a “qualified charitable distribution” (QCD) if you are 70½ or older? A QCD is an otherwise taxable distribution from an IRA or inherited IRA that is paid directly from the IRA to a qualified charity. It may be especially advantageous if you do not itemize deductions.

Three common questions investors are asking:

How do the midterm elections impact the outlook for markets and the economy?

Markets often rally after elections, and the 2022 midterms were no exception with markets up 5.9% during election week. In the future, market prognosticators will point to this as another data point confirming the pattern of post-election rallies.

However, the rally likely had less to do with the midterms and more to do with a softer Consumer Price Index (CPI) print that offered hope that the data-dependent Federal Reserve may not have to increase rates as high as investors thought. Historically, Q4 returns during midterm election years have been strong, averaging 7% over the last 80 years, and overwhelmingly positive. However, there are two notable recent exceptions to this. Negative returns in Q4 of 2018 and 1994 likely had more to do with the Fed hiking rates than the midterms, which could very well be the case this year depending on incoming data and how the Fed responds.

Over the next two years, a divided government should lead to political gridlock which has historically been positive for the markets.  Politics will always be a source of uncertainty for markets, but its policy, not politics, that is more influential for the economy and markets in the long run. Policy is likely to play a considerably smaller role under divided government, reducing its impact to markets over the next two years.

Is this a Bear Market rally?

Markets picked up steam recently, anticipating that the Federal Reserve (Fed) could follow the 75 bps rate hike in November with a smaller 50 bps rate increase in December. Markets have been rallying since mid-October, up nearly 17% since the mid-month low. But is this just another bear market rally?

Although the S&P 500 only fell into bear market territory in June, it has been steadily declining since its January peak. Yet, since then, it has experienced seven bear-market rallies. What has precipitated these rallies? We’ve seen optimism on economic growth, hopes of softer inflation and an easier Fed, and “less bad than feared” earnings. Sound familiar? We have been here before.

Although the Fed is likely eyeing an exit strategy to decelerate and then pause rate hikes, inflation and jobs data has continued to firm.  The next CPI release will be on Dec. 13 at 8:30 am and the markets will be highly sensitive to this incoming data.

What has continued to reverse these rallies throughout the year has been higher expectations of the ceiling on the federal funds rate. Therefore, irrespective of what happens in the December Federal Reserve meetings, we may not see a sustained bull market until the federal funds rate plateaus. Yet, bear market rallies can still provide solid returns— the seven bear-market rallies this year have returned over 8% on average (Date from JP Morgan Asset Management). While this may not be the exact moment to add to equities, staying invested can help portfolios recover in the long run.

What should I do with my fixed income portfolio?

The hallmark of core bonds is their diversification benefits and lower volatility to risk assets, which make them an important ballast in portfolios. However, with bonds down double digits this year (Barclays Aggregate Bond Index), investors are struggling with their fixed income allocations.

The silver lining of the Federal Reserve rate hikes is fixed income investors, for the first time in over 10 years, can earn higher rates on their portfolios.  One year treasuries are yielding nearly 4.8% as of this writing.  High quality 5-year fixed annuities are yielding north of 5.15% for the first time in over a decade.  Investment grade corporate bonds are now yielding an attractive 6% as well.  As an investor, this may be an appropriate alternative for the next year or two as the probability of recession has risen with the Fed’s fight against inflation.

We have been very active helping our clients in this arena.  If you have any questions, please don’t hesitate to reach out to our team about this topic.

December 2022