Robert Krueger

Alexander Randolph Advisory Inc.

8200 Greensboro Drive, Suite 1125

McLean, VA 22102

703.734.1507

www.alexanderrandolph.com

January 2023
Market Update
(all values as of 04.30.2024)

Stock Indices:

Dow Jones 37,815
S&P 500 5,035
Nasdaq 15,657

Bond Sector Yields:

2 Yr Treasury 5.04%
10 Yr Treasury 4.69%
10 Yr Municipal 2.80%
High Yield 7.99%

YTD Market Returns:

Dow Jones 0.34%
S&P 500 5.57%
Nasdaq 4.31%
MSCI-EAFE 1.98%
MSCI-Europe 2.05%
MSCI-Pacific 1.82%
MSCI-Emg Mkt 2.17%
 
US Agg Bond 0.50%
US Corp Bond 0.56%
US Gov’t Bond 0.48%

Commodity Prices:

Gold 2,297
Silver 26.58
Oil (WTI) 81.13

Currencies:

Dollar / Euro 1.07
Dollar / Pound 1.25
Yen / Dollar 156.66
Canadian /Dollar 0.79
 

Macroeconomic Overview

Markets reacted to indications that the Fed might slow the pace of rate increases heading into the new year. Such a change in monetary policy would be positively received by financial markets with the anticipation of eventual lower rates.

The supply chain constraints that existed this same time last year, have nearly been entirely eliminated. Production, shipping, labor, and material shortage issues were critical concerns during the height of the constraints. The alleviation of supply constraints has led to deep discounts by retailers which were widespread as retailers mark down prices on numerous items heading into the holiday season. Lower prices tend to dampen retail stock margins yet allow stores to reduce inventory and bring in consumer traffic.

A weaker U.S. dollar helped U.S. multinationals trim currency constraints as well as offered U.S. exporters to become more competitive globally. International equity markets reacted positively to the lower U.S. dollar, outperforming U.S. equities in November. The Federal Reserve’s most recent survey of economic activity nationwide, known as the Beige Book, revealed weakening economic growth, tighter bank lending standards, and easing inflation. Slowing wage growth has also become more apparent as some companies announce layoffs and trim positions. Some analysts view these dynamics as deflationary as well as indicative of an ensuing economic slowdown.

A closely followed inflation indicator by the Fed, the Personal Consumer Expenditure Price Index (PCE), has been falling consistently since June. Data released by the BEA revealed a drop from 7 in June to 6 in October, signaling a drop in overall prices and inflation.

Recession fears continued to hinder markets from additional expansion, with growing concerns surrounding the labor market. John Williams, Federal Reserve President from the New York district, said that unemployment could reach 5% in 2023, up from 3.7% this past month. Regardless, the Fed’s primary objective of stamping out inflation remains key, meaning any further rate increases could slow hiring and raise unemployment even more.

Yields on U.S. Treasury bonds fell modestly in November, a vital benchmark for mortgage and consumer loan rates. The 10 Year Treasury bond yield fell to 3.68% in November, down from 4.10% at the end of October. Lower yields tend to offer a reprieve for consumers and businesses nationwide.

Sources: U.S. Department of the Treasury, U.S. Federal Reserve Bank of New York, U.S. Bureau of Economic Analysis, U.S. Federal Reserve Bank of St. Louis

 

Short Term Rates Remain Higher Than Long Term Rates – Fixed Income

40-year highs in inflation and Federal Reserve rate hikes played havoc on bonds throughout 2022, sending short and long terms rates to levels not seen in years. Short-term rates remained higher than long-term rates at the end of 2022, indicating a continued inverted yield curve.

The 10-year Treasury note yield started 2022 at 1.52%, peaked at 4.25% on October 24th, and closed the year at 3.88%. The three-month Treasury bill rate, thanks to the Fed’s continuous increase of short-term interest rates to alleviate inflationary pressures, started the year at 0.06% and closed the year at 4.42%.

Sources: Federal Reserve, U.S. Department of the Treasury

Volatility Challenges Equities in 2022 – Equity Markets

Volatility in the global equity markets led to increased uncertainty surrounding growth and earnings expansion for companies. Inflationary pressures and higher labor costs weighed on stocks, with only two sectors of the S&P 500, energy and utilities, posting gains for the year. The consumer discretionary, real estate, communications, and technology sectors underperformed the most for the year.

Corporate earnings forecasts remain a focal point as companies increasingly struggle with tighter margins and a slowing economic environment. Optimistically, the challenges of the post-pandemic supply constraints have eased significantly.

Sources: S&P, Bloomberg, New York Stock Exchange

Tax Changes For 2023 – Tax Planning

In 2022, inflation eclipsed 9% and reached 40-year highs as food and gasoline prices exhibited continuous spikes. Many consumers reported consistently feeling that their paychecks did not go as far as they used to, to which the Internal Revenue Service (IRS) has responded by implementing key changes for the tax year 2023. In 2023, inflation adjustments look to match the burdens created by inflation and the decrease in real wages exhibited in 2022.

For marginal income taxes, all rates remain the same but now higher income amounts are taxed at lower levels. For example, while the top tax rate is still 37%, it applies to any individual income greater than $578,125 rather than the previous threshold of $539,900. With all income tax brackets lifted higher, every taxpayer is expected to save money by paying less on each bracket of income they earn in 2023 versus 2022.

Standard deductions have increased to $27,700 for married couples in 2023, up $1,800 from 2022. The annual gift tax exclusion is up to $17,000, with 2023 being the first year the exclusion will rise only one year after it was previously increased since the exclusions inception in 1997. Itemized deductions continue to have no limitation since 2018, and the estate tax exclusion amount for 2023 will be $12,920,000, nearly $900,000 greater than in 2022.

Taxes reflecting these changes will be filed in early 2024, yet will apply for the tax year 2023.

Sources: Internal Revenue Service

 

 

 

Gas Prices Fall to an 18-Month Low – Oil Industry Update

Average gasoline prices have officially reached an 18-month low after extraordinary prices in 2022. The average price per gallon of regular gasoline across the U.S. stood at $3.09 at the end of 2022, which was last seen over 18 months ago in June of 2021.

In 2022, several international factors including supply limitations due to the war in Ukraine led to abnormally high fuel costs for consumers. The average price per gallon across the nation eclipsed $4 for 22 weeks in a row and surpassed $5 in June of 2022. Gasoline became a financial burden for many consumers throughout 2022, compounding already higher prices for other essential items.

Sources: U.S. Energy Information Administration, Federal Reserve Bank of St. Louis

 

 

OPEC Decides to Cut Oil Production – Oil Industry Overview

The Organization of the Petroleum Exporting Countries (OPEC) is a group of nations that are the world’s major oil producers, producing more than half of the world’s crude oil. OPEC has recently announced its largest cut to its production of oil since April 2020, dropping daily production by 2 million barrels. This decision is likely to raise gas prices for consumers across the globe and increases tension in already strenuous relations between Saudi Arabia and the United States.

Saudi Arabia, the de facto leader of OPEC, will voluntarily cut production while other OPEC members like Iraq may not be able to afford lower production levels. While Saudi Arabia denied that the production cut would harm Saudi-U.S. relations, U.S. officials see it as an act of aggression that may force a reconsideration of the already tense relations. U.S. officials also claim this to be Saudi Arabia siding with Russia, which has lost daily production of upwards of 1 million barrels per day due to its war with Ukraine. OPEC’s production cut could undermine the efforts of Western countries to move away from Russian oil.

Sources: Wall Street Journal, U.S. Energy Information Administration, Macrotrends, Organization of the Petroleum Exporting Countries, Federal Reserve Bank of St. Louis

 

 

 

High Mortgage Rates Scare Away Potential Homebuyers – Housing Market Review

Mortgage rates eclipsed 7% in late October 2022, their highest in over 20 years. This has discouraged countless potential buyers from purchasing a home and instead resorting to renting or staying where they currently live. Extremely high rates are discouraging enough that the probability of individuals changing their primary residence in the next year has fallen to a record low.

A survey conducted by the Federal Reserve Bank of New York highlights this fall in consumers’ likelihood of moving homes. In March 2019, nearly 22% of people were likely to change their primary residence over the next year, which coincided with a strong faith in the economy and low mortgage rates of around 4%. However, as the pandemic disrupted this faith and a recessionary environment settled in late 2022, now only 14% of households are expected to change households over the next year.

The Fed continues to debate whether to continue increasing interest rates, which have a tremendous effect on mortgage rates, yet now has a plethora of other factors to weigh in. Housing prices saw their first fall in over 10 years in 2022, as fewer buyers wish to pay mortgages at increasingly high rates. Lower spending rates in the housing market could also hint toward a grim economic outlook for 2023.

Sources: Federal Reserve of New York, Rosenberg Research, U.S Census Bureau, Freddie Mac, Federal Reserve Bank of St. Louis

Highlights From The SECURE Act 2.0 – Retirement Planning

In response to an aging American population, a bipartisan retirement measure passing through Congress looks to assist Americans nearing retirement in the next decade. The measure, titled Secure Act 2.0, builds upon previous changes to retirement policies in 2019 and makes saving for retirement easier.

A major highlight of the Secure Act 2.0 is to increase the age at which required minimum distributions (RMDs) begin, allowing workers and retirees to leave funds in retirement accounts for longer, thus pushing off additional tax liability. In 2019, the RMD age was raised from 70½ years of age to 72. Now, the Secure Act 2.0 raises it to 73 beginning in 2023 and to 75 in 2033. These gradual changes are expected to accommodate and assist an incoming wave of baby boomers nearing retirement. With a few extra years before RMDs kick in, older workers have greater incentives to continue saving for retirement.

Company-sponsored retirement plans will require automatic enrollments into 401(k) and 403(b) plans, whereas it is currently only optional for employers to do so. In these plans, employers must also set up a contribution rate between 3% and 10%, plus an automatic contribution increase of 1% annually until a range of 10% to 15% is met. This provision will go into effect beginning December 31, 2024.

Another key change introduced by the Secure Act 2.0 will be allowing employer contributions for student loan payments. This would allow employers to match contributions to employee retirement plans based on student loan payments, easing the journey of saving for retirement. In the case of an emergency, Secure Act 2.0 also allows for a penalty-free withdrawal of up to $1,000 a year versus a previous 10% early-withdrawal penalty for withdrawals made under the age of 59½. Secure Act 2.0 also raises the ceilings on catch-up payments made past the age of 50, with an emphasis on payments made between the ages of 60 and 63.

In summary, the bill will allow for soon-to-be retirees to save more easily and for a longer period than before, reflecting a growing, older population and expanding retirement postponements.

Sources: U.S. Congress; Internal Revenue Service

Market Returns: All data is indicative of total return which includes capital gain/loss and reinvested dividends for noted period. Index data sources; MSCI, DJ-UBSCI, WTI, IDC, S&P. The information provided is believed to be reliable, but its accuracy or completeness is not warranted. This material is not intended as an offer or solicitation for the purchase or sale of any stock, bond, mutual fund, or any other financial instrument. The views and strategies discussed herein may not be appropriate and/or suitable for all investors. This material is meant solely for informational purposes, and is not intended to suffice as any type of accounting, legal, tax, or estate planning advice. Any and all forecasts mentioned are for illustrative purposes only and should not be interpreted as investment recommendations.