January 10, 2023
Dear Valued Client:
Enclosed are your reports and spreadsheets for the period ending December 31, 2022. This package also includes a 2023 outlook from American Funds, information on Medicare, a piece on the Municipal bond market, and “From the Desk Of” pieces by Marianne Brown CPA, Anthony Sandomierski CPA,CFP®, and Jason Gordon CPA,CFP® on tax changes that you may be able to benefit from.
Market Recap – Year to Date and Outlook
The year 2022 was the most difficult year for investors since the Global Financial Crisis of 2008. This was caused by multi-decade highs in inflation combined with very aggressive Fed rate hikes. Additionally, there were growing concerns about economic and earnings recessions.
The S&P 500 index (-18.1%), the Nasdaq index (-32.3%), MSCI Foreign Developed Index (-14.0%), and even the BBgBarc Municipal Index (-8.5%) all had declines.
We want to mention how we navigated this market with respect to you in the last year. We monitored ALL client portfolios to try to make sure that clients in retirement were taking no more than the interest, dividends, or benefits provided by their accounts. By using this strategy clients were not digging into principle to maintain their retirement nest egg. While portfolios were all down, income generated was little changed or even increased. This strategy is critical for defending yourself in the inevitable bear markets we experience. If you are not sure of how this works for you, you are strongly encouraged to contact our office.
We believe that our clients were able to get through the financial storm of 2022. Virtually all clients outperformed the major equity indexes mentioned above. We were over-weight value stocks vs. growth stocks and that proved to be correct. We also tactically re-balanced portfolios at excellent times such as the end of the third quarter. Our clients are well positioned to benefit from the next recovery.
The question then becomes “Where do we go from here?” We believe the market is heading towards an important transition that could see these challenges ease in the months ahead. Let me explain further below.
Inflation is showing definite signs of peaking and declining. Statistics can be deceiving. For example, year over year inflation is calculated between 7% to 9%. Over the past six months, however, inflation has been running at a rate of between 2% to 3%. This is measured by using either the Consumer Price Index or Personal Consumption Expenditure Index. This is a significant improvement. Remember that I have mentioned that I felt there would be increases in the supply chain when China ended their “Zero Covid-19” policy. They have ended it!
The Federal Reserve is probably towards the end of its aggressive rate hiking campaign. The next move will probably be another 50 basis points increase and then the hikes will be more “data dependent”.
Economic growth and corporate earnings are expected to decline in 2023 and those negative expectations have largely been “priced into” the market. If the economy and corporate America proves more resilient than forecast, it could provide for a positive spark on asset markets in the coming year.
I am a student of history as it is both interesting and something you can learn from. Declines of the magnitude we saw in 2022 are usually followed by strong recoveries, not further weakness. Stocks have not had two consecutive years of losses since 2002. The reality is that severe market declines such as what we had witnessed in 2022 have ultimately yielded substantial long-term opportunities in both stocks and bonds.
The headwinds over the economy/stock market include well known geo-political issues such as Ukraine/Russia, North Korea, and Iran. I am concerned the Fed Chairman Powell seems more focused on labor statistics than inflation statistics. Finally, I am concerned that if the Fed stays too aggressive, the recession will be deeper and thus earnings/stocks would decline. Since we now have divided government, it is unlikely that there will be major changes in fiscal policy.
The bottom line is that you should stay the course that we have set together. Pullbacks on the S&P500 to the 3,650 level or so would be good buying opportunities in our judgement. For now, we believe the market is “fairly valued”.
We are comfortable where the portfolios are at and welcome the chance to update you on your personal situation whenever it is convenient for you.
Wealth Management Issues
Most clients are now using our on-line portal and you get your information much faster. Now it is time to take that to the next level. I will be asking our staff to check that all clients have been asked to download important information that can be needed at critical times. In my own personal situation, here is some of what I have put in the portal:
- Wills, Durable Power of Attorney, Advance Health Directive
- Business Continuation Plan and Legal Documents
- Insurance Schedule
- Real Estate Information (closing statement, deed, insurance, cost basis)
- Spreadsheets with asset values and cash flow
It is CRITICAL that your loved ones know where your important information is. I ask you to contact our office to help you with these items.
Clients that are still working can check with our team to see if your 401k plan is properly balanced. Clients near retirement should check with our office to see be sure your plan is truly “buttoned up” so you can enjoy the next chapter!
Wealth Management Issues – Office Updates
We want to thank you once again for your business. When the year 2022 ended, the accounts we manage were only 3% less that what they were at the start of the year even though the S&P500 went down over 18%. I consider that a “WIN”.
Thank you for the new clients you have sent to us. The kind notes you send us over the year are truly gratifying to our entire team.
The focus of our business continues to be to focus on YOU!!!! It is our belief that if we focus on our clients, all good things will happen. It has worked that way for over 30 years.
If you would like to schedule an update meeting, please contact our office.
Jack D. Oujo, CPA/PFS, CFP®, CSA, MS Taxation
Certified Senior Advisor
- Investment Recommendation Disclosure: The client acknowledges that the representative is relying upon the client information (e.g. risk tolerance, time horizon, and investment objective) for the purposes of providing recommendations to the client. The client agrees to give the representative notice of any significant changes in the client information and to provide the representative with any additional information that the advisor may reasonably request.
- Historical Performance Disclosure: Past performance is not indicative of future results. The investment return and principal value will fluctuate with the market. Investor’s shares when redeemed may be more or less than their original cost.
- General Market/Investment Risk Disclosure: Investments are subject to market risks including the potential loss of principal invested. Yields and prices will fluctuate along with the market and other economic conditions. Securities may be worth less than the original cost when redeemed.
- Information Disclosure: The information contained herein has been obtained from sources considered to be reliable, but Avantax does not guarantee the accuracy or completeness of any statement.
- A portion of municipal bond’s income may be subject to state or local taxes. A portion of a municipal bond’s income may be subject to the federal alternative minimum tax. Investing in municipal securities can be volatile and include such risks as: adverse tax or court rulings, legislative or political changes, market and economic conditions, issuer, industry-specific (including the credit quality of municipal insurers), and other conditions.
- The Avantax affiliated companies exclusively provide financial products and services, and do not provide or supervise tax or accounting services. Advisors may provide tax, accounting or other services through their independent outside businesses, but these services are separate and apart from Avantax.
- Standard & Poor’s is a corporation that rates stocks and corporate and municipal bonds according to risk profiles. The S&P 500 is an index of 500 major, large-cap U.S. corporations. You cannot invest directly in an index
- Asset allocation does not assure or guarantee better performance and cannot eliminate the risk of investment losses.
- Dollar-cost averaging does not assure a profit and does not protect against loss in declining markets. Such a plan involves continuous investment in securities regardless of the fluctuation of price levels of such securities. An investor should consider his or her financial ability to continue his or her purchases through periods of low price levels.
(*) Performance and Data numbers are per Morningstar and Earnings Estimates are per Bob Brinker. Client spreadsheets are normally sent four times per year to clients with over $750,000 of investment assets and twice per year for clients at the $500,000 to $749,999 level.
** Represents brokerage, direct to fund and annuity assets under management as of 6/30/2019