2023 Investment Insights

The biggest surprise so far in 2023 has been a renewed interest from retail investors in cryptocurrencies and technology stocks. In 2022, retail investors got hit hard after the enormous equity gains in 2021. The one unexpected consequence of the lockdown in 2020 was a surge in interest in the stock market among individual investors. Many people who were stuck at home with extra time on their hands turned to the stock market as a way to make money or pass the time. Online brokerages such as Robinhood made it easier than ever for novice investors to buy and sell stocks, and social media platforms like Reddit and Twitter created communities of amateur traders who shared information and encouraged each other to buy certain stocks.

Many investors, including myself, saw the drop in stock prices in 2020 as an opportunity to buy stocks at a discount and potentially profit as the economy recovered from recession. Now, as you fast forward to today, investors are buying stocks to profit from a recession that hasn’t even happened yet!  It’s important to note that this does create a potential situation that many stocks may become overvalued if the downturn hits corporate profits. This is why I believe there will be a cloud of uncertainty around stocks as the economy slows. The other surprise is the housing market will also not break because there is an expectation that rates will fall in the next year, and housing, as we all know, is one of the best inflation hedges. The Fed has placed so much emphasis on inflation reports and job reports that has helped to create a volatile stock market that is favored by retail traders firing in and out of the market.

Wall Street and Main Street can become disconnected for several reasons. One reason is that the financial markets are forward-looking, meaning that they are always trying to anticipate what will happen in the future. Main Street, on the other hand, is focused on the present and the immediate impact of the economy on their daily lives. As a result, there may be a time lag between what is happening on Wall Street and what is happening on Main Street. Another reason why Wall Street and Main Street get disconnected is that Wall Street is more focused on corporate profits and stock prices, while Main Street is more focused on jobs, wages, and the cost of living. The financial markets can continue to rise even if the economy is not doing well because companies are cutting costs and boosting profits. This can result in a scenario where the stock market is performing well, but people on Main Street are struggling to make ends meet.

The one sector that is not disconnected from reality is in retail. Over the last two weeks, two of the largest home improvement retailers, Home Depot and Lowe’s, warned of softness in the market in recent earnings reports, indicating the year ahead is likely to be a difficult one as inflation weighs on consumers. Walmart had a strong holiday shopping season, but the year ahead will be more challenging for America’s largest retailer. Last week, Walmart forecast slower sales and profit growth, disappointing investors. “The consumer is still very pressured,” Walmart CFO John Rainey told CNBC. “And if you look at economic indicators, balance sheets are running thinner and savings rates are declining relative to previous periods. And so that’s why we take a pretty cautious outlook on the rest of the year.” Target warned that the company continues to operate in “a very challenging environment.” Shares of Target fell sharply as the retail giant flagged a slowdown in spending among its shoppers. “I think there is a recession in consumer electronics,” said Neil Saunders, managing director for analytics firm GlobalData’s retail division. “The spend is down quite consistently, and it’s also down pre-pandemic. It is a sign of wider trends.” Best Buy’s sales sank the entire year as consumers shifted their spending to other purchases, such as travel and entertainment, after stocking up on home electronics during the height of the pandemic.

Despite these challenges, there are still reasons to invest in the stock market. The market may be a bit detached from reality due to inflation and the influx of money from retail investors, but this also presents opportunities for investors. The stock market historically performs well during periods of inflation. Additionally, many companies are still performing well, and there are still growth opportunities.

Going forward, I expect that many households that are not in a strong financial position delay major purchases such as a car or a home until those households feel more financially secure. Additionally, during a recession, people may also shift their focus to paying off debt and building up their savings. They may be more cautious about taking on debt, such as credit cards or loans, and may focus on paying off existing debt. This can impact the economy because it can slow down the velocity of money, as people are not spending as much. The great news is that those people who have saved can now earn over 4.50% on cash, and the stock market is presenting some decent pricing. As I’ve warned in the past, if rates overshoot well over 5%, I expect that the economy would be pushed to its limits.

Overall, I remain positive on the stock market as well as bonds and believe that this market environment is much more favorable than last year. I expect the retail traders to keep this market range-bound with higher elevated volatility. As always, I’ve maintained a diversified portfolio and have a long-term outlook for most of the investments that you own.

This has been the second consecutive week of rising interest rates. The swing back down has been particularly fast in the bond market, where U.S. Treasuries have reversed almost all of the early-year rally. This has sent the 10-year Treasury yield back to around where it finished last year, approaching 3.82%. Stocks have kept more of the gains this year because last year finished on such a down note from all the tax loss selling, especially in all the technology stocks that blew up in 2022. Almost all the market gains this year are attributed to the worst performing stocks in 2022. 

There are now more concerns about a more aggressive Federal Reserve. Cleveland Fed President Loretta Mester said that she sees a compelling case for rolling out another 50 basis point hike, and the US central bank has to be prepared to move interest rates higher if inflation remains stubbornly high. This sentiment has been reinforced by the two inflation reports released this week, which have shown that inflation remains high. Investors now believe that the Federal Reserve will be required to battle inflation for a more extended period than anticipated.

The US government debt and consumer debt are both at record highs, and this has significant implications for the economy. Higher interest rates would increase borrowing costs, making it even more challenging for families. The last quarter of 2022 saw credit card balances reach a record high of $986 billion, and the share of credit card users making payments that were at least 30 days late, also known as early delinquencies, rose last quarter. The US government debt has been increasing steadily over the past few years, from $28.4 trillion to $31.5 trillion. If interest rates continue to increase, borrowing costs would rise, making it more difficult for individuals and the government to service debts. For consumers, higher interest rates would mean more expensive credit card debt, car loans, and mortgages. This would result in less disposable income, lower consumer spending, and a potential slowdown in economic growth. For the government, higher interest rates would increase the cost of servicing its debt, which would mean higher taxes, reduced government spending, or both. This could lead to slower economic growth and reduced services for citizens. This is why I believe these higher interest rates will begin to fall in about a year. 

On a positive note, economists predict that inflation will slow to 3.1% by year-end. These weekly and monthly economic releases have created a toxic environment for day traders. On the other hand, markets must seem calmer if you only glance at market levels occasionally. There hasn’t been much market appreciation over the last 18 months and any major losses for long-term investors have been in the bond market. 

The risk continues to be that the stocks are becoming more pricey when compared to cheaper bonds as interest rates move to over 5%. I’ve been consistent in my belief that if the Fed moves rates beyond 5%, they will place major stress on the economy. You can only control so much in the economy, and it would be nice if the Fed realized that rising interest rates to these levels is like taking a sledgehammer to the economy. You can put me in the camp that it’s time for the Fed to let the markets figure this one out and step out of the way.  

This week saw some exciting developments in the tech industry, as Microsoft unveiled a new version of Bing powered by ChatGPT. The demo received a positive reception, and over 1 million people joined the waitlist for the new search engine within the first 48 hours of signups being open. This new development highlights the growing trend towards conversational AI, and the role it will play in the future of technology. I believe that the AI story has only begun and it will live up to the hype, especially compared to the new innovations that haven’t worked out such as the metaverse, NFT’s, cryptocurrency, and blockchain.  

The company with the most to potentially lose is Alphabet, the parent company of Google, because it already has a monopoly on search. They can only lose market share. They suffered a blow after its new artificial intelligence technology, Bard, made a factual error in an ad demo. This reception has raised concerns about the risks posed by AI technology, including the spread of misinformation, biased answers, and increased plagiarism. While AI bots are often seen as all-knowing machines, they can frequently state incorrect information as fact due to their design to fill in gaps.

In market news, the tech industry has been facing challenges due to the ongoing wave of mass layoffs. Tech companies have laid off nearly 95,000 workers since the start of the year. If this trend continues, the industry could potentially cut more than 900,000 jobs in 2023. The impact of these layoffs has been felt not only in the tech sector, but also in other economic bellwethers, such as industrial company 3M and material company Dow, who have also announced cuts.

Disney announced plans to cut about 4% or 7,000 of its workforce on Wednesday, and on Monday, Dell said it would be eliminating about 5% of its workforce in a regulatory filing. The memo sent to employees, posted on Dell’s website, cited “market conditions continue to erode with an uncertain future.” In addition to layoffs, companies are also looking at cost-cutting measures, such as flattening their organizational structures and reducing middle management. FedEx informed its employees that it plans to slash more than 10% of its managers to reduce costs, while Meta is asking some managers and directors to move to different roles or leave the company.

The rise in interest rates is having the biggest impact on the tech industry because it is more reliant on outside funding than other industries. I’ve heard the same messages in most of these layoff announcements that revenue accelerated through the pandemic because of people working from home, and too many people were hired leading into this economic downturn we’re now facing. Another reason is many consumers stopped buying electronics after they depleted their stimulus money. There was also the crypto implosion and massive FTX fraud. This time last year almost every Super Bowl commercial was a crypto ad and now we know some of those ads were likely paid for with customer deposits.  

Companies are facing headwinds as they strive to adapt to the current economic environment. Despite positive economic news, the stock market remains volatile and unpredictable. One key factor affecting the market is employment numbers. If employment numbers come in lower than expected, it could have a positive impact on stocks as the Fed would likely respond by lowering interest rates, which would boost market returns. However, the biggest risk to market growth remains an unexpected increase in inflation. Such a reacceleration of inflation can lead to higher interest rates, which would cause much more market volatility. This is unlikely to happen, but I don’t place much confidence in these government reports. They are always being revised months later and the government is constantly changing how they are calculated. 

As always, I’ll continue to have a long-term outlook when navigating these markets and making investment decisions. While short-term trends and changes may cause some fluctuations, it’s important to focus on the bigger picture and not let temporary events because the market narrative can change overnight. There has been so much negative news in the tech industry with all of the layoff announcement, but there has never been a time with so many advancements and innovations in the tech industry. I believe that AI is here to stay and this new technology will fuel future investment returns. 

This week the Federal Reserve raised interest rates to 4.75%. Chairman Powell hinted that the central bank still expected to raise rates to just above 5 percent and then leave them there throughout 2023. “We’re talking about a couple more rate hikes to get to that level we think is appropriately restrictive,” he said. He later added that he did not expect to cut rates this year if the economy performed as expected.  Even though higher interest rates has slowed corporate earnings, the economy remains robust. On Friday the jobs report blew out expectation adding around 517k jobs, which exceeded the expectations of 187k new jobs. The services industry continues to thrive, making up the largest and fastest-growing sector and playing a crucial role in employment and economic growth. 

After the tough year last year, people are starting to see returns on their money. This has been one of the best investment environments for both low and high-risk investments. The risk-free rate is nearing 5% and technology stocks have had a great start to the year. Value stocks which outperformed last year have lagged this year as all the new money is rotating into tech stocks. The earning reports from technology companies have been mixed and there is not much revenue growth in many tech companies. Google, Microsoft, Apple, and Amazon all missed earning expectations but the stock prices have risen this year because of cost cutting and buybacks. 

The recent increase in interest rates and high inflation has had a mixed impact on the economy and financial markets. On one hand, the rise in interest rates has been good news for retirees and other fixed-income investors who have been able to earn higher returns on their investments in bonds and other fixed-income securities. However, the same increase in interest rates and inflation that has been beneficial for these fixed-income investors has also had a negative impact. The pace of inflation has also been eroding the purchasing power of many individuals, especially retirees on fixed budgets.  The rise in interest rates and inflation will eventually have a negative impact on the economy as a whole. As interest rates increase, it is becoming more expensive for businesses to borrow money and invest in new projects. This will eventually slow down economic growth and lead to a decline in business investment and lower job creation. 

Given these competing forces, it is important for the Fed to carefully consider the impact of interest rates and inflation on the economy. The Federal Reserve, for example, has a dual mandate of promoting both price stability and full employment. As interest rates and inflation rise, it becomes more challenging for the Fed to achieve both goals at the same time. The Fed will need to continue to closely monitor these trends and make adjustments as necessary to maintain economic stability and support job growth. So far it looks as though the Fed will pull off a soft landing, which is lowering inflation without causing a deep downturn. It seems the risk at the moment is too much economic strength which increases demand and keeps prices high.  

Investors will continue to monitor the next move by Chairman Powell and the Fed. The challenge going forward for the Fed is they have limited control over long term rates. The yield on the 10-year bond rate is around 3.50% and the short end of the curve, which is controlled by the Fed is headed to 5%. This is great time for generating income because of these higher short term interest, but with the long bonds at such low rates it is will make the Feds job of stopping inflation that much more difficult. The long rates are having more of an impact on the economy than the short term rates. The higher inflation is causing a slowdown in certain parts of the economy and has taken a toll on some families. 

According to The WSJ, a record 2.8% of the five million people in 401(k) plans managed by Vanguard Group had to tap into their retirement savings in 2022 to cope with hardships such as medical bills, evictions, or foreclosures. This is up from 2.1% in 2021 and a pre-pandemic average of about 2%. Hopefully, the best economic scenario plays out this year which is falling inflation, weaker economic growth, and a strong job market. This should help to ease some of the hardships experienced last year and allow the Fed to normalize interest rates going forward. 

I just finished watching the Netflix series “Eat the Rich: The GameStop Saga”. This series portrayed the story of how a group of millennial misfits banded together online to rescue their beloved GameStop from the clutches of Wall Street hedge funds. The series explained the inner-workings of what triggered the meme craze, but missed that there were other hedge funds and traders from different age groups who also jumped in late on the short squeeze on platforms such as Interactive Brokers, Schwab, TD, and Fidelity. GameStop was the most actively traded stock on all these platforms. The losses for those who missed the first week of the craze were staggering, and despite congressional hearings, the government has not yet fixed the underlying flaw in financial markets.

The Wall Street Journal recently noted that Tesla has become one of the hottest stock-option trades on Wall Street. Tesla options trading accounts for roughly 7% of all options trading on an average day, and nearly three million contracts change hands on an average day according to Cboe Global Markets data. This is up from 1.5 million a year ago and more than any other stock, with the exception of wagers on the SPDR S&P 500 ETF. The WSJ wrote that many of the biggest options bets on Tesla are lottery-ticket trades requiring statistically improbable moves to pay out. For instance, the most popular bet is for Tesla shares to double within 12 months from their previous record high of $409.97. That would require a more than fivefold surge from Thursday’s close of $160.27.

I believe this article was the spark that caused Tesla to jump 10% on Friday. The volume almost doubled, and the number of options traded was insane. It led to a massive short covering rally in all the most heavily shorted stocks. Even GameStop was up 15% at one point, and there were a dozen or so stocks up over 10%. The ETF that captures all the mostly widely shorted stocks, the ARKK ETF, was up over 5% for the day. The rally this year is in the companies that were down the most in 2022. The ARKK ETF finished down -66% last year, and the bear market math that I wrote in prior posts is at play. A $100k investment at the start of 2022 would have finished the year at $34k, and after a massive 29% rally this year, the investment would only be $44k. The flaw in this market is that weekly options are now traded like fantasy football DraftKings lineups. The last hour on Friday is usually the time when markets will see the biggest moves when all the contracts are closed out, and profits are taken. It’s impossible to know when this short squeeze will end. The GameStop short squeeze only ended when all the brokerage firms illegally banned together and wouldn’t allow investors to buy.

The weekly options are now more popular than trading stocks. The statistics prove that 90% of people lose money trading options, but the short-term gains can be enormous. In one of the worst years on record last year, Citadel was the most successful hedge fund ever after it made $16 billion, the biggest annual windfall on record. They are the market makers for all the day traders, and they will ultimately be the biggest winners making money off all the retail traders. Since the flaw in the market was never fixed, there is a good chance that GameStock or another heavily shorted stock breaks the back of the shorts. The short sellers betting against the market last year were not expecting the worst stocks that were left for dead with the largest losses to jump over 50% in price to start the year.

High-frequency computers that fix prices seem to be programmed differently than last year. For example, Microsoft reported and missed both earnings and revenue, but the stock went up 8%. Then, they issued a dire forecast and the stock fell, but recovered all the losses and finished up 8%. Intel issued one of the worst reports in recent memory for a large growth company, yet the stock only fell 6%. Last year, the stock would have dropped 30% on such an awful report. This type of activity is putting a scare in the shorts because there are many companies issuing warnings, but the stocks keep climbing.

The one-day moves in the market will be even more magnified because the volume of options has to move prices to the extremes in both directions. For example, Chevron announced a $75 billion stock buyback, and the stock jumped almost 5%. Option traders thought the easy money would be buying one-day calls or writing put contracts because there was no way the stock could fall after this type of announcement. However, the stock dropped $9 or 5% from the high the next day when it was least expected.

The possible recession and higher interest rates were supposed to put an end to all of the speculation in the markets, but I don’t believe that higher interest rates are having a significant impact on tech stocks. If the Fed believes higher rates will stop investor speculation, they are wrong. Stocks rallied during the lockdown and recession, so it’s not surprising that there could be another massive rally at the start of another recession. Day traders are not concerned about whether rates are 3, 4, or 5 percent, as they are trying to make over 20% in a single week. They are trading weekly options and really don’t care about Fed policy. The cycle has been that as soon as earnings season ends, all the headlines turn back to politics and the Fed. It seems the only thing that the Fed is doing is costing some people their jobs and putting a financial burden on low-income borrowers while enriching the bankers. In my opinion, the inflation was caused by the Fed and the free government handouts and it will take a few years for the trillions of dollars printed to work through the system. Hopefully, this short squeeze continues and crushes all the short-sellers that unrelentingly pushed stocks down week after week last year. The only downside is that I expect those who catch the end of this rally will have a bad hangover. It’s only been a few weeks and I’m sure the shorts will not be sleeping well this weekend.

Chairman Powell got his wish this week when Google’s parent company, Alphabet, announced plans to cut 12,000 employees, just days after software giant Microsoft announced plans to cut 10,000 employees, and Amazon began laying off 18,000. He warned that pain was coming and it has arrived for thousands of people whose lives have been upended. Not long ago, the government spent trillions of dollars on the PPP program to pay employers to retain employees, and now the people in charge are determined to cause a million people to lose their jobs.

The Federal Reserve is reversing its decade old policy of keeping interest rates low and increasing the money supply through quantitative easing. This process involved the central bank buying government bonds and other securities from banks, with the goal of increasing the money supply and lowering interest rates. This resulted in the Federal Reserve’s balance sheet expanding from $1 trillion to $8.5 trillion as a result of this quantitative easing. This resulted in a misallocation of capital and the Fed did nothing at the time to correct it. In 2020, there was an artificial boost created by pandemic-era decisions. For instance, in a brief moment in 2021, the video-conferencing company Zoom had a higher market cap than oil giant ExxonMobil, and now Exxon is worth more than nineteen times Zoom. Last year, the technology bubble burst and capital now looks less misallocated.

The Federal Reserve is currently working to lower inflation and is expected to cut interest rates as soon as it accomplishes this goal. As a result, many traders believe that there will be a market rally and that this will cause inflation to return. This is already evident in the recent increase in high-risk technology stocks and meme stocks, as well as the jump in the price of cryptocurrencies like Bitcoin. Despite the Fed’s current focus on raising rates, investors are continuing to invest in these stocks anticipating that interest rates will have to be cut if the labor market weakens. The yield curve is now the most inverted it has been since 1981, signaling a potential job recession later this year. However, investors are buying on any sign weakness with the expectation that earnings will rebound even in a recession. 

This may seem counterintuitive, but there is a good explanation for why stocks do better when people lose their jobs. One reason is that when a company announces layoffs, it often signals to investors that the company is taking steps to cut costs and improve profitability. This can boost the stock price overnight, as investors anticipate increased earnings and higher returns on their investments. Another reason is that the tech industry is not large enough to cause a meaningful labor market slowdown on its own. The technology sector, while important and rapidly growing, is not as significant to the labor market compared to other sectors such as service and manufacturing. The technology sector is known for its high turnover rate, as the industry is constantly evolving and new technologies are frequently developed, which means that the demand for certain skills can change rapidly. This means that while the technology sector may be creating jobs at a fast pace, it may also be losing jobs just as quickly, which limits its overall impact on the labor market. The Fed’s actions will slow the economy, but companies are adjusting to this new environment, and so far, the stock market has not crashed as many had feared.

The shape of the economy is a “K,” meaning that while some people will do very well, others will be forced to make difficult decisions. People who own assets such as real estate, stocks, and bonds tend to do better during high inflation. People who have savings in cash or bonds, on the other hand, may see their purchasing power decrease. The Fed’s actions will also affect different sectors of the economy in different ways. For example, as interest rates rise, the housing market may slow down, but the financial sector will benefit. Banks make more money when interest rates increase because they are able to charge higher interest rates on loans. The interest rate they pay on deposits is generally lower than the rate they charge on loans, which means that the spread between the two increases and their profit margin increases as well. This was the case when banks reported quarterly earnings last week. 

The Fed’s actions to unwind its ultralow interest rate policy and shrink the balance sheet will continue to create job losses and a slowdown in the economy. The technology sector, in particular, has been hit hard by the job recession, but it is not likely to cause a meaningful labor market slowdown on its own. The stock market will continue to experience volatility as investors adjust to the changes. The Federal Reserve’s actions are affecting various industries in different ways, making this economic downturn unique and unlike previous slowdowns.

The Federal Reserve has raised the return expectation this year. The risk-free rate is fast approaching 4.50%. It will likely move to as high as 5% in the next few months. For those who own more individual stocks or equity ETFs, the return expectations will have a wider dispersion of potential return or potential loss due to the uncertainty created from higher interest rates. 

Last year, growth investors learned that valuations ultimately matter in the end. The Fed popped the speculative bubble by raising interest rates at the fastest pace in history. Stocks that have stable cash flows and can raise prices without hurting demand have had the highest returns over the last year. Berkshire Hathaway, which is widely held in client portfolios, had a positive return last year, despite the average stock falling over -20%. This year, these more value oriented stocks that are “cash cows” have a higher bar to beat the risk-free return. For example, in order for Berkshire to beat the 4.5% risk-free rate, the stock price would have to appreciate from $317 to $333 at some point this year. With all the weekly market volatility ranging from 2%-3% and as high as 5% during earnings season, it’s possible to happen in only a week. 

The government has created market instability by changing market incentives and constantly changing return expectations. If you buy a car, house, or stock this year, it’s possible to lose over 15% overnight. However, there has never been a better time to capitalize on falling assets since the housing crisis in 2009. Yesterday the entire automotive world was upended by Tesla when they dropped prices -20% for the Model Y and -14% for the Model 3 in order for those vehicles to qualify for as much as $7,500 electric vehicle tax credits. The Treasury Department and Internal Revenue Service released guidelines late last year that irritated Musk because the Model Y didn’t weigh enough to be deemed an SUV. The vehicle was subject to the $55,000 price cap that applies to sedans, rather than the $80,000 limit for SUVs. The price difference made no sense because if someone buys a Jeep Wrangler with 56 MPGe (23 MPG after the battery is depleted) instead of a Tesla Model Y with 122 MPGe, then the government clearly isn’t doing the most it can to reduce carbon emissions. Musk tried to lobby the government to change but to no avail, so he was forced to cut prices. The broad impact is that if you own a newer car the price will likely depreciate faster than you expected for gas or electric. For example, a Toyota Highlander is now more expensive than a Model Y.  After the price drop the Model 3 is priced at $44k, which is now competitive with many other vehicles. GM and F will not be able to compete with the scale that Tesla produces electric cars. Tesla is fast becoming the Amazon of the car industry. They have built bigger factories and can produce more cars at lower margins. The way Wall Street works is that it cares more about market share and revenue than profits. I can’t guarantee much in this business but if there is one thing for certain the rules will change again. The government might have to throw a lifeline to the less efficient car manufacturers so that more cars qualify for the 7,500 tax credit.

The good news is that the price of new and used cars is falling, which could help to lower inflation. Used car prices have already fallen over 10% and now the dealers will have a harder time selling cars over sticker price. There are also other unintended consequences of poor government policy. One of the most obvious is the interest expense on US public debt, which rose to $775 billion over the past year and is at a record high. If it continues to increase at the current pace, it will soon be the largest line item in the Federal budget, surpassing Social Security. Everyone knows that the Fed will not be able to keep interest rates this high for very long because these costs will all add up over time. 

There are many industries benefiting from higher interest rates. Banks are still making record profits as they have been slow to raise deposit rates. If you have money in the bank, you could be doing better by earning over 4% in risk-free US Treasuries. Yesterday, Bank of America and JPMorgan beat profit expectations, but at the same time, warned of a mild recession by mid-year. They are setting aside more profit to pay for higher loan losses. This year, it’s best to approach portfolio construction and risk management similarly to how Jamie Dimon and Brian Moynihan are managing trillions of dollars. They are preparing for the worst, but not eliminating all risk. A portion of the portfolio is invested in risk-free assets earning 4-5%. This pool of money will be used to buy underpriced stocks if the market falls like Tesla cars just did overnight. Another part of the portfolio is invested in high cash flow businesses that have a history of performing well over time. Additionally, portfolios are hedged in longer-term bonds because bonds could outperform stocks if there is a recession and interest rates fall. Investment-grade bonds have the potential to earn over 10% this year if there is bad economic data and unemployment rates increase or inflation falls.

The surprise this week came when JPMorgan Chase CEO Jamie Dimon backed off of comments he made in June when he warned of a coming economic “hurricane.” On Thursday, he said, “I shouldn’t have ever used the word ‘hurricane’.” As I recall, that warning helped to cause an immediate drop in the market last year. In my opinion, he should be more cautious when talking about possible future market crashes. However, he is entitled to change his opinion in this fast-moving market. I expect there will be more apologies coming from the Fed if more people lose their jobs. The fate of this market is in the hands of the Fed and how far they raise rates. Inflation data shows that prices are falling and there is a glimmer of hope that the economy can avoid a deep recession if the Fed stops short of 5%. I’ve mentioned this threshold level in other posts as the possible tipping point for the economy. This is why a diversified portfolio in stocks and bonds continues to be the best approach this year. 

The SECURE 2.0 Act is a new piece of legislation that was passed last week as part of a larger government-funding package. It includes 92 provisions that are meant to help more Americans save for retirement and increase the size of their retirement savings. Here are some key points about the SECURE 2.0 Act and how it could impact your financial plan:

1) The required minimum distribution age will increase from 72 to 73 next year, and then to 75 in 2033. This means that you will have more time to save aggressively and more flexibility in your retirement plans if you are approaching retirement age.

2) You will be able to make increased catch-up contributions to company retirement plans and individual retirement accounts. This means that if you are 50 or older, you can contribute more money to your retirement accounts to make up for any shortfall in your savings.

3) You will have more flexibility in the use of 529 plans. You will be able to rollover up to $35,000 from a 529 account in your name to a Roth IRA over your lifetime, as long as the 529 account has been open for more than 15 years and you meet certain other conditions. 

4) Required minimum distributions (RMDs) will be eliminated for qualified employer Roth plan accounts starting in 2024. This means that if you have a Roth 401(k) account through your employer, you will not be required to take out a certain amount of money from it each year, similar to how Roth IRAs work.

5) You will be able to take early “emergency” distributions from your retirement account to cover unexpected financial needs starting in 2024. These distributions of up to $1,000 will not be subject to the usual 10% tax on early distributions, but you will need to pay it back within a certain time frame or you will not be able to take additional emergency distributions for three years.

6) Your employer may be able to make matching contributions to your retirement plan based on your student loan payments, starting in 2023. This is meant to help people with high student loan debt save for retirement.

7) You will be able to use your 401(k) or IRA account to pay for student loans, subject to certain conditions, starting in 2023.

Overall, the SECURE 2.0 Act is designed to help more Americans save for retirement and increase the size of their retirement savings. It includes a number of provisions that give you more flexibility in your retirement planning and allow you to contribute more money to your retirement accounts.  If you have any questions, please do not hesitate to reach out to me. 

This past year marked the end of the cheap money era. Since the Great Financial Crisis of the late 2000s, central banks around the world implemented low interest rates as a way to stimulate growth. This era, known as the “cheap money” era, saw a surge in risky investments in technology stocks, cryptocurrencies, and special purpose acquisition companies (SPACs). However, when the COVID-19 pandemic hit and central banks continued their loose monetary policies it created inflation.

In response, central banks had to raise interest rates to combat high consumer prices. This sudden shift signified the start of a new era for the global economy that will prioritize traditional business values such as stability and profits. This is why value companies such as Berkshire Hathaway outperformed companies that had sky high growth rates. Next year, I expect that higher borrowing costs will continue to slow economic growth and decrease corporate profits. This will put more stress on financially unstable and heavily indebted firms. As interest rates rise, the cost of servicing this debt will also increase, which could put pressure on weak businesses and overleveraged consumers. Companies with high cash flows should continue to outperform in 2023. 

This was an outlier of a year as higher interest rates hit both stocks and bonds. There were a number of other factors that contributed to market uncertainty in 2022. These included the Fed raising interest rates at the fastest pace in history, political tensions, the war in Ukraine, and the bursting of the technology bubble. 2022 was a unique year for investing due to a number of factors, including higher interest rates, which impacted both stocks and bonds. I recognized the growth bubble and was able to avoid significant damage in the NASDAQ, which fell 32.58% last year. However, a new generation of investors learned firsthand the lessons of the 2001 and 2009 market crashes. For example, the NASDAQ 100 fell 83% from its high from March 2000 to October 2002, a period of 31 months. Similarly, the ARK Innovation ETF, which has been a popular choice for speculative investors this year, fell 81% from its high in February 2021 to its recent low. This occurred in just 22 months, which demonstrates the rapid pace at which losses can accumulate in a market crash.

In 2022, it was challenging because nearly every investment seemed to decline to some extent. This made it difficult to diversify portfolios and mitigate risk. Looking ahead to the next year, I expect that there will be a renewed interest in fixed income investing as it becomes more of a “saver’s market.” This shift will likely require investors to adopt a more selective and profit-driven approach, moving away from speculative investments in stocks. The transition to this new era may be rocky, but it could also present opportunities for higher returns. If interest rates continue to rise, it could increase the returns on safer investments such as short-term bonds and treasuries. While the transition has been difficult, it may also set up the opportunity to buy companies at a discount. 

The chart below illustrates the challenging year that investors faced in 2022. The vertical axis represents the annual return for US bonds, and the horizontal axis represents the annual return for US stocks. This chart demonstrates that 2022 was a particularly difficult year for both bond and equity investors, as there has never been a year since 1871 in which returns for both asset classes were so low. However, it’s important to note that when the market falls as much as it did in 2022, it often experiences a rebound in the following year. This can provide an opportunity for investors to capitalize on the recovery and potentially achieve higher returns.

The performance of individual stocks can be influenced by a variety of factors, and the relationship between economic growth and the performance of growth stocks is not always straightforward. However, it is possible that a short-term economic slowdown could lead to an expectation that the Federal Reserve will lower interest rates, which could lead to a rally in stocks.

In 2020, the stock market saw a rally even as lockdowns and other measures were implemented by the government to manage that crisis. This demonstrates that investors are always on the lookout for undervalued securities and are willing to buy into short-term dips in the market.

Last week, Southwest Airlines experienced a systemwide chaos that resulted in the cancellation of thousands of flights and stranded hundreds of thousands of customers during its busiest week. Despite this, the stock rebounded later in the week and only finished down a few dollars. This shows that there is a limit to the selling even in the worst of times, and many investors are willing to buy into short-term dips.

As we head into 2023, it’s important to maintain a long-term view of the market. The stock market has a tendency to bounce back when you least expect it, and interest rates could also fall unexpectedly. Your portfolio is diversified and I’ve considered all the factors such as your risk tolerance, time horizon, and investment goals.