Market Insights & A Numerical Overview
We trust everyone had a wonderful holiday season. Whether you reached your personal goals last year or faced challenges, a new year brings new opportunities and a fresh start. 2022 offered an unpleasant experience for investors. Most market averages peaked the first few days of the year then began to decline shortly after, and finished the year much lower.
The Fed’s response to stubbornly high inflation prompted the fastest series of rate hikes since 1980, according to data from the St. Louis Federal Reserve. The war in Ukraine exacerbated inflation by temporarily sending oil prices higher and lifting commodities such as wheat, and the allied response to discourage the war trickled into financial markets as well.
The domestic economy expanded, but the interest rate and inflation environment overwhelmed any tailwinds from economic and profit growth. The Dow lost only 8.8%, while the S&P 500 Index gave up 19.4%, the biggest disparity in over 60 years according to CNBC. Furthermore, the tech-heavy, growth-heavy Nasdaq tumbled amid the high-rate environment. In hindsight, it’s not surprising, as we’d expect fast-growing firms such as technology to be the most sensitive to higher interest rates. A slowdown in growth in the sector compounded problems.
Uncertainty tends to push investors towards fixed-income, as debt investing tends to involve less risk and has historically shown moderate correlation to equities. Last year was a notable exception. The yield on the 10-year Treasury bond rose from 1.63% at the beginning of the year to 3.88% by year-end (U.S. Treasury Dept). Bond prices and yields move in opposite directions, which pushed bond prices down. In fact, 2022 turned out to be the worst year in bonds since 1926.
The drop in bond prices can be traced to the sharp rate hikes from the Federal Reserve. Inflation is the root of the problem. A year ago, the Fed belatedly recognized that 2021’s surging inflation wasn’t simply transitory. The annual CPI was running at 7.0% in December 2021; it peaked at 9.1% in June, and moderated to a still-high 6.45% by December, the last available reading according to the U.S. Bureau of Labor Statistics. This bout of disinflation is welcome, but a few of months of lower readings is not a trend according to the Fed.
While the Fed appears set to slow the pace of rate increases in 2023, it has signaled that the eventual peak will last longer, as it attempts to bring the demand for goods, services, and labor into alignment with the supply of goods, services, and labor.
The bond market may disagree with the Fed’s forecast; the 10 year Treasury Note yield has been eclipsed by the 3 month Treasury Bill yield. Perhaps the bond market is predicting a pivot sooner than what the Fed officials are forecasting. A pivot may include a lowering of the federal funds rate, a change from selling long term debt off the Fed’s balance sheet to buying long term debt, and lastly a lowering of the Overnight Reverse Repurchase Facility yield which would push roughly $2.2 trillion away from the Federal Reserve facility back into the financial markets.
Of course, the Fed’s weapon of choice—higher interest rates—is a blunt instrument. It does not operate with the precision of a surgeon, and pain won’t be and hasn’t been spread evenly. This year could bring new challenges, and attention has slowly been shifting away from inflation to economic performance. More than two-thirds of the economists at 23 large financial institutions expect the U.S. to slide into recession this year, but a recession is not a foregone conclusion [[https://www.wsj.com/articles/big-banks-predict-recession-fed-pivot-in-2023-11672618563]]. A resilient labor market and a sturdy consumer could support economic growth this year, and if the bond market is correct with a pivot in the near future, easy money conditions may fuel growth.
Ultimately, we counsel that you must control what you can control. We can’t control the stock market or the economy, and we can’t control events overseas, but we can control our financial plans.
How the Change in Retirement Laws Will Affect You
The Setting Every Community Up for Retirement Enhancement Act of 2019, popularly known as the SECURE Act 1.0, was signed into law in late 2019. The bill included provisions that raised the requirement for mandatory distributions from retirement accounts and increased access to retirement accounts. But it didn’t take long for Congress to enhance the landmark bill that was enacted barely three years ago. Tucked inside a recently passed 4,155-page, $1.7 trillion spending bill is another overhaul of the nation’s retirement laws.
9 Key Takeaways on SECURE Act 2.0
- Changing the age of the required minimum distributions. Three years ago, 1.0 increased the age for taking the required minimum distribution, or RMD, to 72 years from 70½. If you turn 72 this year, the age required for taking your RMD rises to 73 with 2.0 If you turned 72 in 2022, you’ll remain on the prior schedule.
If you turn 72 in 2023, you may delay your RMD until 2024, when you turn 73. Or you may push back your first RMD to April 1, 2025. Just be aware that you will be required to take two RMDs in 2025, one no later than April 1 and the second no later than December 31.
Starting in 2033, the age for the RMD will rise to 75.
Employees enrolled in a Roth 401(k) won’t be required to take RMDs from their Roth 401(k). That begins in 2024.
- RMD penalty relief. Beginning this year, the penalty for missing an RMD is reduced to 25% from 50%. And 2.0 goes one step further. If the RMD that was missed is taken in a timely manner and the IRA account holder files an updated tax return, the penalty is reduced to 10%.
But let’s be clear, while the penalty has been reduced, you’ll still pay a penalty for missing your RMD.
- A shot in the arm for employer-sponsored plans. Starting in 2025, companies that set up new 401(k) or 403(b) plans will be required to automatically enroll employees at a rate between 3% and 10% of their salary.
The new legislation also allows for automatic portability, which will encourage folks in low-balance plans to transfer their retirement account to a new employer-sponsored account rather than cash out.
In order to encourage employees to sign up, employers may offer gift cards or small cash payments. Think of it as a signing bonus.
Employees may opt out of the employer-sponsored plan.
- Increased catch-up provisions. In 2025, 2.0 increases the catch-up provision for those between 60 and 63 from $6,500 in 2022 ($7,500 in 2023 if 50 or older) to $10,000, (the greater of $10,000 or 50% more than the regular catch-up amount). The amount is indexed to inflation.
Catch-up dollars are required to be made into a Roth IRA unless your wages are under $145,000.
- Charitable contributions. Starting in 2023, 2.0 allows a one-time, $50,000 distribution to charities through charitable gift annuities, charitable remainder unitrusts, and charitable remainder annuity trusts. One must be 70½ or older to take advantage of this provision.
The $50,000 limit counts toward the year’s RMD.
It also indexes an annual IRA charitable distribution limit of $100,000, known as a qualified charitable distribution, or QCD, beginning in 2023.
- Back-door student loan relief. Starting next year, employers are allowed to match student loan payments made by their employees. The employer’s match must be directed into a retirement account, but it is an added incentive to sock away funds for retirement.
- Disaster relief. You may withdraw up to $22,000 penalty-free from an IRA or an employer-sponsored plan for federally declared disasters. Withdrawals can be repaid to the retirement account.
- Help for survivors. Victims of abuse may need funds for various reasons, including cash to extricate themselves from a difficult situation. 2.0 allows a victim of domestic violence to withdraw the lesser of 50% of an account or $10,000 penalty-free.
- Rollover of 529 plans. Starting in 2024 and subject to annual Roth contribution limits, assets in a 529 plan can be rolled into a Roth IRA, with a maximum lifetime limit of $35,000. The rollover must be in the name of the plan’s beneficiary. The 529 plan must be at least 15 years old.
In the past, families may have hesitated in fully funding 529s amid fears the plan could wind up being over funded and withdrawals would be subject to a penalty. Though there is a $35,000 cap, the provision helps alleviate some of these concerns.
What we have provided here is an overview of the SECURE Act 2.0, so keep in mind that it is not all-inclusive. Please reach out to your tax advisor with any tax-related questions.
Sources: [[https://images.thinkadvisor.com/contrib/content/uploads/documents/415/479719/GA_SECURE-2.0-Act-of-2022_Section-by-Section-Summary-FINAL.pdf Secure Act 2.0 Act of 2022]]; [[https://www.fidelity.com/learning-center/personal-finance/secure-act-2 SECURE 2.0: Rethinking Retirement Savings]]; [[https://www.schwab.com/learn/story/congress-passes-major-boost-to-retirement-savings Congress Passes Major Boost to Retirement Savings]]; [[https://www.wsj.com/articles/WP-WSJ-0000441889 The 401(k) and IRA Changes to Consider After Congress Revised Many Retirement Laws]]
This research report has been prepared by the Centerline Wealth Advisors Investment Committee 2023©