Bulls and Bears
Happy New Year! With so much happening over the holiday break, we thought we’d send out two Notables this month. Today, we are going to focus on a few general market related comments and then try to provide a quick summary of the newly passed Secure Act 2.0. We’ll send out another newsletter later in the month discussing some of the allocation changes we are thinking about for the quarter.
As we wrapped up 2022, it’s safe to say that the year was a challenging one in both bond and equity markets. We started 2022 with equity markets being priced higher than in any time since the late ‘90s during the dot com bubble. As the year progressed:
- We pushed into the highest inflationary period since the ‘80s
- We saw a war break out in Europe
- We saw a complete collapse of cryptocurrencies and a few cryptocurrency firms
- We had disruptions around the world (especially China) from the pandemic hangover
- We fought through continued political disruptions globally
With all of the above, we saw US equity markets finish the year down by about 19% (S&P 500). The US bond market also had a difficult year (Bloomberg US Aggregate Bond Index down 13%) while the Fed increased interest rates faster than anyone could have guessed. While difficult to see accounts fall, it continues to be important to focus on the long-term.
As of the end of the year, the S&P 500’s forward price to earnings ratio is now in line with the last 25-year average (16.65 vs 16.82 average). This means that the market’s current position is more in line with historical averages without being wildly overpriced as we’ve seen for the last few years. To compare, we saw this stat as high as almost 23x at the beginning of 2022 vs the 16.82x average. If you want to hear more about how future earnings affect the stock market, listen to the audio version!
While it would be tempting to run towards depositing everything in cash at the bank (or burying the cash in the back yard!), we have to remember that these drawdowns are part of investing. In fact, the last time we saw inflation this high ended up being a great time to be invested. Between 1968 and 1982, we saw inflation average more than 7% annually. If we had taken $1,000 out and bury it in the back yard in 1968, by 1982 we’d have less than $333 in purchasing power. On the other hand, if we had invested $1,000 per year from 1968 to 1982 and then stopped, we’d have over $33,000 (over 14 years). Just for fun, if you kept that going until today, you’d have almost $3 million. We can run scenarios like this all day long…the main point is to consider the long-term and be patient.
Secure Act 2.0
In other news, congress passed their $1.7 trillion (with a t!) budget plan over the holiday. Included in this plan is a huge piece of legislation that is being referred to as the Secure Act 2.0 (it’s the second big retirement planning law passed in the last couple years). The bill has a TON in it which would be impossible to summarize fully here. If you’re interested in reading the full bill…good luck at over 400 pages! You can read a great summary of the bill here. The different changes will roll out over the next few years with each change having a different timeline. Here are some highlights that we pulled out (definitely not everything!):
- RMDs will increase to age 75 over the next couple of years
- Decreased tax penalties if RMDs are not taken (50% to 10%-25%)
- No more RMDs from Roth employer plans (401(k)/403(b) etc)
- Creates the ability to contribute to Roth accounts in SEP and SIMPLE IRA accounts
- Additional rules and potential increase to catch up contributions in employer plans
- Some interesting rules allowing 529 plan assets to be converted to Roth accounts (lots of asterisks here!)
- IRA catch up contributions being indexed to inflation
- Changes to qualified charitable distributions (QCDs)
- Lots of ways to access money early from retirement accounts with no penalty in different types of hardships
- No potential penalties on excess retirement contributions if taken out in timely manner
- New provisions allowing for employer sponsored emergency savings accounts
- New rules for the not so SIMPLE IRAs
- Rules around employers being allowed to use match in plans to help pay back student loans
- Help for military spouses to speed up addition in employer plans
- The creation of SEP IRAs for household employees
- And a whole bunch more!
There is a ton in the new bill that everyone in our industry is trying to digest, many of which are exceedingly complicated. Everything above could have a full paragraph and includes lots of ifs and buts. If you’d like to discuss any of the new changes, let us know.
Happy New Year and please let us know if we can help in any of your goals for 2023 and beyond!