Today we’re going to talk briefly about some of the bright spots on the horizon for 2023, recap some of the highlights of last year, and finally talk about the new Secure Act and all the goodies that are embedded in that law.
So as we know, 2022 was one of the worst year for portfolios, in fact since 1937 by some measures. And that’s because not only was it a bear market in stocks, but also bonds were down 17%. In fact, it was the worst performance in the history of the Morningstar Core Bond Index. That’s pretty bad. Some of the accompanying charts show the pain quite graphically.
We have, however, seen the pendulum swing from growth to value. My Partner, Sarah, wrote a white paper titled “The History and Future of Value Investing”. You’ll find the link to the document HERE. Whether or not the value premium has faded, the pendulum will continue to go back and forth, and right now the pendulum has swung violently away from tech and aggressive growth, towards value, which is what we would expect in this sort of an environment.
Needless to say, it’s been an extremely bad year for crypto. Crypto is kind of in a difficult place because now some of the hype is out of it. We still have the underlying blockchain technology. It’s very fascinating. And possibly reasonable valuations. But remember, if crypto’s a currency, it’s not a great long term investment and if it’s not a currency, it’s a commodity and therefore it’s risky, something that a lot of crypto investors seem to lose track of.
It’s also the end of what’s been affectionately known as ZIRP, zero interest rate policy. We’ve seen some pretty aggressive rate hikes, some of the strongest rate hikes since the early 1980s. I think we’re going to see a peak of these hikes and most of the market expects that peak to be maybe March, April, and the top Fed funds rate will probably be five and a quarter percent. This is fantastic news for bond holders. For those who have ridden this out, the pain is over. Much more importantly, there’s some yield that’s going to be meaningful.
And we do expect inflation to come under control. Immediately it will improve. Longer term. Getting down to two or 3% may take a few years. But the point is the direction is down, and as inflation comes under the control, so we would expect interest rates to fall a little bit. And why do I say a little bit? Because these are normal rates. They seem high in the context of recency, but long term they’re normal. But it’s good for bond investors.
What do we expect from the economy? Well, we may already be in the beginnings of a mild recession. And why do I say mild? This isn’t a financial collapse like 2008, and the labor market has never been so tight in history. And when I say in history, I’m talking all the way back to about the Bubonic Plague. This is a phenomenal labor market, throughout the world, and it is going to prop up economies globally. Flip side, real estate’s not looking great, but wat is real estate, but a place you live in? Yes, there are supply constraints, but those supply constraints are very much priced into real estate at this point.
So let’s talk about the goodies. 2023 is the beginning of what could be a nice new period for investors. First, the Secure Act, 2.0. I’m actually going to cut about three videos the next few weeks on this because there are so many treats, but here’s some teasers. RMDs have been pushed back, from some case to 73, some to 75 years old. There’s new Roth Account flexibility, including 529 account rollovers to Roth accounts. That’s cool. IRA limits are now formally indexed and there’s been changes to qualified charitable distributions. Way too much meat for this video. We’ll talk about them in the coming weeks.
Social Security cost of living adjustment for 2023 is 8.7%, the highest bump since 1981. That was when I joined the US Air Force. That’s a while back. It’s great advanced planning opportunity. We want to always talk through how to optimize those distributions so we can get the most value out of these bumps. Federal estate tax exemption is now almost $13 million per person. Now, it is scheduled to drop in 2026, which means there are advanced planning tactics that can be executed now to take full advantage of this deduction before it’s lost. Because when you take it, they can’t take it back.
So let’s make 2023 a great year. I’m personally very optimistic about the opportunities that are facing us. And we wish you the best of investing success.
“The History and Future of Value Investing” by Sarah McIvor and Paul J. Carroll
Solberg, Lauren. “15 Charts Explaining an Extreme Year for Investors.” Morningstar, Inc., 3 Jan. 2023, https://www.morningstar.com/articles/1131179/15-charts-explaining-an-extreme-year-for-investors.