Windsor Brief for November 2022
Investing:Midterm Elections and the Markets
Planning:Inflation Adjustments for 2023
This month’s Windsor Brief discusses how the midterm elections might impact the markets for the remainder of the year and into 2023. There is a lot of historical precedent on the market reaction in midterm election years and beyond, and we will look at this history for clues to the future.
In our Financial Planning Section this month we look at inflation adjustments for 2023 that will affect everything from retirement plan contributions to income taxes to estate taxes.
If you’d like to talk to us further about these topics or about any of your financial planning or investment goals, please do not hesitate to get in touch.
Investing: Midterm Elections and the Markets
The midterm elections for the United States will be held on Tuesday November 8th, which is just a week away. These elections have seen extensive media coverage whether through political advertising, news coverage, talk shows, debates, and various other outlets. These elections, like all elections before, will have ramifications for the future political landscape and the country. However, our focus in this month’s brief is to discuss the implications for the stock market from the elections going forward.
Prior to discussing election implications for the markets, October experienced a nice rebound delivering a total return for the S&P 500 of 8.10%. Fixed income, as viewed through the Bloomberg Global Aggregate, was down 1.30% for the month. Overall, the fourth quarter is off to a strong start. As you will read below, this is in line with historical precedent.
Over the last few months, we have mentioned the midterm elections multiple times in our monthly write ups. However, as the elections are now one week away, we thought it would be worthwhile to revisit some of those prior charts and add others to give a better picture of what the midterms mean for the stock market. To start, we want to highlight an interesting and important point. From the stock market’s perspective, the actual election outcome on November 8th does not have much impact on the market performance going forward. As shown below, the historical average annual returns are not all that different regardless of the makeup of the Government. The two red bars are the most likely outcome of the elections this year, and as you can see, there is little historical difference in the future market returns.
S&P 500 avg annual performance by make-up of Government (1933-2021)
What is more important is the historical price action as we approach, complete, and move on from the elections. Uncertainty is the enemy of the market. With the elections in front of us, there is uncertainty. However, once the elections are complete, the market will have certainty to the makeup of the Government, removing that unknown. As shown below, since 1994 the market has struggled in the year of the midterm elections, only to begin to rally around the beginning of October and into the following year. Once again, the elections eliminate an unknown and gives the markets clarity.
Avg. S&P 500 performance before & following midterm elections
(1994, 1998, 2002, 2006, 2010, 2014, 2018)
Just as we have seen in 2022, midterm election years have historically been the most volatile year for stocks in the four-year presidential cycle. The average intra-year decline for the S&P 500 in a midterm election year is approximately 19%, much higher than the negative 12%-14% average in the first, third, and fourth years of a Presidential cycle. The performance of 2022 is following a similar path to past midterm elections with this year’s drawdown over 19%. If history prevails the performance 12 months after the election could be strong.
S&P 500 corrections and the 1-year performance following the correction by Presidential Cycle
This next chart shows the average returns of the S&P 500 in a midterm election year since 1962. Interestingly, 2022 is following the historic precedent thus far through the end of October. The lighter blue line on the chart is the performance of the S&P 500 for 2022 and it is following the pattern of the average since 1962 very closely. The one main difference between 2022 and the average is the percent drawdown has been to a greater magnitude than the average year, but still following the same trajectory through the year.
S&P 500 performance: Avg. midterm election year (1962-2018) and 2022
Looking beyond 2022, the historical precedent is even better. Since 1950, there has never been a negative return in the 12-month period following a midterm election. In addition, the average return for those 18 years is 15.1%.
S&P 500 return in the 12-month period following a midterm election
As a matter of fact, the fourth quarter of a midterm election year and the first quarter of the following year have historically been the strongest of the full 16 quarter Presidential cycle. However, there are a couple of potential wildcards that deviate from history as we enter 2023. It is widely expected the US economy will enter a recession in mid to late 2023. As shown in the chart below, we have not experienced a recession in the third year of a Presidential cycle since 1973. The magnitude of a recession will be the key for how it impacts the markets, but as of now, a recession in 2023 will put us into unchartered water.
Number of recessions starting in the year of the Presidential cycle (1973-2021)
In addition, in the third year of a Presidential cycle we typically would experience an influx of government spending from the newly elected Congress. However, new spending most likely will be significantly curtailed in 2023 due to the historic levels of Government spending and stimulus that has happened the past few years. It is that massive influx of cash into the economy that has spurred inflation, and further Government spending would only make inflation worse. Thus, 2023 will experience different Government spending patterns than seen in most post mid-term years. The economy remains resilient and what impact this lack of Government spending may have is yet to be seen.
In closing, although the election outcome itself should have no meaningful impact on the stock market going forward, it is the election conclusion that is typically the catalyst. Using history as a guide, midterm election years tend to struggle up until October, where the market then seems to gain upward momentum. So far, 2022 is following the same pattern, albeit with a bit worse overall performance through the YTD period. Historically, the 6- and 12-months periods post the midterm elections have been positive, with good returns. Every year is different, though historical patterns are an important part of the investment mosaic. Only time will tell if the end of 2022 and the next 12 months will continue to track the positive patterns of the past. Regardless, we continue to encourage you to stay invested and focus on your long-term investment goals and objectives. It has been shown time and time again, staying invested delivers the best overall performance, while attempting to time themarket has potential serious consequences. As always, we will be seeking out opportunities for your overall financial plan based on the current economy and our outlook. Together, we will continue to tailor your plan to suit your unique financial objectives and a risk level you are comfortable with. Thank you for your confidence in our team and in Windsor Wealth Management.
Planning: Inflation Adjustments for 2023
Inflation has been in the news all year whether the discussion is about prices at the grocery store or the effects on your investment portfolio. Inflation will also have a direct impact on the qualified plan contributions you can make, the income taxes you pay or the social security income you receive next year. Below we note some of the key inflation related adjustments for 2023.
Retirement Plan Contribution Limits Increase:
People saving for retirement will get to save more into qualified accounts in 2023. The following are some of the key limits for retirement plan contributions:
Estate & Gift Tax Exclusions Increase:
Estate & Gift Tax exclusion amount will increase to $12,920,000 in 2023 (up from $12,060,000). Note this exclusion amount is still scheduled to sunset after 2025. Based on current law, it is anticipated that the exclusion amount will be closer to $6,000,000 in 2026.
The Annual Gift Tax exclusion amount will also increase to $17,000 in 2023 (up from $16,000). This is the amount that any donor can give to any individual without utilizing part of your lifetime gift tax exclusion amount or paying gift tax.
Income Tax Adjustments:
Almost all income ranges for qualifying for tax deductions or tax credits have been adjusted upward based on a 7% inflation rate. This includes the income ranges for making deductible IRA contributions or Roth contributions. In 2023, the income limit for making Roth IRA contributions phases out for AGI between $138-153,000 single/$218-228,000 joint filer (last year was upper limit was $144,000 single/$214,000 joint filer).
The social security wage base is increasing to $160,200 (up from $147,000). This is the maximum wage that pays the 6.2% employee social security contribution. The Medicare contribution of 1.45% remains unchanged with no maximum wage. Self-employed individuals pay double those amounts as they are contributing both the employee and employer portions.
The standard deduction for 2023 will increase to $13,850 singles/$27,700 joint (up from $12,950 single/$25,900 joint). Following are two of the new tax tables for next year:
Single tax table for 2023
Married filing jointly tax table for 2023
Social Security and Medicare Adjustments:
Social Security and Medicare beneficiaries get a double boost – higher income and lower premiums. Social Security recipients will get a Cost-of-Living Adjustment of 8.7% which is the highest since 1981.
In an adjustment not related to inflation, Medicare Part B monthly premiums will decrease by $5.20 for 2023 the base premium of $164.90. This decrease is due to a previous reserve for anticipated spending on a new Alzheimer drug (Aduhelm). This spending did not materialize so part of the reserves is being returned in 2023 through lower Part B premiums.
For high income Medicare participants, the adjusted gross income ranges for Income Related Monthly Adjustment Amount (IRMAA) have increased based on inflation, except for the highest fixed income amounts of $500,000 single/$750,000 joint do not adjust for inflation. Below are the 2023 income ranges and surcharges based on tax returns filed in 2021:
2023 will usher in a lot of changes to retirement plan contributions, estate and gift tax planning and income tax planning. Windsor will incorporate these inflation adjustments into your financial plan. Please let us know if you have any questions on how these changes could affect your personal financial plan.
Dream boldly. Plan wisely.