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Windsor Brief August 2023

Windsor Brief August 2023

| August 04, 2023

Windsor Brief for August 2023

InvestingOn One Hand the Fed, On the Other Hand Congress
PlanningIRS Relief for 2023
Market Snapshot

This month’s Windsor Brief reviews market performance for the month of July. In addition, we give our latest thoughts on inflation, interest rates, and what a potential government shutdown on October 1st means for the economy.

In our Financial Planning section this month, we look at a recent IRS announcement that has given some Inherited IRA owners another year to delay required minimum distributions. Caution must be taken because this reprieve does not apply to all Inherited IRA beneficiaries. See our Financial Planning section below for more details.

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: On One Hand the Fed, On the Other Hand Congress

Before we get started on this month’s brief, we want to apologize to many of our readers who may not have received the Windsor Perspective on July 1st. It has come to our attention that a technology glitch resulted in the Windsor Perspective email going into the spam folder for many recipients. We have worked to ensure that does not happen again and apologize to those affected.

July continued the trend of positive monthly equity results, with the equity market up nicely. Falling inflation and receding recession fears drove the positive performance in July, recording the 5th positive month in a row. For the full month, the S&P 500 delivered a total return of 3.21%. This puts the S&P 500 total return at an impressive 20.65% for the year-to-date period. The fixed income markets continue to muddle along, as interest rates have remained an overhang. The AGG was nearly flat for the month with a return of -0.07% for July and is now up 2.02% year to date.

Last week was an important week for investors as the Fed held an end of month meeting and we will not hear from them again until their next meeting on the 19th and 20th of September. We also received important inflation data at the end of the week. The outcome of last week’s Fed meeting was the expected 25 bps increase in interest rates. More importantly the commentary from Jerome Powell, the Federal Reserve Chairman, was dovish, implying we may only have one more, if any, rate increases. There were a couple of very interesting comments he made during his press conference:

  • Powell said he would stop raising rates before their inflation goal of 2% is reached. This comment from the Fed is important because it indicates if inflation is moderating and there is a glide path towards the 2% inflation level, the Fed can stop raising rates. And it certainly appears we are on a nice glide path lower based on the data.
  • The Fed is no longer expecting a recession. This comment is interesting and indicates the risk of a hard landing has been essentially eliminated, and this is quickly becoming the consensus view in the investor community. Consensus is now for a soft landing to no recession, a very good outcome for investors.

The inflation data we got last week reinforced the comments above. The Fed’s favorite inflation gauge, the Personal Consumption Expenditures (PCE), came in at 4.1% year over year, the lowest reading since September 2021 and down from 4.58% a month ago. Similarly, another important inflation gauge, the Employment Cost Index (ECI) three-month percent change came in below expectations at 1.0% and was the lowest reading since March of 2021. This data reinforces the notion that inflation is slowing while the economy remains on solid footing. Overall, this is very positive for investors as it appears we may be at the end of the interest rate hike cycle and the economy could potentially come through this rate hike cycle in good shape.

Core PCE Price Index Annual Change

Source: Windsor Wealth Management, BEA

Shifting topics, we have previously mentioned that there was the potential for a government shutdown on October 1st. As of this writing, the sentiment has shifted to not if, but how long will the shut down last and what it will take for the US Government to re-open. The reason for the shutdown is it does not look like Congress will be able to agree on (and pass) the 12 appropriations bills that are needed to run the government by the October 1st deadline. Without those budgets approved, parts of the government will shut down on October 1st. One solution to prevent this occurrence is if Congress can pass a 3-month continuing resolution (a temporary spending bill) to avoid a government shutdown. As of now, it does not appear that they will have enough votes to move this forward. This is going to begin to get more attention in the media as we get closer to October 1st. Although on the surface it is a negative, this is more a political issue than an economic issue. It should not have any lasting impact on the overall markets outside of some noise/volatility. As a matter of fact, GDP during shutdowns is rarely impacted. The chart below shows the GDP during the last government shutdowns.

GDP Growth During Prior Government Shutdowns

Source: Strategas

Overall, we expect the topic of the government shutdown to begin to be picked up by the news cycle, but this is not something that will have much impact on the economy or investors. However, we wanted to bring it to your attention in case you do begin to see it in the news.

The last topic we wanted to touch on is August tends to be one of the more challenging calendar months historically. Many European and US investors take vacations prior to summer ending and school beginning. This results in less trading volume for the month and the potential for news to have a greater impact than under normal circumstances. This is not something to be overly concerned with, but more of a statistical observation. As shown in the chart below, the long-term average for the month of August since 1950 is 0.01%, with a 55% probability of a positive outcome. Once again, this comment is more about providing interesting historical market context than anything else. The ultimate drivers of the market will continue to be inflation readings, economic data, and company earnings for the second quarter.

August Tends to be a More Challenging Month Historically

Source: Fundstrat, Bloomberg

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: IRS Relief for 2023

In December 2019, The SECURE Act brought about a new classification system for IRA beneficiaries. Starting for beneficiaries who inherited an account after January 1, 2020, we now have Eligible Designated Beneficiaries (EDB), Non-Eligible Designated Beneficiaries (NEDB) and Non-Designated Beneficiaries (NDB) as illustrated in the chart below.

The SECURE Act further stated that Non-Eligible Designated Beneficiaries (NEDB) need to deplete the Inherited IRA within 10 years. We have been awaiting final IRS Regulations surrounding this 10-year period. The question and confusion pertain to if the original IRA owner died after their required RMD beginning date, does their NEDB need to take annual required minimum distributions from the Inherited IRA during this 10-year period?

In October 2022, the IRS gave relief to NEDB by excusing 2021 and 2022 required minimum distributions until they finalize the rules. Then on July 14, 2023, the IRS announced that it is also waiving 2023 distributions for these inherited IRA accounts. The IRS announced that final regulations will apply for the calendar years beginning no earlier than 2024.

Keep in mind that this relief is only eligible for NEDB that inherited the IRA in 2020 or later that are subject to the 10-year rule. RMD relief does not apply to beneficiaries that are currently subject to lifetime distributions.

The IRS also announced on July 14th some relief for retirement account owners who incorrectly believed they were subject to Required Minimum Distributions (RMD) in 2023. On December 29, 2022, SECURE 2.0 changed the RMD age from 72 to age 73. Some custodians and recordkeepers did not have time to update their system before incorrectly notifying owners turning 72 of their RMD for 2023. If you were born in 1951 and took what you believed to be your first RMD before July 31, 2023, then the IRS is extending the usual 60-day rollover deadline until September 30, 2023. This allows additional time to return the mistaken distribution back to your IRA.

Your Windsor advisor can help you navigate the complex IRA rules and regulations. Please let us know if you have any questions regarding your retirement distribution planning.

Dream boldly. Plan wisely.