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Windsor Brief February 2023

Windsor Brief February 2023

| February 03, 2023

Windsor Brief for February 2023

Investing:What a difference a year makes
Planning:SECURE Act 2.0
Market Snapshot

This month’s Windsor Brief reviews the start to 2023 and contrasts that with a year ago. In addition, this week is a big week for economic news, and we discuss what this could mean for the market, starting with the FOMC decision today, February 1st, on interest rates.

In our Financial Planning section this month, we will review some of the key provisions in The SECURE Act 2.0 that could affect your retirement and education planning. 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: What a difference a year makes

The first month of 2023 produced very good results across the board. Both equity and fixed income markets had a strong month, delivering solid returns to start the year. The S&P 500 delivered a total return of 6.28% for the month of January. This was the strongest start to a year since 2019 and second best in over 33 years. Likewise, the fixed income markets also had a strong start to the year. The US Agg total return was up 3.08%. As with equities, this was the best January since 1988 and the second-best January since the index began in 1976.

The outlook today contrasts greatly with where we were just one year ago. From February of last year through year end, the markets were under continued selling pressure as inflation fears continued to rise through the year. The Fed, in its effort to combat this inflation, raised interest rates seven times throughout the year, for a combined 4.25% of increases, to its highest level in 15 years. This was a major headwind to both equity and fixed income markets in 2022.

2022 Fed Rate Hikes - Date and Interest Rate Increase

Source: Windsor Wealth Management

Ironically, today being February 1, it is the first meeting of the Fed this year. Depending on when you are reading this Windsor Brief, the Fed may have already made the announcement for another interest rate increase. We fully expect the Fed to announce an additional 25 basis point increase today, with at least two more additional 25 basis point rate hikes this year. The good news is that the market is fully anticipating this, and this will not be a surprise. The key for today’s announcement will be in the rhetoric and tone the Fed maintains in their public comments. Once again, the expectation is for a Fed that is committed to keep rates up “higher for longer” to fight inflation. Depending on how aggressive they sound, this could cause near term volatility in the market, but clearly the end to the interest rate hikes is near, and this is good news for the market.

Thus, could the headwinds of 2022 eventually become tail winds in 2023? Investors will have to begin to shift their mindset from rising inflation and rising interest rates to moderating inflation and a pause in rising interest rates. The Fed’s two main datasets for tracking inflation are the Personal Consumption Expenditures Price Index (PCE) and the Consumer Price Index (CPI). We received PCE results last week for the month of December, which continued to show slowing inflation. Although the Fed and the media tend to focus on the “year over year” number, the more important number is the “month over month” result, as this captures the declines much quicker. In the chart below, you can see the three-month annualized PCE number is now 2.87%, a level not seen since early 2021, and could be described as “falling like a rock”.

Core PCE Year-Over-Year % and 3-month annualized %

Source: Fundstrat and Bloomberg

In addition, the December Producer Price Index (PPI) also showed a rapid decline. This is important as the PPI tends to lead the CPI data. Thus, lower PPI should result in lower CPI. December monthly PPI came in at 0.1% vs 0.4% the prior month. The 3-month annualized PPI is now 2.16%, which is pretty consistent with a CPI reading of near 2%.

Core PPI (Ex-Food and Energy) Year-Over-Year %, And 3-Month Annualized %

Source: Fundstrat and Bloomberg

Thus, there is clear evidence that inflation is falling quickly, and the Fed will have to reassess the interest rate trajectory. Our best guess is the May meeting could be when the Fed announces a potential pause to the interest rate increases if inflation continues the current path of decline.

While the inflation and interest rate headwinds look to be subsiding, the debt ceiling is a new topic we will need to keep in focus in the coming months. Even though there are no immediate implications for the markets, the debt ceiling will become front and center for investors in the next several months. Although it will ultimately be resolved, there is no quick and easy path to this resolution. It is for this reason that the debt ceiling will soon become an increasingly important topic for investors. The US will not actually default as it has more than enough cash flow from tax revenues to ensure interest payments are made. Principal and interest will continue to be made on time while maturing securities will be rolled over into new ones. Interest will be paid out of the Treasury General Account.

Federal Tax Revenues & Net Interest (12 Month Rolling, $Tn)

Source: Strategas

However, if we temporarily breach the debt ceiling, rating agencies may refer to this as a technical default and discretionary programs would most likely not receive funding until a political resolution to the debt ceiling is achieved.

Federal Spending By Category, as a percent of GDP

Source: Strategas, CBO

It should be made clear that this is mainly a political issue and not a true financial issue, but the political atmosphere will make default a common word in the coming months and may increase uncertainty in the financial markets. And as we have mentioned many times on these pages, uncertainty is the enemy of investors. Thus, this is a topic that will begin to become more important in the near future, and one we will closely monitor going forward.

Summarizing, this has been a terrific start to 2023. Lower inflation should allow the Fed to begin moderating their interest rate hikes with a potential pause as soon as May. This hopefully will result in the positive momentum we have seen in the markets thus far in 2023 to continue, albeit with volatility. Looking over the horizon, there are still some clouds in the distance as the debt ceiling will soon become a focus of the market and something to monitor. In addition, earnings are fully expected to continue being reduced for the S&P 500, but as this is expected it should not have a significant impact on the overall market performance. And to end we offer two historical facts. First, since 1938 when stocks finish positive in January, the S&P 500 has been positive 86% of the time at year-end, with a median gain of 16%. Second, and even more impressive, of the five instances in which the S&P 500 gained more than 5% for the full month of January following a negative year, the index rose 30%on average that year. As the old adage says, “so goes January, so goes the year”. Let’s hope history repeats and adages are correct!

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: SECURE Act 2.0

On December 29, 2022, The SECURE Act 2.0 was signed into law by President Biden as part of the year-end federal spending bill. The SECURE Act 2.0 has many different provisions that will gradually go into effect – changes that will affect retirement planning and education planning. The following are some of the key provisions.

Changes to Retirement Plan Distributions

Increase Required Minimum Distribution Age: If you turn age 72 in 2023, you can delay the start of your RMDs for one year. For 2023, the new RMD age is 73. Starting in 2033, the age increases to 75.

Qualified Charitable Distributions: Starting in 2024, QCD limit of $100,000 will be indexed for inflation. Starting immediately, individuals have a one-time opportunity to gift $50,000 of their QCD as a Charitable Gift Annuity or Charitable Remainder Trust. Note the increase in RMD age does not change the age when you can make Qualified Charitable Distributions from your IRA – this remains at age 70 1/2.

Reduced Penalty for missed RMDs: The penalty tax for not taking out your full RMD has been reduced from 50% to 25%. The penalty can be further reduced to 10% if the missed RMD is taken within a 2-year correction window.

Employer Plan Roth RMDs: Starting in 2024, RMDs will no longer be required during the owner’s lifetime from qualified employer Roth accounts such as Roth 401k, Roth 403b or Roth 457 accounts. This change will put them on even par with existing Roth IRA distribution rules.

Changes to Retirement Plan Contributions

Catch-Up Contribution Limits: Increase in contribution limits for those age 50 and older:

  • IRA – starting in 2024, catch-up limit of $1,000 will be indexed for inflation (in $100 increments).
  • Employer plans – starting in 2025, participants aged 60-63 will have catch-up limit increased from $7,500 to the greater of $10,000 or 150% of the inflation adjusted annual limit.

Catch-Up Contributions for High Wage Earners: Starting in 2024, catch-up contributions from high wage earners to employer plans must be made as Roth contributions (i.e., after tax). High wage earners are currently defined as wages over $145,000 in previous calendar year from the same employer.

Employer Contributions: Employees can elect that matching or nonelective employer contributions to 401k or 403b accounts be made as Roth contributions if permitted by the plan. These contributions would be taxable to the employee but not subject to FICA tax.

Emergency Saving Account: Starting in 2024, as part of an employer 401k or 403b plan, non-highly compensated employees can elect to save up to $2,500 in a designated Roth emergency savings account.

Change to Education Savings

Excess 529 funds: Starting in 2024, if money is saved for education but not needed, the excess 529 funds can be transferred into the plan beneficiary’s Roth IRA. Additional guidance will be required but current restrictions include:

  • 529 accounts must have been opened for at least 15 years.
  • Contributions (and related earnings) must have been made at least 5 years prior to transfer.
  • Annual transfer limit is the IRA contribution limit for the year, less any regular IRA contribution made for that year. It appears that the child will need to have earned income to make the 529 transfer.
  • Lifetime transfer limit of $35,000.

There are many unanswered questions for this provision such as What if the 529 account beneficiary is changed? We also do not know if Indiana or other states will conform to these new provisions – meaning if any prior state tax credit would be subject to recapture.

Windsor will continue to monitor the developments in these new provisions as they roll out over the next few years. We will continue to look for strategies that will aid in your overall financial planning. Please let your Windsor advisor know if you have any questions.

Dream boldly. Plan wisely.