Windsor Brief for May 2023
Investing:A Positive Month Impacted by Countering Cross Currents
Planning:Changes in Retirement Spending
Market Snapshot
This month’s Windsor Brief reviews the positive performance for the month of April. In addition, we take a brief look at the prevailing market crosscurrents, as the market tries to navigate the countering headwinds and tailwinds going forward.
In our Financial Planning section this month, we look at how spending may change during retirement and how we can account for that in our retirement 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.
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Investing: A positive month impacted by countering cross currents
April delivered a solid positive gain for both the equity and fixed income markets, delivering the second month in a row of positive returns. This also follows two quarters of positive performance in a row. For the month of April, the S&P 500 delivered a total return of 1.56%. For the year-to-date period, the S&P 500 total return is up a very impressive 9.18%. The fixed income market returned a positive performance of 0.61% for the month of April and is up 3.59% for the year to far.
Like the prior couple of months, April was characterized by mild volatility in performance. The market is currently caught between both headwinds and tailwinds, resulting in cross currents, making it difficult to deliver consistent positive performance. Below, we briefly discuss the cross currents and why we think the tailwinds will ultimately win out.
In terms of the headwinds, the main concerns on the mind of the market have remained consistent for the past several months:
- Inflation and the Fed (interest rates)
- Bank failure concerns post Silicon Valley Bank
- The debt ceiling
- Corporate earnings
The Fed meets this week and will provide fresh commentary on their view of inflation and the economy. It is fully expected the Fed will raise rates 25 bps at this meeting. However, we expect their commentary to be more dovish in tone than in recent meetings. We also fully expect they will leave themselves plenty of wiggle room on future rate hikes as they will not want to back themselves into a corner one way or another. Although there is the possibility for future hikes after this, it will be very data dependent and at this time we lean towards thinking they may pause after this increase. The inflation data continues to show inflation is slowing while unemployment is beginning to rise. For instance, home prices continue to fall, and this will begin to show up in the CPI reported numbers, giving the Fed comfort the past interest rate increases are working.
Case Shiller Home Price Index %YoY
Source: Bloomberg
In addition, market concerns about bank failures had begun to recede. However, there were renewed concerns last week when First Republic (one of the three banks that originally caused the banking concern) disclosed the amount of deposit withdrawals they had experienced. This did have an impact on the market as the failure concerns once again rushed to the forefront.
Fortunately, this is not a new issue, it is just the same issue they had prior. Over the weekend JP Morgan working with the FDIC acquired the assets of First Republic, and all branches will open today under the JP Morgan Chase banner. This should continue to alleviate fears of a banking crisis. More importantly, when you look at the regional banking space, recent data from the Fed shows that total borrowings by banks have declined four weeks in a row and is down about $11.4 b, which is an indication the banks are not under duress, thus this issue should resolve itself. The BTFP program shown below is the Bank Term Funding Program launched March 12 for banks and credit unions experiencing liquidity issues. The borrowings from this program have clearly been dropping.
Fed Emergency Lending Drops
Source: Bloomberg, Federal Reserve
The next concern is the debt ceiling. Unfortunately, there is still a long way to go until we get a resolution on the debt ceiling. This is purely a political issue and not a true financial issue. However, it does have ramifications for the stock market. At this point both political parties are digging in their heels, but that is how the process works. The Republicans did pass legislation in Congress last week on provisions for raising the debt ceiling and cutting spending. Although this will not pass the Senate, it was an important step in the process, and it is important to remember this is a process. This opens the door to eventual discussions to resolve the issue. The fear is that this will be like 2011 when the US debt was downgraded on the budget deficit concerns and the political conflicts over raising the debt ceiling. And recall, the US government shut down for 16 days in 2013 and 35 days in 2018. So, debt ceiling issues are not new, and something we go through every few years. Weall need to be prepared for negative headlines as we get closer, but it will eventually be solved as it always is. Looking at 2011, 2013 and 2018, these events did not have a lasting impact, maybe weeks to a couple months in worst case scenarios. The question for now is when will “the US Treasury run out of money”, also known as the X date? Of course, the answer is never, as it is only a technical breach. From a technical standpoint it depends on if you look at the Congressional Budget office (CBO) baseline or the Office of Management Budget (OMB) baseline. These have slightly different X dates, but it will be sometime later this summer. But approaching this date is what will force the negotiations and a resolution. We will cover this in more detail in future Windsor Briefs.
Maximum available cash balance to U.S. Treasury including extraordinary measures (billions)
Source: Capital Group, CBO, OMP
The last overhang the market has been focused on is first quarter corporate earnings and earnings revisions for the full year. The good news is that with 53% of S&P 500 companies already reporting actual results, 79% of the companies reported a positive EPS surprise and 74% reported a positive revenue surprise. The blended EPS decline for Q1 so far is -3.7%, which is much better than the expected -6.7%. This should give comfort to the market that earnings are not declining rapidly, and this could lead to a soft landing for the economy.
A key takeaway from all four headwinds above is that they soon may no longer be headwinds and could even turn into tailwinds. In addition, there are currently existing tailwinds for the market. One great technical tailwind is the fact the market has now had two positive quarters in a row. Since 1950 two positive quarters in a row has led to a new bull market every time.
S&P 500 Quarterly Returns since 1950
Source: Fundstrat, Bloomberg
In addition, valuations are not as bad as it seems. The forward 12-month P/E ratio for the S&P 500 is 18.1, about in line with the 5 yr. average of 18.5 and the 10 yr. average of 17.3. If you take the FAANG stocks out of the equation, the multiples drop significantly. Thus, when you look at the fact inflation is rolling over, the Fed may pause after the May rate increase this week, valuations are not stretched, the economy may have a soft landing as earnings are coming in better than expected, and the bank concerns look to be both contained and behind us, it is not hard to be optimistic that the market could continue to deliver solid results through 2023.
In conclusion, although there remain headwinds to the market, many of these headwinds could soon dissipate, or even become tailwinds. Combined with existing positives already in the market, this could be a nice set up for the remainder of 2023. And, despite these headwinds, the S&P 500 is now up a very impressive 9.18% for the year! Although volatility is always possible, we could soon see double digit returns for 2023.
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.
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Planning: Changes in Retirement Spending
Every year J.P. Morgan publishes a Guide to Retirement that contains several interesting charts surrounding retirement planning, investing, and spending. In this month’s Windsor Brief, we are going to look at two charts regarding retirement spending.
The first chart below indicates how spending categories may change in retirement. This spending chart is based on households with investable wealth between $1 – $3 million. The “Other” spending category includes tax payments, insurance, gambling, personal care, and uncategorized items.
Note that spending tends to peak around age 50-54 and then overall spending starts to decline during the early years of retirement. Most categories tend to decline with age except for health care and charitable contributions. Housing is the largest spending category for all ages and could increase at later ages depending upon long-term care needs. The increase in these three categories can cause overall spending to trend up in the final years of retirement.
Source: J.P. Morgan Asset Management Guide to Retirement 2023 page 29
The second chart looks at potential spending stages of retirement. The first few years of retirement can be considered the Go-Go years characterized by increased spending on things like travel and entertainment. Spending during this first phase of retirement can be the same as, or actually more than, the spending pre-retirement. The next phase is the Slow-Go years in which spending tends to decline over the next 10 years. The final phase, known as the No-Go years, is marked by a continued decline in normal spending but health care and long-term care spending could increase significantly.
Source: J.P. Morgan Asset Management Guide to Retirement 2023 page 26.The Prosperous Retirement: Guide to the New Reality, Michael K. Stein, CFP, 1998, pp. 16-18.
The above two charts can shed some interesting light into potential future spending trends during retirement. Windsor can help you plan for your anticipated retirement spending by not only including an overall retirement living expense goal but also by adding additional goals that are for a set time frame. For example, the additional goals could include Additional Retirement Travel during the first 10 years of retirement, Extra Entertainment – Symphony/Sporting Events, Family Gifting, Charitable Giving and Long-Term Care Expenses.
During retirement, it is also important to monitor your financial plan and update your goals based on actual spending or changes to your goals. Your Windsor team is ready to help you plan for your retirement spending goals. Please let us know if you have any questions.
Dream boldly. Plan wisely.
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