NWP Monthly Digest | May 2023
A Financial Fiesta: Celebrating Market Resilience
May is an eventful month on Wall Street, with the release of first-quarter earnings reports and a Federal Reserve meeting scheduled for tomorrow. Investors are anticipating a 25 basis point rate hike as the Core PCE Index, the Fed's preferred inflation gauge, was recently reported at 4.6% - well above the Fed's target of 2%. Despite some indications of a slowing job market and overall economic growth, it may not be enough to dissuade the Fed from hiking rates this week. The question now is whether this rate hike will be the last and when the Fed might cut rates again.
A Pinata of Problems
This morning, regulators seized First Republic Bank and struck a deal to sell the bulk of its operations to JPMorgan Chase Bank, marking the second-largest bank failure in U.S. history, behind the 2008 collapse of Washington Mutual Inc. First Republic's stock has shed more than 95% of its value this year, largely due to aggressive Fed monetary policy and $100 billion in deposit outflows in the first quarter, putting pressure on a balance sheet containing over $100 billion in single-family mortgages. Following the sale, investors are keeping a close eye on the potential repercussions for the financial sector, hoping the piñata of problems doesn't burst open and impact other banks.
May Madness
May is an eventful month on Wall Street, with the release of first-quarter earnings reports and a Federal Reserve meeting scheduled for tomorrow. Investors are anticipating a 25 basis point rate hike as the Core PCE Index, the Fed's preferred inflation gauge, was recently reported at 4.6% - well above the Fed's target of 2%. Despite some indications of a slowing job market and overall economic growth, it may not be enough to dissuade the Fed from hiking rates this week. The question now is whether this rate hike will be the last and when the Fed might cut rates again.
Lumbering Liquidity: Taco 'Bout a Challenge
The decline in lumber prices may be linked to First Republic Bank, indicating that liquidity pressures in the regional banking sector still exist. This could impact credit availability since regional banks account for a significant portion of the lending market. Smaller community banks are experiencing significant deposit withdrawals, which could force them to either slow lending or sell off assets - neither of which is an ideal solution. These banks play a significant role in the real estate market, so let's hope they find a solution to keep their guacamole fresh and green.
In mid-April, a record-breaking two-week decline in CRE loans caught our attention. Although this decline represented just $30 billion of a massive $3 trillion loan book, it raises concerns as nearly $1.5 trillion of US commercial real estate debt is set to mature by the end of 2025. Prompting the question: who will step in and lend to these borrowers? According to Morgan Stanley, office and retail property valuations could plummet by up to 40%, heightening the risk of defaults.
Prepare for a Bumpy Ride and a Side of Nachos
As the aggressive monetary policy's consequences become more apparent, the Fed will likely face pressure to reduce rates. Investors should brace themselves for potential turbulence in the coming months. The ongoing heated negotiations in Congress to raise the $31.4 trillion debt ceiling could lead to a U.S. default on payment obligations as early as June if an agreement is not reached. This situation makes fiscal tightening nearly unavoidable, which may hasten the timeline for a rate cut. Notably, the Fed's own projections indicate an expectation to cut rates before the year's end.
Looking Ahead and Dancing the Night Away
When the Fed lowers rates, it may cause the value of the dollar to decrease, providing a tailwind for global risk assets. Investors should feel enthusiastic about the potential interest rate cut, as it eliminates a major barrier to wealth growth and further propels global risk assets, creating new opportunities.
Despite the recent market turbulence, our outlook for stocks in 2023 remains positive. With the anticipation of a decline in interest rates, ongoing growth in the consumer sector, more reasonable valuations, and a recovery in earnings during the latter half of the year, we encourage investors to concentrate on long-term goals rather than short-term outcomes. Much like the resilient Mexican army on Cinco de Mayo, the market can prevail over adversity. It's essential to remember that market fluctuations are not unusual and have historically rebounded. By focusing on long-term objectives, investors can better manage their emotional reactions to market shifts. So let's celebrate our financial progress with a lively dance and a side of chips and salsa!
Noble Wealth Pro Tip of the Month
Series I-Bonds May Be Losing Their Luster
I began recommending I-Bonds to clients when their rates rose above 7% while Treasury bills were offering yields of less than 1%. As rates continued to climb, I-Bonds became even more appealing, with rates reaching as high as 9.62%. However, the current I-Bonds rates have decreased to 4.3%, while six-month Treasury Bill yields are 5.06%. For those who currently hold I-bonds, more enticing alternatives may be available based on your financial objectives.
The Sunset of the 2018 Tax Reform - How Should You Prepare?
A well-planned tax strategy can help reduce taxes both presently and in the future. It's important to note that specific provisions of the TCJA are set to expire by the end of 2025, which may have significant implications for taxpayers. For instance, individuals may want to consider accelerating income if they anticipate a significant tax rate increase. For example, married couples filing jointly with income between $274,401 and $364,200 could see their tax rate increase by 9% when the TCJA expires. Those needing to accelerate income may want to consider options such as exercising stock options, Roth conversions, avoiding deferred compensation, taking larger RMDs, and making inherited IRA withdrawals. Business owners may also want to consider changes to their business structure. If you have any questions, we would be happy to assist you in creating a tax strategy that suits your needs.
Fun Facts of the Month
Bullish C-Suite: More than 1,000 officers and directors at more than 600 companies bought their own stock in March. That is the highest number on an individual and company basis since last May, according to the Washington Service, an insider-trading data analytics provider. The ratio of insider buying to selling last month swelled to the highest level since September (WSJ).
Recession anyone?: The Conference Board’s Index of Leading Economic Indicators declined for the 12th consecutive month in March, tying the 12-month streak of declines from May 1980 as the third longest since 1959. In each of the three prior periods when LEI declined for 12 or more months in a row, the economy was in a recession (The Conference Board).
Still not convinced?: The Conference Board’s index of Leading Indicators declined 6.5% year-over-year in February. Outside of the current period, since 1960, leading indicators have never been down 5% or more on a year-over-year basis when the economy wasn’t either in or within six months before or after a recession (Bespoke).
Overweight: As many as 70% of Americans are overweight and 40% are obese. Excess weight raises the risk for health issues, including heart disease, diabetes, and Alzheimer’s (CDC).
Get your estate plan in order: 61% of US households have either received, expect to receive, or plan to leave an inheritance, which is up from just 46% in 2015. The biggest increase came from households expecting to leave an inheritance, as that percentage increased from 27.2% in 2015 up to 38.2% in 2022 (Hearts & Wallets).
Billions Left on the Table: 29 college savings plans have accumulated over $400 billion in assets, but a 2023 study found that two-thirds of assets under management are parked in expensive home-state plans that don’t offer offsetting tax benefits. On a cumulative basis, investors in these plans are leaving over $37 billion on the table (NBER).
Always a “buy”: The average S&P 500 stock has coverage from 23 Wall Street analysts. As of 4/20/23, 52.7% of all S&P 500 analyst ratings were “buys,” 41% were “hold,” and just 6.3% were “sells.” The percentage of “buy” ratings has decreased 2.4 percentage points since the end of 2022, when 55.1% of all ratings were “buys,” meaning analysts have gotten less bullish on stocks this year as the major indices have bounced back.
Sell in May: Since WWII, the S&P 500’s median performance during the six-month period from May through October has been a gain of 3% with positive returns 65.4% of the time. That’s less than half of the 6.2% median gain (positive 76% of the time) in the six-month period from November through April (Bespoke).
Solid returns: The S&P 500’s 7% rally in Q1 2023 was the second straight quarter of more than 5% gains. Since WWII, there have been 25 prior back-to-back quarterly gains of over 5% for the S&P 500. Over the next two quarters, the index’s median gain was 8.2%, with positive returns 23 times. For all two-quarter periods, the S&P 500’s average increase was 4.3%, with gains 68% of the time (Bespoke).
Treasury yield streak: On April 4th, 2023, the 10-Year US Treasury yield hit a six-month low on a closing basis for the first time since August 2020. The 664-trading day streak without a closing low was the longest since at least 1962. The only two streaks that lasted more than two years ended in December 1966 and November 1970 (Bespoke).
Refunds: Of the 71.5 million Federal tax returns processed through March 17th, 2023, 53.9 million received a refund, up 4.1% from a year earlier. The average IRS tax refund issued for 2022 returns declined 11.3% from a year earlier to $2,933 (IRS).
Gains ahead?: Since WW2, when the S&P 500 posted a gain in Q1, it has averaged a rest-of-year gain of 8.9%. When the S&P 500 was down in Q1, the rest of-year gain was only 2.6%. In the ten years that the Q1 gain followed a down year, the average rest-of-year gain was 15.9%, with positive returns every time (Bespoke).
What We’re Reading
The Art and Science of Spending Money | Morgan Housel
Do you think your financial decisions are purely rational? According to Morgan Housel, that may not be the case. Housel, one of my favorite authors on personal finance, explains in his book that deep-seated psychological needs often drive our spending habits, and our life experiences shape how we interact with money. The book offers several key messages that everyone can benefit from, including the idea that more spending doesn't necessarily lead to more happiness, and that saving shouldn't become a core part of your identity. Housel also advises readers not to feel guilty about emotional big purchases and points out that spending has both utility for the owner and social signaling effects. Many people mistakenly believe that flashy possessions will bring admiration and respect, but often overlook the long-term costs associated with their purchases. Additionally, Housel notes that our feelings of financial success are often relative to the perceived success of our peers.
Intentional Leadership | Rose M. Patten
In her book, Patten debunks common myths about the eight key leadership capabilities she has identified. She encourages leaders to focus on self-awareness, feedback, intention, adaptability, and good character in order to reach their full potential. She also emphasizes that critical challenges can help leaders become stronger, and identifies three game changers that are affecting leadership: stakeholder demands, the workforce, and changing strategies.
Patten also discusses four fallacies about leadership that can hinder adaptability and rapid change. She stresses that the time spent doing a job does not necessarily improve a leader’s soft skills; deliberate prioritization is required instead. Interestingly, most senior leaders believe they do not need mentoring, which Patten argues is a mistake.
The "Big 8" leadership capabilities, according to Patten, include adaptability, strategic agility, self-renewal, character, empathy, communication, collaboration, and developing other leaders. She argues that talent development is arguably the most crucial of these capabilities.