Broker Check

August Market Update - A Glimpse Into the Future

August 02, 2023

Stocks have climbed a formidable “wall of worry” since March. Events that would have shaken markets and maybe even precipitated a recession in the past, were instead treated as only mildly irritating speed bumps. Banking crisis? ‘No big deal.’ Congress flirting with default? Yawn! Another series of Fed hikes with short-term rates potentially reaching 6%? ‘Bring it on!’ It’s been a great run but led by just a narrow set of stocks: Alphabet, Amazon, Apple, Microsoft, Meta, Nvidia and Tesla. Apart from these “Magnificent 7”, many other companies comprising the “S&P 500” either languished or are down for the year.


Given that 2022 is barely in the rear-view mirror and inflation still remains high by historical standards, can we say we are out of the woods? Not necessarily. In our view, while the worst from the bank failures now appear to be behind us, commercial banks are tightening their credit issuance and reducing their loans. We think this is likely to cause a reduction in economic activity later in Q3 or Q4. We do believe the odds of recession are lower than they were 4 months ago, reflecting the lingering power of the resilient U.S. consumer. However, consumers have been buttressed by all of the excess money that was created and pumped into the economy during the Covid lockdowns. The Fed is now actively trying to reduce the monetary supply and sop up much of those excess reserves without bringing on a recession. We wish them luck.


So far, in 2023, we see the markets responding to major, powerful investment themes that we think will continue for the foreseeable future. These themes are: artificial intelligence (AI), geo-political decoupling and de-globalization, the move away from carbon energy production, digital transformation of our financial system and the “stickiness” of inflation in the economy. Our choices for investments reflect these broad themes at the portfolio level. For example, our security selections over the last year, and especially into 2023, have emphasized companies with intrinsic roles in AI, such as Microsoft and Alphabet, Salesforce and others.


Inflation has been a scourge to financial markets and consumers alike. It is said that inflation is the harshest and most regressive of taxes, affecting the poor and middle class the most. Inflation has also been destructive to financial markets, particularly bonds. In fact, under the pressure of inflation, bonds suffered their worst year since 1926 last year. While we’ve seen inflation moderate since then, it remains to be seen whether the Federal Reserve’s fight against inflation will be successful. In the meantime, we are seeing opportunities in short-term bonds where yields have risen dramatically, floating rate Treasuries and TIPS, complemented with long-term Treasuries. This barbell strategy may help guard against the cumulative effects of Fed tightening potentially proving to be excessive bringing about what so many have been worrying about for the last 18 months: the R word.


From the Did You Know? Dept.

One of the more confusing areas of IRA rules over the last couple of the years has been the changing requirements regarding Required Minimum Distributions for Inherited IRAs. Up until 2020, it used to be that non-spouse beneficiaries could take RMD’s over their lifetimes, allowing funds to grow tax-deferred for decades. That all changed in late 2019 and those inheriting a non-spouse IRA in 2020 and beyond were told they had 10 years to withdraw all the funds. The IRS’s initial interpretation of the rule led many to believe they didn’t have to take out an annual RMD from their inherited IRA so long as all the money was withdrawn by year 10. Then, in March of last year, the IRS proposed regulations that sowed confusion by differentiating if RMD’s were required based on whether the decedent had been taking RMD’s. If they had, then RMD’s would also be necessary for the non-spouse beneficiary. If the decedent died before taking RMD’s then no RMD’s were necessary, and the beneficiary could wait until year 10 to take everything out.

The IRS’s proposed regulation has been roundly criticized and the agency has yet to finalize it. So, while they mull it over, they continue to offer relief to beneficiaries who have not taken out annual RMD’s from their inherited IRAs. Relief was given for 2020, 2021 and 2022 and the IRS just extended that relief for 2023. At this rate, the 10-year cleanout of the IRA without any RMD’s will be a fait accompli by the time the IRS finally decides whether RMD’s are needed or not!

Wishing you a wonderful rest of your summer!

- Rich Jacobson, CFP

Statements of future expectations are based on current market conditions, and involve uncertainties that could cause actual results to substantially differ from those expressed. This commentary is for informational purposes only and should not be construed as specific advice.