November 2022 - Market Update

Data Dashboard

Stock Market

Both the S&P and NASDAQ continued the prior month’s rally and finished this November about +5.5%. With the USD index down about -5% on the month, international markets finished strong with Developed and Emerging Markets notching about +11% and +8% positive returns respectively. Satisfactory earnings reports in both the technology and retail sectors alongside indications that the Federal Reserve is open to slowing its pace of rate hikes helped fuel the rally.

Early in the month, headline and core Consumer Price Index reports surprised markets (each 0.2% lower than expected) causing equity markets to rally on the lower-than-expected inflation data as the NASDAQ and S&P rose more than +7% and +5%, respectively in a single day.

December is an important month for stocks, particularly in the consumer-driven sectors. Retail sales around the holidays will shed more light on consumer sentiment given higher prices.

November Monthly Returns (by US Sector)

Bond Market

The yield curve deepened its inversion this month with long-term rates dropping more than short-term rates. Over the course of the month, the 2Y treasury yield fell only 17 bps, while the 10Y treasury dropped 44 bps. This means investors are expecting lower interest rates in the future, which would generally be a function of the Fed needing to provide stimulus and inflation becoming contained. The Fed has a history of over-tightening, so investors may be betting that over-night rates remain too-high for too-long, hurting the economy and causing the Fed to need to react with a swift reduction in rates in response.

With the handful of positive economic data reports and negative MoM rent & housing prices, evidence that inflation is finally easing is starting to pile up. At the start of the month, TIPS securities showed a breakeven inflation rate of 2.86% and 2.51% (2Y and 10Y breakevens respectively), which decreased to 2.59% and 2.44% by the end of the month.

Economics

The key economic question for 2023 remains the Fed’s fight with inflation and whether the current rate hiking regime will be enough to lower inflation without sending our economy into a deep recession. We remain cautiously optimistic of the “soft-landing” scenario that has recently come closer into view as the turn of the year fast approaches. Earlier this month, we saw CPI and PPI inflation numbers (both measurements of goods and inputs prices) come down more than expected. Coupled with this there’s resiliency in the economy with low unemployment, positive GDP growth & jobs numbers, and consumer spending remaining buoyant despite rising costs (whether the spending can stay high through 2023 is another story). In Fed Chairman Powell’s November 30th meeting, he detailed his idea of a “soft landing” as one that involves a small increase in unemployment numbers without tipping us over the edge into painful job loss and extreme decrease in household spending. The JOLTS report showed a lowering of job openings which Chair Powell says is a positive as it’s much less painful to lower job openings than it is to increase unemployment.

We recognize there are significant risks to our cautiously optimistic view of 2023 including but not limited to the possibility of inflation being more entrenched than imagined, the Federal Reserve hiking rates higher than necessary, or an escalation of Russia-Ukraine (or other global) conflict.

Tactical Updates

For Tactical Equity ETF portfolios, we swapped out of seven of the eight positions this month for exposure to European, Aerospace & Defense, Energy & Oil, Industrials, and Copper Miners equities. As for Tactical Equity Stocks, our sector concentration at the end of the month was primarily in Energy, Industrials, Materials, and Financials.

As for Tactical Fixed Income portfolios, we traded out of most of our ultra-short term and floating rate convertible bonds and locked in small gains. We traded in favor of emerging markets, international, and short-term corporate bonds. The remainder of the portfolio stays invested in short-term floating rates which have allowed us to increase some of the credit risk in other positions.

General Client Considerations

In 2023, the annual contribution limit for 401(k), 403(b), most 457 plans and Thrift Savings Plan is $22,500. This is an increase from the 2022 limit of $20,500. Additionally, if you are 50 or older, the catchup contribution limit for 401(k)s increased from $6,500 to $7,500. That means, in 2023, individuals who are 50+ in 2023 can contribute up to $30,000 to their 401(k)s.

The IRS changed the contribution limit for IRAs and ROTH IRAs from $6,000 to $6,500, and left the catch-up contribution at $1,000. The fall is the perfect time to plan for your retirement account elections so you can spread your contributions evenly throughout the year.

Many of you have already received RMD reminders for your IRA, but is another friendly reminder. If you are 72 or older and have not yet taken your RMD or are unsure if you have an RMD to take, please contact us to discuss. Additionally, if you have an inherited IRA and are unclear on the rules for taking distributions, please contact us.

Thanks,

The Friedenthal Financial Team

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