Hello All-

I hope everyone is having a nice, relaxing Thanksgiving. I came across this quote the other day by Meister Eckhart, and wanted to share it with you: “If the only prayer you ever say in your entire life is thank you, it will be enough.” There are so many things I’m grateful for this year, but one of the biggest (and most perennial) is your trust and confidence, which I will never take for granted. No matter what happens in the world, I have the best clients in the world. Thank you.

First off, as we approach the year-end, I’d like to remind you of some important tax planning considerations to address before 12/31. NOW is the perfect time to check your 2022 YTD contributions for tax-advantaged accounts and make sure you’re on track to maximize those benefits to the extent you are able.

Please click the link below for a quick run-down of the typical year-end items. For any accounts that are funded through payroll deductions, the quickest way to check where you are ‘at’ YTD is via a paystub. For example, the max 401k/403b employee deferral for 2022 is $20,500 (or $27,000 for those age 50+), which does NOT include whatever your employer may contribute. So, if you are trying to max this out, your YTD employee contributions (by end of November) should be ~$18,792, or $24,750 if age 50+. If it seems you may be coming up short and need help calculating how to adjust your December contributions to close the gap (and/or help going in and making the adjustment), just let us know and we’re happy to help.

Next, let’s talk about the market. Recent inflation data has renewed optimism for a peak in the federal funds rate during the first half of 2023. We share in the market’s ‘over the hump’ enthusiasm, but believe it could be a bumpy path for equity markets until there is a clear culmination of Fed tightening. While history may not repeat, it may rhyme with other major rate hike cycles, implying there is upside risk for inflation and interest rates. In addition, the S&P 500 has historically traded lower into a Fed pivot. The current backdrop for Fed tightening into next year should also continue to support value outperformance. With a potential peak in interest rates occurring near a Fed pivot, we suspect growth could make a comeback during the back half of 2023.

Because it’s been a very volatile year for stocks (& bonds), before I go any further on market-related ‘stuff’, I want to first (at the risk of sounding like a broken record by this point) reiterate the overarching conclusions about investing:

I know we still have a month left in 2022, but as of this writing, not a single client has made what we call the ‘Big Mistake’ (i.e. panic selling) despite an extremely chaotic year with lots of terrible headlines everywhere one turns. So, well done for staying the course. That’s the critical issue in a bear market, isn’t it? Did the investor who succumbed to the ‘Big Mistake’—fatally infected with the disease of human nature—decide that as prices fell, risk was rising, and therefore flee as the decline happened? Or, did she or he say ‘Recessions come and go, and market drawdowns come and go, but great companies endure and prosper, so the lower their prices, the greater that enduring value?’

As you know, while we do sometimes prognosticate when ‘cornered’, at the end of the day we can’t advise you on economic and/or market timing. No shame on us for that: neither can anyone else, as the last nearly three years of chaos cumulatively demonstrate. Instead, we’re happy to make a lifetime plan with you and for you, then spend the rest of our relationship helping you make sure that plan comes to fruition. Our newsletters have somehow had an astonishingly high 80%+ read rate most of this year, so I’m getting the sense that this content has been somewhat useful and perhaps even therapeutic. We will continue to prioritize these, and of course welcome any feedback.

In my last writing, I talked about how financial journalism (and journalism in general) manifests a relentless bias toward the negative, and mentioned Business Week’s classic ‘The Death of Equities’ cover article, which was subtitled ‘How inflation is destroying the stock market’. It appeared on August 13, 1979 and said ‘For better or worse, then, the US economy probably has to regard the death of equities as a near-permanent condition…’ In hindsight, this was of course right at the dawn of the biggest bull market of all time. In this month’s piece by Nick Murray, titled ‘Inflation, Recession and a Frantic Bear Market…Again', he points to a similar (now) laughable piece of journalism from June 1970 from Life magazine. I think the best point Nick makes in this piece is how $10,000 invested that month is today right around $2,000,000. The best quote he shares is from the great investor Sir John Templeton who said, “The investor who says ‘This time is different’ has uttered among the four most costly words in the annals of investing.”

While we CAN’T control markets, inflation, earnings, interest rates, news, the economy, the Fed, drawdowns, volatility, elections, etc. etc., we’ve been working overtime this year focusing on the things we CAN control. We CAN control taxes (e.g. tax loss harvesting, Roth conversions, etc.), portfolio positioning (making sure we continue to own a large and diversified set of high quality, profitable businesses with strong balance sheets and durable competitive advantages), expenses/fees, and encouraging our clients to keep saving/investing.

My primary job is not to do chaotic and treacherous acrobatics to insulate you from short-term volatility in moments like these, but rather, keep you from having long-term regret (lost opportunity not being in the market).

For what it’s worth, my (albeit eternal) optimism remains firmly rooted as we look toward 2023, for the following reasons:

·      Two weeks ago, the CPI (Consumer Price Index, key inflation metric) came in much lower than expected at 7.7%, which is a strong signal that what the Fed is doing to cool inflation is working, without putting us into a recession (yet). All eyes have been on the CPI for many months now, and the market surged when this data came in. Good sign that there’s light at the end of the Fed’s tightening tunnel.

·      For Q3 2022, nearly 70% of S&P 500 companies have reported positive earnings that exceeded expectations.

·      The unemployment rate remains historically low. There are still more posted job openings than people actively looking for work. Just about everyone who can work, or wants to work, is in fact working, and at higher wages. This certainly makes the inflation fight more challenging (full employment with rising incomes isn’t about to suppress goods inflation), and paradoxically, the Fed’s argument is that it will likely need to see job destruction to curtail growth/inflation.

·      While we are indeed hearing about more layoffs in the media, especially in big tech, that can also be attributed to other business-specific reasons, and bottom line, we are just not (so far anyway) seeing any big changes in the unemployment rate. If we do see this figure tick up, however, it might be welcome news for the Fed & financial markets (as mentioned above).

·      Now granted, monetary policy operates on a long lag, and it can be argued that the full effect of the sharp rate increases from the Fed has yet to be felt. With the Fed’s track record, there’s still a meaningful risk that they could overdo it with the tightening and cause a recession but the statistics we are seeing so far indicate that it would take a lot to ‘break’ the US economy right now, so if we do see a recession in 2023, our contention is that it would be a shallow one.

·      So, inflation is falling yet unemployment rate remains historically low + 70% of companies beat earnings expectations + wages are growing + Americans’ bank accounts are still very ‘flush’—to me this is very encouraging math.

·      In any case, inflation is cancer. Recession—assuming it proves necessary, which our clients must be prepared to do—is chemotherapy. And we say bring it on.

If, like so many of us, geopolitical ‘stuff’ has you spooked lately, this article from Foreign Affairs titled ‘Globalization Isn’t Dead’ is a good read that suggests that the world isn’t going to totally fall apart anytime soon.

Nick Murray’s perspective on globalism (that it was all an illusion in the first place) in ‘A Whole New World’ is also interesting and thought provoking, although his politics are clearly on display.

Zoom out on market history, and one of the scariest crashes ever becomes a mere blip.

One of Wall Street’s most implacable bulls has laid out his argument for why he thinks U.S. stocks can continue to rally into the year’s end after Thursday’s game-changing October inflation data.

Stocks soared in their best day since 2020 on Thursday after new economic data showed that price increases eased in October. Investors cheered the development because it indicates the Federal Reserve’s interest rate hikes may finally be cooling inflation.

Inflation is starting to ease, but the United States is still a long way from the Federal Reserve’s goal.

The Internal Revenue Service announced Wednesday higher federal income tax brackets and standard deductions for next year, which will be a welcomed cost of living adjustment for many Americans.

The chances of an upside surprise may have increased

See practical tips on when it makes sense to switch in Medicare coverage

Retirees can save money by reviewing their drug coverage options

The larger COLA may require more tax planning for 2023

Long-term Treasury bonds have lost more money than stocks in 2022

You’ve been working and saving for decades for just this moment: retirement. But many retirees have a very hard time psychologically tapping those savings.

A new report suggests that the Inflation Reduction Act could be even bigger than Congress thinks.

- Charlie

John Bay, CFA I Chief Market Strategist | jbay@meetmarathon.com