Market Update | Markets Start the Year Off With A Bang

Following a rough 2022, investors were cautiously optimistic that 2023 would bring better returns for both the equity and fixed income markets. Indeed, since 1926, equity and fixed income markets had only been down in the same calendar year three times: 1931, 1969 and 2022. Accordingly, with such an atypical year out of the way, some expected 2023 to bring better results. With January in the books, so far so good. But as we have become well aware, there’s a long way to go. That said, investors are certainly happy with the solid start, as the S&P 500 Index surged 6.2%, the Dow Jones Industrial Average added 2.8%, and the tech-heavy NASDAQ jumped almost 11.0% for its best start since 2001.Internationally, the MSCI EAFE Index added 8.1% while the MSCI Emerging Market Index gained slightly less, at 7.9%. The bond market also rebounded nicely, as the Bloomberg Aggregate Index tacked on 3.1% and high yield bonds, as measured by the Bloomberg High Yield Index, jumped 3.8%.

As has been the case for much of the last year, inflation and the Fed’s response to inflation have been the primary drivers of the markets. As such, in mid-January, when December’s inflation figures were released, markets reacted quite favorably to the results. Headline inflation posted its largest monthly decline, -0.1%, since early in the pandemic (April 2020), and on a year over year basis was up 6.5%, its smallest annual increase since October 2021. A steep drop in gasoline prices was a big driver in the lower inflation number, as prices fell 9.4% in December. 

As inflation rose to the highest levels since the early 1980s the Federal Reserve hiked rates from near zero at the beginning of 2022 to 4.25%, the highest level in 15 years. However, as inflation has moderated since peaking last June, the expectation is that the Fed will take its foot off the gas in terms of tightening, as there is now only a 25-basis point rate hike expected on February 1^st. The Fed is attempting to navigate a soft landing on its rate policy to slow down the economy and inflation without tipping the economy into recession.

Unfortunately, as inflation fears are starting to subside, recession fears are starting to intensify. The U.S. economy grew at a better-than-expected 2.9% annualized pace in the fourth quarter, as an increase in government spending and private investment aided growth. However, consumer spending, which accounts for 68% of GDP, weakened from the previous period. As rate hikes typically operate on a lag, meaning their real impact may not be realized until much later, consumer spending numbers may continue to deteriorate. If the consumer starts to falter, or even reduces spending substantially, growth will be adversely impacted, possibly sending the U.S. into a recession.

While the economy is facing numerous headwinds in 2023, markets have remained somewhat resilient, with a solid fourth quarter and a good start to the year in January. Fed action in response to future inflation readings will be a big driver of markets going forward, and while it’s likely that inflation will slow in 2023, achieving the Fed’s 2% target will be a multi-year process. Moreover, corporate earnings, and maybe more importantly forward-looking guidance from corporations, will also have a significant impact. So far, in January at least, earnings have been better than expected. While inflation, corporate earnings, and other economic data are highly unpredictable, the equity and fixed income markets are as well. As such, staying the course with your investments is typically the best course of action.

Legal Update | SECURE 2.0 Act Brings Major Retirement Plan Changes

On December 29, 2022 (the "Enactment Date"), the SECURE 2.0 Act of 2022 ("SECURE 2.0") was signed into law. SECURE 2.0 is an enhancement to the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 ("SECURE Act") and includes both mandatory and optional changes to the rules governing various types of retirement plans, such as defined benefit plans, 401(k) plans, 403(b) plans, governmental 457(b) plans, and Individual Retirement Accounts ("IRAs"). The changes under SECURE 2.0 are substantial and complex, covering a wide range of provisions with various effective dates. Most of the changes begin in 2024 or later, but a few provisions are effective this year or became effective as early as the Enactment Date. 

Last month we issued a Retirement Plan Spotlight which summarized some key provisions of SECURE 2.0. Since the changes are too numerous to cover in a single update, in the coming months we will provide a series of updates where we will focus on certain provisions in greater detail. This month we are focusing on some of the provisions that went into effect as of the Enactment Date or in 2023.