Women’s History Month is an annual celebration in March that recognizes and honors the contributions and achievements of women throughout history. It is held to increase awareness of women’s struggles, accomplishments, and contributions to society while promoting gender equality and women’s rights.
March was chosen as the month to celebrate Women’s History Month because of International Women’s Day, which falls on March 8th. Women’s History Month 2023 is “Celebrating Women Who Tell Our Stories.”
Despite U.S. Treasury Bond yields moving higher, equities notched a solid gain last week as all major indexes ended the week higher, with the Dow Jones Industrial Average rallying +1.75%, the S&P 500 Index moving up +1.90%, and the NASDAQ increasing by 2.58%. The 10-year U.S. Treasury Bond, after briefly touching 4.00% mid-week, closed the week at 3.97%. Oddly, even with higher bond yields, the VIX (Volatility Index, the CBOE Measurement of Expected Volatility) moved lower (18.49) and is down from its October high (33.63) (Chart 3). Further, Fed Fund Futures point to higher short-term rates and a higher terminal rate for Fed Funds rate around 5.25% (Chart 1). Lastly, corporate EPS (Earnings Per Share) releases for the 4th Q 2022 are over, and most were moderately higher even after many analysts projected lower EPS. After the 1st Q 2023 closes, markets will get fresh evidence of economic activity.
US Economy
Most inflation indicators are moving lower, and markets continue to point to higher short-term interest rates and a higher terminal rate for the Fed Funds Rate. Chart 1 below by the Federal Reserve of St. Louis shows the current Fed Funds Effective Rate of 4.75%. The average of Fed Fund Futures is now predicting a terminal rate of 5.25 – 5.50% by December 2023. Considering how far and fast we have moved in interest rates—from ZERO last year to 4.75% one year later—why are markets reacting so negatively to, at most, +0.75% higher from here?
It has been and continues to be our opinion at VNFA that the U.S. Economy remains healthy and will be able to easily digest up to three additional +0.25% rate hikes over the next three FOCM meetings, ending the year near 5.25 – 5.50%. Notwithstanding the 1980s inflationary period, multiple GDP (Gross Domestic Product) expansions occurred when interest rates were high, but the economy continued to grow.
As mentioned above, bond yields continue to increase, especially in the short end of the yield curve (3 months to 2 years). Chart 2 below from Bloomberg shows generic bond yields, which continue to hit multi-year highs offering investors risk-free rates of return significantly higher than in previous years. The opportunity cost for staying out of equities and keeping safe on the sidelines by investing in short bonds (2-year yields ~5.00%) is much lower than in previous years when short rates were zero. However, we at VNFA want our investors to consider whether equity returns over the next two years will be higher than 5.00%. Given the information in front of us: bank health, labor markets, corporate earnings, and consumer spending, we believe investors still need equities in their portfolios to take advantage of future compounding returns.
Markets continue to be volatile, which is expected and common during the Fed tightening interest rates because of the implied uncertainty. However, the VIX (Volatility Index, the CBOE Measurement of Expected Volatility) moves lower. Chart 3 below from the Valley National Financial Advisors and Y Charts shows the VIX Index. The VIX decreases when there is less demand for put options (options bought by investors predicting lower equity prices). The VIX moves inversely to equity prices.
Global Economic Politics
The Russia/Ukraine war continues to muddle on without much hope for a cessation. Thankfully, a modest winter has helped EU countries avoid an economic disaster that could have happened given natural gas shortages due to the war. Sanctions on Russia have been de minimis as other countries such as China, and India has increased trade, replacing former western trading partners.
While finally coming out of zero-Covid lockdown, China has set the lowest GDP growth target in decades. Much can be said about China’s economic ambitions. Still, their new growth target of “only” 5% is telling, in that China may finally acknowledge the many issues, demographic among the most important, facing the country in the future.
What to Watch
U.S. Job Openings: Total Nonfarm, for January ‘23, released 3/6/23, prior 11.01M.
U.S. Initial Claims for Unemployment Insurance week of 3/4/23, released 3/9/2023, prior 190K.
U.S. Nonfarm Payrolls MoM (Month Over Month) for February ‘23, released 3/10/23, prior 517K.
U.S. Unemployment Rate for February 2023, released 3/10/23, prior 3.4%.
Equity markets and bond yields both ended higher last week. The Fed is on a course to reduce inflation to 2.00% while keeping full employment and a growing economy. This scenario would be considered an exceptionally soft landing and a tough one for Chairman Powell to “stick.” Every piece of the puzzle is known – higher rates, employment, economic growth. Short-term bond yields at 5.00% are incredibly enticing to investors still wounded from last year’s market wipe-out. However, wealth is gathered over exceptionally extended periods and is generational. Missing a few big days in the markets can make an enormous difference in portfolio returns, and market timing usually is a fool’s game. Stick to your investment plan and always look at the big picture rather than the minutia of daily market swings.
The Sources: Index Returns: Morningstar Workstation. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. Three, five and ten year returns are annualized. Interest Rates: Federal Reserve, Mortgage Bankers Association.
MARKET HEAT MAP The health of the economy is a key driver of long-term returns in the stock market. Below, we assess the key economic conditions that we believe are of particular importance to investors.
US ECONOMY
CONSUMER HEALTH
NEUTRAL
Real gross domestic product (GDP) increased at an annual rate of 2.9 percent in the fourth quarter of 2022 after increasing by 3.2 percent in the third quarter. The increase in the fourth quarter primarily reflected increases in inventory investment and consumer spending that were partly offset by a decrease in housing investment.
CORPORATE EARNINGS
NEUTRAL
The earnings growth rate for Q3 2022 was 2.4%. With 99% of S&P500 companies reporting actual results, the blended earnings decline was -4.6%. This is the first negative growth rate since Q3 2020 (-5.7%). Overall, 68% of companies beat EPS estimates and 66% beat revenue expectations.
EMPLOYMENT
POSITIVE
U.S. Nonfarm Payrolls for January 2023 increased by 517,000, almost three times the expected number of 187,000. The unemployment rate fell to 3.4% from 3.5% and is now the lowest in 50 years. Leisure and hospitality, health care, professional services, and government were among the sectors with the most notable gains.
INFLATION
NEGATIVE
The annual inflation rate in the U.S. increased by 6.4% for January 2023 compared to the December 2022 reading of 6.5%. This is the lowest CPI value since October 2021. Core CPI increased at a rate of 5.6% versus 5.7% in December. The primary contributors to the increase in inflation were shelter, food, gasoline, and natural gas. On the other hand, indexes for used vehicles, medical care, and airline fares decreased over the month.
FISCAL POLICY
NEUTRAL
A few weeks after taking control of the chamber, GOP lawmakers are pushing for austerity measures in hopes of improving the nation’s fiscal health. Democrats have responded with harsh criticism and stressed that they would not negotiate a deal with Republicans involving reductions of benefits. Meanwhile, the latest CBO projections show that rising interest rates and spending bills are adding to deficits as the U.S. is on track to add $19 trillion of new debt over the nextdecade.
MONETARY POLICY
NEGATIVE
Earlier this month, the Fed approved a 25 bps rate hike taking its target range to 4.50%-4.75%. Although the magnitude of rate hikes has decreased, rates will likely be kept higher through 2023 with no reductions until 2024. The FOMC has also reiterated its strong commitment to return inflation to its 2% objective. The next Fed meeting is scheduled for March 21st and 22nd.
GLOBAL CONSIDERATIONS
GEOPOLITICAL RISKS
NEGATIVE
While the Russian-Ukraine conflict does not show signs of abating, additional geopolitical issues have arisen between the U.S. and China and between the U.K. and the E.U. Secretary of State Blinken’s trip to China was canceled in the wake of the incidents involving Chinese spy balloons, which lead US-China relations to deteriorate further. The U.K. and E.U. are involved in negotiation conflicts over tariffs and freedom of trade.
ECONOMIC RISKS
NEUTRAL
Although the aforementioned geopolitical risks remain prevalent in everyday news, their effects on the global economy seem to have subsided. China abandoned its zero-Covid policy, which will have a positive impact on the supply chain and the economy as a whole. The European economy also seems to be healthier than expected, partly due to an unusually warm winter that has provided some relief from increasing energy prices.
The “Heat Map” is a subjective analysis based upon metrics that VNFA’s investment committee believes are important to financial markets and the economy. The “Heat Map” is designed for informational purposes only and is not intended for use as a basis for investment decisions.
Why Checking Your Withholding at Tax Time is Crucial: Avoiding Surprises and Penalties
When reviewing your tax return, if you find that you owe more than expected, it may be time to update your withholding. Checking your withholding at tax time is crucial to ensure you pay the correct amount of taxes throughout the year. Withholding is the amount of money deducted from your paycheck / or retirement income. If your withholding is too low, you may owe more taxes when you file your return, resulting in a surprise tax bill. By reviewing your withholding based on your tax return results, you can make any necessary adjustments to avoid underpaying or overpaying your taxes, which can help you avoid penalties or unexpected tax bills in the future.
In addition to updating your withholding, making estimated tax payments can help you avoid underpayment penalties and ensure you’re paying enough taxes throughout the year. Estimated tax payments are quarterly payments to the IRS and/or state tax authority based on the income you earn for the year. If you’re self-employed or have other types of income that are not subject to withholding, making estimated tax payments is especially important. By estimating your tax liability and making quarterly payments, you can avoid having to pay a large tax bill at once.
