This Week in Review:
Strong Economy, Weak Stock Market?
Inflation news continues to move markets, and next week could be a doozy. On Tuesday, we’ll get the latest consumer price index reading—just in time for the Fed’s two-day meeting, which concludes with a policy statement on Wednesday.
THIS WEEK:
- Chart of the Week: International Investing’s Revival
- Last-Minute Tax Tips for ’22
- Looking Ahead
Good news was bad news for Wall Street once again this week: Better-than-expected economic data led traders to conclude that policymakers at the Federal Reserve may keep interest rates higher for longer. The S&P 500 index’s 0.2% drop on Wednesday marked its fifth consecutive daily decline. Growthy stocks, which make up a disproportionately large part of the broad index (think Apple, Microsoft, Amazon and Google), have hobbled it this year, with the more selective Dow Jones Industrial Average outperforming year-to-date by the most in any calendar year since the S&P’s 1957 inception.
Inflation news continues to move markets, and next week could be a doozy. On Tuesday, we’ll get the latest consumer price index reading—just in time for the Fed’s two-day meeting, which concludes with a policy statement on Wednesday. Chair Jerome Powell has hinted that the central bank is likely to increase the fed funds rate yet again, but probably by less than the 0.75% hike it has implemented following the last four meetings. Tuesday’s inflation figures will no doubt have some bearing on the matter.
Here’s what else we’re watching this week and why:
- Rent—the largest contributor to measures of overall inflation—appears to be coming down. Still, that good news may take a while to show up in the official inflation figures due to the way new and existing leases get baked into the numbers.
- Good help remains hard to find. Wages grew 5.1% year-over-year in November, up from 4.9% the month prior. With unemployment still hovering near historic lows, workers hold the reins when it comes to salaries. Part of the dilemma is a lack of supply, with workforce participation by people aged 20–24 and 55-plus still below pre-pandemic levels.
- The used-car market—a major contributor to pandemic-era inflation—is in a skid, with prices down 14% in November from the same time last year. That’s good news for inflation fighters and consumers facing higher borrowing costs, but it’s bad news for car dealers and high-profile resale platforms such as Carvana, which saw its stock crash nearly 50% on Wednesday.
Chart of the Week: International Investing's Revival
Traditional asset allocation has usually included a healthy chunk of investments overseas to reduce downside and diversify portfolios, mitigating risk. But for well over a decade, investors who followed this sensible advice have been stuck in a value trap: International markets have offered attractive cash flows and valuations, but returns have been subpar.
The chart below compares the S&P 500 to the All Country World Index ex-U.S. (ACWX) over the last 10 years until the most recent market peak.
Source: FactSet
Looking at that impressive run of outperformance, the right choice for investors seems simple. Case closed: Buy American.
Not so fast.
After a decade of frustration, the stars might be aligning for international markets to have their day in the sun. And that’s due to a recent shift in dollar dominance. For most of 2022’s bear market, the U.S. dollar has been a literal world-beater, strengthening against nearly every major currency. But in recent weeks, the U.S. index has peaked, and there are signs of reversal.
The effect? A notable flow of capital out of the U.S. and into international markets, visible in both bonds and equities. Since the start of November, international markets have performed roughly 8% better than the S&P 500.
Source: FactSet
The lesson here is clear. When investing for the long term, diversification is essential. International exposure is too often overlooked in lieu of chasing higher-risk returns. The key to successful investing over the long haul is maintaining broad, cross-factor diversification in order to achieve a sustainable return. Don’t overlook our foreign counterparts when seeking long-term portfolio performance and durability!
Last Minute Tax Tips for '22
The year is winding down. It’s time to cross these financial planning items off your list before the calendar flips.
Maximize contributions to retirement savings accounts. Depending on your employer’s plan, you may be able to contribute up to $20,500 in tax-deferred earnings to your 401(k) or 403(b) in 2022. If you turn 50 before Dec. 31, and your plan allows it, you can contribute an additional $6,500. For individual retirement accounts (IRAs), the maximum contribution in 2022 is $6,000, plus a $1,000 “catch-up contribution” for anyone who turns 50 before year-end. You need to make 401(k) contributions by the end of the calendar year, but IRAs and some other tax-deferred retirement accounts allow you to contribute until April 18, 2023.
Consider a Roth IRA conversion. A bear market in stocks makes Roth conversions more appealing because you pay tax on less money…and watch it grow tax-free after that. The deadline to convert is Dec. 31, and the conversion of after-tax amounts is not included in your gross income.
Recognize investment gains or losses. You need to sell securities by Dec. 30, the last trading day of 2022, to realize a capital gain or loss for the year. Selling a position at a price below your purchase price means those losses can be used to offset other gains and income in your portfolio—lowering your annual tax bill.
Check the expiration. Don’t let stock options expire. But remember, exercising nonqualified options results in ordinary income, so keep an eye on how the move will affect your tax bracket. Meanwhile, exercising incentive stock options could result in an alternative minimum tax liability. Options can be complex, so it’s important to consult your Adviser tax specialist before making a move.
Get organized. Our final tip is a simple one: Gather the statements, receipts and other paperwork you’ll need to complete your 2022 tax return today. This will make life much easier when it comes time to file in 2023, and hopefully it’ll mean you get a refund sooner.
Looking Ahead
While the Fed’s meeting and policy statement will command the spotlight next Wednesday, we’ll also be looking closely at fresh data on small businesses, retail sales, manufacturing and the service sector, plus we’ll get the latest inflation read with November’s consumer price index report.
If you’d like to learn more about our tactical or fundamental strategies, please contact our team at 800-268-9046 or info@polariswealth.com.
Please note: This update was prepared on Friday, December 9, 2022, prior to the market’s close.
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