This Week in Review:

Will China Break the Supply Chain?

Inflation concern went wild on Wall Street again this week as traders grappled with widespread protests in China over draconian COVID-19 lockdowns and the potential disruption to China’s exports of, well, everything.

Polaris Investment Team | www.polariswealth.com

THIS WEEK:

Stocks fell for three days running as investors worried about renewed global supply chain logjams once again. That said, one major obstacle for the movement of goods is gone—California’s main ports are no longer backed up at all.

Midweek, all eyes were on Federal Reserve Chair Jerome Powell’s speech. In his last address, Powell squashed any notion that the Fed would pivot from a policy to curb inflation to one more supportive of economic expansion. While Powell suggested a slower pace of interest-rate increases might be appropriate as soon as the Dec. 13–14 meeting, which made for a good day for stocks Wednesday, it’s not the policy shift that Wall Street has been hoping for. And fresh jobs data on Friday further soured Wall Street’s mood: Hirings far exceeded expectations and wages were up. So long as the labor market stays red hot, the Fed is likely to keep pouring on the rate hikes.

Here’s what else we’re watching this week and why :

Congress headed off a looming rail strike with legislation imposing a labor agreement on rail workers. A rail strike would have wreaked havoc on the nation’s supply chain just when it’s beginning to mend and have a potentially wrenching effect on the economy.

Black Friday was booming as consumers shelled out a record $9.1 billion via their smartphones and computers, up 2.3% from 2021. Cyber Monday saw consumers spend an additional $11.3 billion online, up 5.8% from last year. Nearly 2 out of 3 Americans shopped in stores and online over the Thanksgiving weekend, suggesting consumers had been keeping their powder dry for months awaiting the bargain blowouts.

Oil prices, which impact production costs broadly across the global economy (think fuel, fertilizer, chemicals, transportation, etc.), fell to an 11-month low this week after three consecutive weekly declines. Gas’ slide from $5 per gallon in June to today’s average of $3.50 will help ease inflationary pressure at the pump. Will oil maintain its downward trend? The OPEC+ oil cartel convenes on Sunday to discuss cutting production. Stay tuned.

Presaging Powell’s comments Wednesday, Federal Reserve officials continued to beat the aggressive-rate-hike drum this week, citing strong consumer demand and labor market strength. St. Louis Fed President James Bullard said he sees keeping the fed funds rate in the 5% to 7% range into 2024, and that “markets are underpricing a little bit the risk” of the central bank maintaining a “more aggressive approach.” Meanwhile, New York Fed President John Williams warned that the persistently strong labor market and consumer demand “suggests a modestly higher path for policy relative to September.”

Chart of the Week: Time to Ride the Bull?

It’s been an extremely difficult year for investors, as bear market declines of more than 20% have seemingly taken hold of nearly every investable asset class. With gloom still pervading the headlines, investors might be excused for not focusing on the fact that the S&P 500 is up nearly 13% since its October lows. More than halfway through Q4, we’re in the midst of a rally.

I think this equity rally merits our attention. As we pointed out two weeks ago, the recent upturn in the market demonstrated considerable breadth, which is generally an indicator of a sustainable trend. And since that time, we’ve seen evidence that our current rally is even more widespread: It is taking hold not only in the domestic stock market, but in the global markets as well.

The turning point we highlighted last month was that 50% of stocks in the S&P 500 were trading above their trailing 200-day moving average (DMA). The 200 DMA is indicative of long-term trends, and the shift last month was a positive signal for the U.S. equity markets.

Earlier this week, Ned Davis Research published a similar analysis, but it examined global equity markets, referencing the MSCI All-Country World Index as its benchmark. As you can see in the chart below, the analysis looked at the number of stocks trading above their 200 DMA as well as their 50 DMA (a short-term indicator).

The analysis found that when more than 45% of the stocks held in the MSCI ACWI are trading above their 200 DMA and more than 65% are trading above their 50 DMA, forward-looking returns over the next 12 months are considerably more favorable.

In other words, when both short- and long-term trends are pointed in the same direction, and both show breadth, it’s a potent cocktail for market returns.

Over the past three years, when breadth was in the upper register on both the 50 and 200 DMA, the average rate of return over the coming year was close to 12%; conversely, when breadth was in the lower register, the average annual rate of return was a loss of 7%.

Over longer periods, dating back to 1994, this same divergence in returns held true: The ACWI averaged nearly 14% per annum when breadth was high; it averaged an annual loss of 3% when breadth was low.

Now don’t get me wrong—it’s not as though the global macro environment has really changed. The headwinds that have stifled market returns in 2022 (inflation, the Russia-Ukraine war, COVID-19 lockdowns in China) are still impacting the global economy.

But it’s important to remember that the stock market is a leading indicator. Even if we are headed for recession, the stock market may very well have already priced in that scenario.

Whether we are in the beginnings of a new bull market is yet to be determined, but after the losses we’ve experienced in 2022, sitting on the sidelines is surely not the answer.

Shipping Costs Suggest Smooth Sailing

China’s zero-COVID-19 policy and resulting protests have analysts worried that exports will be disrupted once more. As mentioned above, there are also concerns that a strike could disrupt rail traffic across the U.S. if the White House and Congress fail to enact emergency legislation preventing a widespread walkout.

But what’s not getting nearly as much airtime is how much things have improved since the start of the year. One way to view this is by measuring traffic at the Los Angeles ports. At the start of the year, more than 100 ships were backed up at sea waiting for a berth to unload. Today there are zero.

Note: Chart shows the number of ships waiting to dock at the ports of Los Angeles and Long Beach in California. October data as of 10/21/22; November data as of 11/22/22. Sources: Marine Exchange of Southern California, The Wall Street Journal.

And shipping costs are coming down as the backlog clears. The Shanghai Containerized Freight Index, a gauge of shipping prices out of China, is at one-third its June level. The average price for shipping a 40-foot container fell to its lowest level in two years earlier this month.

Backlog cleared. Supply chain becoming unkinked. That translates into lower inflation—and should continue in the months and quarters ahead. Of course, you won’t see that in the headlines…because bad news sells.

Tax Moves to Make Posthaste

Holiday shopping and party planning mean time is growing short to make your year-end tax moves. While it can be difficult to focus on your finances during this hectic season, these steps can pay dividends in 2023 and beyond.

Maximize Opportunities for Tax-Deferred Growth

401(k)s, IRAs and other retirement accounts are a great way to keep your assets growing tax-deferred. Depending on your employer’s plan, you may be able to defer up to $20,500 in earnings by contributing to a 401(k) or 403(b) plan in 2022. If you will turn 50 before Dec. 31, 2022, and your plan allows it, you can contribute an additional $6,500.

For IRAs, the maximum contribution in 2022 is $6,000 (it increases to $6,500 in 2023), plus a $1,000 “catch-up contribution” for those who turn 50 during either calendar year. You must make 401(k) contributions by the end of the calendar year, but IRAs and some other types of tax-deferred retirement accounts allow you to contribute to your 2022 limit until Apr. 18, 2023.

Do it now and enjoy the benefits of tax deferral and compounded gains sooner rather than later.

Don’t Forget About Required Minimum Distributions (RMDs)

Once you’ve reached age 72, you are required to withdraw a minimum percentage from tax-deferred accounts by Dec. 31 each year. For non-Roth IRAs and 403(b) accounts, you calculate the RMDs separately for each account you own, but you can withdraw the total amount from one or from multiple accounts. It’s up to you.

Unlike IRAs, withdrawals must be taken separately from each 401(k) and 457(b) plan account. Roth IRA accounts are not subject to RMDs. If you forget to take your RMD from your retirement account, you will be assessed a penalty equal to 50% of the amount you should have withdrawn, in addition to your normal income taxes.

Reap the Benefits of Tax-Loss Harvesting

Losses in your portfolio have value, and given this year’s market volatility, some of the shares you own may be underwater. Selling a position below your purchase price isn’t fun, but those losses can be used to offset other gains and income in your portfolio—lowering your tax bill. Selling positions at a loss, waiting 31 days (as per the “wash-sale” rule) and then repurchasing your original position is called tax-loss harvesting. This is something we’ve engaged in on your behalf as a cost-saving aspect of your investment strategy all year, and we’ve again focused on it as December approaches.

Be Charitable

Feeling generous and want to reduce the tax value of your estate? You can give up to $16,000 (or $32,000 as a married couple) to as many people as you want this holiday season without gift-tax implications.

529 college savings plans are another great way to provide gifts to family members. You can even circumvent the annual $16,000 gift limit to fund higher learning by using a special rule called “super funding,” which allows you to contribute up to five times the annual tax-exempted gift limit (up to $80,000) at once without triggering your lifetime gift- or estate-tax exclusion. (You can only “super fund” once every five years.) For a married couple, that super funding could be as much as $160,000, which is certainly a great way to start a newborn on the road to a fully funded private school, college or graduate school education.

Looking Ahead

Next week, we’ll keep an eye on fresh data on manufacturing and the service sector, factory orders, and inflation and consumer sentiment, along with the latest developments on Capitol Hill and in China.

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 2, 2022, prior to the market’s close.

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