Fourth Quarter Newsletter

Responsible Guidance:  Fourth Quarter 2022 Newsletter, January 2023

Did Market Performance in 2022 Impact Your Financial Plan?  Are You Letting Recency Bias Impact Planning for the Future?

It is no secret that 2022 was a challenging year for investors.  Looking at the raw numbers may make you feel uneasy, but what does the performance of your investments mean for you, specifically?  Do you have a plan in place that provides actionable items to help keep you on track for achieving your financial goals and objectives in different economic and market environments?

As you think about planning for your financial life, are you now most concerned if the markets keep going down?  If so, you may be subjecting yourself to recency bias, where you are thinking about what you experienced recently, rather than looking at a complete range of possible outcomes. If you are feeling this way you are not alone.  In fact, there are many different biases that people subject themselves to.  There is a complete study on this called Behavioral Finance, which is an important study subject for your Baron Team.

At Baron, we plan for changing economic and market environments by considering multiple outcomes, including positive, flat, and negative economic and market environments.  We cannot plan for the timing of when and how long cycles will last, but we can help plan for what to do in those different environments.  This approach can help relieve stress during challenging times because there is a plan.  And because multiple environments and outcomes are built into the plan, this may help alleviate actions caused by biases.

As you read through the data, it is not all bad.  Economic data was decent, and the fourth quarter was positive for most indexes we cover, which may be surprising, given the markets’ performances in December.  There’s that recency bias again.

A Global Perspective

A core objective for our customized Baron Financial Group investment strategies is global diversification.  Global diversification means including investments based both domestically in the U.S., as well as internationally in developed and developing countries.  There are popular benchmark indexes that provide perspectives about performance of global investments. 

For equities, we monitor the MSCI ACWI All Cap Index.  This index represents equity investments across 23 developed and 24 emerging markets. The index was up 9.85% in the fourth quarter, as equity performance rebounded despite concerns about inflation, interest rates, economic growth, and geopolitical risks.  The positive performance in the fourth quarter was not enough to save the year, as the index finished down 18.44% for 2022. 

For fixed income, or bonds, we track the FTSE World Government Bond Index.  The index tracks sovereign debt from 20 countries, denominated in their respective currencies.  It was positive in the fourth quarter, up 3.82%, but the index finished down 18.26% on the year. 

U.S. Economy

The economic data we follow has improved during the third and fourth quarters, though concerns about inflation and rising interest rates impacting economic growth remain on top of investors’ minds.  Up-to-date economic information like stock prices, the shape of the yield curve, and housing construction reflect either uncertainty or negativity.    

The Bureau of Economic Analysis (BEA) announced in its third estimate for the third quarter of 2022 that real Gross Domestic Product (GDP) increased at an annual rate of 3.2% (the full press release can be found at https://www.bea.gov).  This puts economic growth back into positive territory after two consecutive quarters of contraction. 

Due to the normal delay in receiving growth data from the BEA, the Federal Reserve Bank of Atlanta publishes a “nowcast” by estimating GDP growth for the most recent quarter (in this case the fourth quarter of 2022) using an approach similar to the BEA.  On January 10, 2023, the estimate for fourth quarter GDP from the Federal Reserve Bank of Atlanta was positive 4.1%.  Note that this estimate is updated regularly and is subject to change.  The “nowcast,” along with the methodology, and additional information can be found at: https://www.atlantafed.org/cqer/research/gdpnow

Job growth remains strong.  According to the Bureau of Labor Statistics (BLS), the U.S. gained 223,000 jobs for the month of December, and the unemployment rate remained below 4%, at 3.5%.  BLS indicated job growth was notable in leisure and hospitality, healthcare, construction, and social assistance (full press release can be found at:  https://www.bls.gov).

U.S. Stocks

The S&P 500, an index consisting of 500 of the largest U.S. domestic stocks, was up 7.56% in the fourth quarter of 2022, but finished the year down 18.11%.  This was the worst year for domestic equities since 2008.  For technical analysts and trend followers, the index spent most of the time below the 200-day moving average, where it finished the year. 

Dividing index components into growth and value, value regained leadership in the fourth quarter and finished the year stronger, relatively speaking, than growth oriented investments.   

International Stocks

International developed country equities (such as those in the European Union), measured by the MSCI EAFE index was up 17.34% in the fourth quarter, which was the strongest performance of the indexes we cover.  Even with the strong fourth quarter, performance was still down 14.45% on the year.  Non-developed, or emerging countries measured by the MSCI EM index, was up 9.70% for the quarter, but down 20.09% for 2022.  Though many economies outside the U.S are experiencing similar inflation and interest rate challenges and the Russia-Ukraine conflict hits a little closer to home for the European countries, international developed stocks were able to outperform the S&P 500 in 2022.  The last time international stocks finished ahead of U.S. stocks was in 2017.     

Bonds

U.S. Domestic Fixed Income (bonds), as measured by the Barclays U.S. Aggregate Bond Index, was up 1.87% in the fourth quarter, but down 13.01% for 2022.  The index gauges the performance of investment-grade intermediate bonds.  With concerns of inflation and the Fed increasing interest rates, the index had one of its worst years in decades.

The 10-year U.S. Treasury bond yield was at 3.88% at the end of the fourth quarter, which was very close to 3.83% at the end of the third quarter. The benchmark bond yield was 2.98% and 2.32% at the end of the second and first quarters, respectively. It began the year even lower at 1.52%. 

If you plot interest rates versus the time-to-maturity to earn those rates, you have created a yield curve. We continue to monitor the changing shape of the yield curve for U.S. debt issues, and what that may signal. Specifically, we follow the shape of the yield curve (plot of interest rates for different time periods).  Using the U.S. Government 2-year bond rate as a proxy for short-term rates and the 10-year U.S. Government bond rate as a proxy for long-term rates, we calculate the difference between the rates, which provides a possible indicator for the future direction of the economy.  A steep spread (long-term rates higher than short-term rates) indicates potential future economic expansion and fixed-income investors are compensated for taking longer-term risk.  A flat spread (long-term rates match short-term rates) is a possible indicator of economic uncertainty and longer-term investors are not being compensated for investing in longer-dated securities.  An inverted spread (short-term rates are higher than long-term rates) possibly indicates future economic contraction.

The fourth quarter finished with the 2-year rate at 4.41% (and 10-year at 3.88% per above), making the yield curve inverted by 53 basis points (a basis point represents 1/100 of 1%).  The shape of the yield curve may suggest that bond investors are concerned about future economic growth, which may not be surprising, given the Federal Reserve is aggressively fighting inflation.  

Housing and Real Estate

Commercial real estate, as measured by the FTSE NAREIT All Equity REIT (Real Estate Investment Trust) Index, was up 4.14% in the fourth quarter but finished the year down 24.95%.  This was the worst performing index in 2022 that we cover.  The lower performance this year follows the staggering 41.30% positive return in 2021, when it was the best performer. 

According to Freddie Mac (FM), the average 30-year residential home mortgage rate has backed off a little, most recently reported at 6.33%.  The 52-week range was 3.55% - 7.08%.  The rate is subject to change and may not be offered in all areas or to all borrowers. 

Natural Resources

The Bloomberg Commodity Index (BCOM) was up 2.22% in the fourth quarter and was able to finish the year up 16.09%.  This index was the only positive performer in 2022 of the indexes we cover for this letter.  This is the first time in over a decade that the index for natural resources has been the top performer.    

Baron Client Strategies

Planning for multiple outcomes with Your Personal Economy^SM is critical to helping our clients answer the simple question "Am I going to be OK?".

As clients know, we are fiduciaries and operate as fee-only advisors, so there is no benefit to us for making investment transactions.  The reasons we make trades are to align clients' portfolios with their customized, risk-appropriate globally-diversified strategy.  Also, we believe the actions we take are potentially strengthening the clients' portfolios or financial positions.  We use this same approach with our own personal money. 

No matter the economic environment, our basic principles remain:

Create a globally-diversified and risk-appropriate strategy.  Validate the investment choices versus peer investments.  Rebalance when needed. Test the strategy in a comprehensive financial plan and obtain regular feedback to update information and advance your financial position.

Your Service Plan

One of our primary roles is to educate our clients to make informed decisions about reaching their goals.  Critical to that process are plan reviews, a process that focuses our attention on your goals, takes account of any changes in your situation and allows us to alter the course, as necessary. If you have had any changes to your financial position or are considering changing financial goals and objectives, please let us know. 

Your Personal Economy^sm

Concluding Comments  

Planning ahead for different economic and market environments does not mean planning for the timing of the cycles, it means planning for the actions in the different cycles.  Knowing what biases may impact your decision-making relative to your plan actions is also important.  Let us know how we can help.  Remember you can always lean on us with questions or concerns related to Your Personal Economy^SM.

Baron Updates

We hope everyone had a great holiday season and a start to the new year!  As we begin 2023, we suggest taking a fresh look at your financials using our 2023 checklist. As always, we are available for a call or meeting.

If you haven’t already applied for the ANCHOR Benefit program or are not familiar with the NJ tax-relief program for homeowners and renters - here is a link to our blog post with the program’s qualification and application details. The current deadline, as of this writing, is February, 28, 2023.

For more educational content, please visit our Website Blog. The Baron Advisors are often called upon by journalists for their insights on financial planning and investing. They are quoted in such prestigious media outlets as The New York Times, CNBC.com, and NJMoneyHelp.com, among others. Please contact us if you have any questions.

Remember that you can also visit our website to gain access to your client portal.  Just click on the client-portal tab, which will allow you to view your account information. The client login requires a username and password to gain access through the portal. Please let us know if you would like to create your portal login or if you would like to learn more about what the portal provides, including paperless statements. Contact Baron at 1-866-333-6659 or at info@baron-financial.com to enroll.

In closing, Baron Financial Group is humbled to announce that Advisors Anthony Benante, Victor Cannillo, and Nicholas Scheibner are recognized as 2023 Five Star Wealth Managers in New Jersey. Anthony and Victor are proud to be multi-year award recipients for 12 consecutive years in New Jersey. Anthony is also a multi-year recipient for Wealth Managers in Sarasota, Florida.  You can read more about this award and its criteria on our website.

We wish you all a happy, healthy, and prosperous New Year!

Warmest Regards,

Baron Financial Group, LLC
www.baron-financial.com

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of January 12, 2023 and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by Baron Financial Group to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. International investing involves additional risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments. Index performance is shown for illustrative purposes only. You cannot invest directly in an index. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will either be suitable or profitable for a client or prospective client’s investment portfolio. Historical performance results for investment indices and/or categories generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results. Inclusion of index information is not intended to suggest that its performance is equivalent or similar to that of the historical investments whose returns are presented or that investment with our firm is an absolute alternative to investments in the index (if such investment were possible). Investors should be aware that the referenced benchmark funds may have a different composition, volatility, risk, investment philosophy, holding times, and/or other investment-related factors that may affect the benchmark funds’ ultimate performance results. Therefore, an investor’s individual results may vary significantly from the benchmark’s performance.