Third Quarter Newsletter
Responsible Guidance: Third Quarter 2022 Newsletter, October 2022
As you read through the performance data below, you will see that all the indexes we cover had negative performance for the third quarter. We are certain you can find many negative news articles about the economy and markets across many different sources. So, what is there to be positive about?
U.S. Economy – Job market remains strong, which means people have an opportunity to earn a living if they are willing and able to work. Even Social Security benefits will see a raise in 2023 (see below). The Atlanta Fed provides an economic growth forecast that suggests economic growth in the third quarter may turn positive.
U.S. and International Stocks – These indexes are down more than 20% year-to-date. Though there is pain now, at some point these prices will represent an opportunity. Though we do not know the timing of when things will get better, we are able to rebalance and buy stock-based investments (exchange traded funds and mutual funds) at reduced prices, compared to earlier in the year. Also, we are tax-loss harvesting where appropriate. Finally, though we currently do not see this in performance today, during historical inflationary periods, stocks, and REITs (see Real Estate below) have been some of the best performing assets. No guarantee that history repeats itself and the timing is unknown, but the historical statistics are favorable.
Bonds – Definitely, there are improvements in opportunities to invest in high-quality bonds. With the Federal Reserve aggressively fighting inflation, investment grade bonds, like U.S. Treasuries, and FDIC Insured CDs are paying rates above 4% for maturities through five years (subject to change). If inflation remains elevated, the returns, overall, may not be great, relatively speaking, but these new higher rates offer improved opportunities for our stability portions of client portfolios. Also, if you have been stockpiling cash, this may be an opportunity to earn returns well above what banks are paying for deposits. The focus should be on funds you do not need for a year or more.
Housing and Real Estate – Real Estate Investment Trusts (REITs) are required to pay a large portion of their earnings out to shareholders. Greater cash flows become more valuable in rising- rate environments. Also, as mentioned above, though there is no guarantee history repeats itself, historically REITs have been a sound investment choice during past inflationary environments.
Natural Resources – A negative may be a positive. Prices have come down over the last two quarters, hopefully signaling relief from inflation is coming.
Your Personal EconomySM – It is time for Medicare enrollment, but no need to stress, see below how we can help. For those with taxable investments, tax-loss harvesting may be beneficial to keep taxes lower. If you are in a low tax-bracket and have tax-deferred savings, a Roth conversion may be right for you. Social Security announced its Cost-of-Living-Adjustment (COLA) for 2023 which is 8.7%. If you are collecting, you can expect a raise. If not currently collecting, this may help increase the base for your future payments when you do start receiving Social Security benefits. If you were a New Jersey resident in 2019, you may be eligible for the ANCHOR Program, which could put some money back in your pocket (see information below and reach out to us with questions).
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 the 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 down 6.65% in the third quarter, as equity performance continued to struggle with concerns about inflation, interest rates, economic growth, and geopolitical risks. The negative performance in the third quarter pushed performance further downward to negative 25.75% year-to-date (YTD).
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 negative in the third quarter, down 7.61%, mostly tied to the same concerns equity investors are facing. YTD, performance is down 21.27%.
The economic data we follow continues to reflect a slowdown in economic growth for the U.S. economy, though the Atlanta Fed’s growth forecast suggests a possible economic turn-a-round may be coming and the job market remains strong. Up-to-date economic information like stock prices, the shape of the yield curve, housing construction and consumer appetite reflect either uncertainty or negativity. As mentioned, challenges related to inflation, interest rates, and geopolitical risks all remain areas of concern.
The Bureau of Economic Analysis (BEA) announced in its third estimate for the second quarter of 2022 that real Gross Domestic Product (GDP) decreased at an annual rate of 0.6% (the full press release can be found at https://www.bea.gov ). This reflects the second quarter in a row of economic contraction, which meets the basic criteria for a recession. However, the National Bureau of Economic Research (NBER) is the actual organization that determines when the economy is in a recession. At this point, there has not been a declaration that we are actually in a recession.
Due to the normal delay in receiving growth data from the BEA, the Federal Reserve Bank of Atlanta now publishes a “nowcast” by estimating GDP growth for the most recent quarter (in this case the third quarter of 2022) using an approach similar to the BEA. The “nowcast,” along with the methodology, and additional information can be found at: https://www.atlantafed.org/cqer/research/gdpnow.
On October 14th, 2022, the estimate for second quarter GDP from the Federal Reserve Bank of Atlanta was positive 2.8%. Note that this estimate is updated regularly and is subject to change. The next estimate, as of this writing, will be on October 19th. This and the job data below are really the only positive things reflected in the economy currently.
Job growth remains strong. According to the Bureau of Labor Statistics (BLS), the U.S. gained 263,000 jobs for the month of September, and the unemployment rate remained below 4%, at 3.5%. Similar to what we reported for the second quarter newsletter, BLS suggests that job growth was notable in leisure and hospitality, and healthcare (full press release can be found at: https://www.bls.gov ).
The S&P 500, an index consisting of 500 of the largest U.S. domestic stocks, was down 4.88% in the third quarter of 2022, pulling YTD performance down further to negative 23.87%. For technical analysts and trend followers, the index spent most of the time below the 200-day moving average, where it finished the quarter.
Dividing index components into growth and value, growth outperformed in the third quarter, which was a reversal from the previous quarter. As economic growth has been slowing, investors may be once again looking to pay up for stocks that have growth opportunities above the overall economy.
International developed country equities (such as those in the European Union), measured by the MSCI EAFE index was down 9.36% in the third quarter and down 27.09% YTD. Non-developed, or emerging countries measured by the MSCI EM index, was down 11.57% for the quarter and 27.16% YTD. 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, which may be why YTD performance is below the S&P 500.
U.S. Domestic Fixed Income (bonds), as measured by the Barclays U.S. Aggregate Bond Index, was down 4.75% in the third quarter and down 14.61% YTD. The index gauges the performance of investment grade intermediate bonds. With concerns surrounding inflation fears and the Fed increasing interest rates, the index continued to struggle.
The 10-year U.S. Treasury bond yield was at 3.83% at the end of the third quarter, as rates continued an upward path. 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 third quarter finished with the 2-year rate continuing to rise, finishing at 4.22%, making the yield curve inverted by 39 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 fell 10.83% in the third quarter and is down 27.93% YTD. The lower performance this year follows the staggering 41.30% positive return in 2021.
According to Freddie Mac (FM), the average 30-year residential home mortgage rate jumped to 6.92% with 0.8 Fees/Points, well above the rate of 3.45%, with 0.7 Fees/Points recorded near the beginning of the year. The rate is subject to change and may not be offered in all areas or to all borrowers.
The Bloomberg Commodity Index (BCOM) once again fell 4.11% in the third quarter, bringing performance down to positive 13.57% YTD. This index is the only positive performer YTD of the indexes we cover for this letter. The slowdown in pricing during the third quarter though, hopefully reflects a potential slowdown in inflation as the year progresses.
Baron Client Strategies
Planning for multiple outcomes with Your Personal EconomySM is critical to helping our clients answer the important questions like, "Am I going to be OK?".
As clients know, we are fiduciaries and operate as fee-only advisors, so there is no financial incentive for 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 EconomySM
You may have heard us say that we are happy to help clients with issues outside of investing that may have an impact on their financial lives. We say things like “Lean on us when you are making a decision with anything with a dollar sign involved.” So, we have been including this section as a reminder of all our services and to share ways in which we can help clients outside of investing.
It is that time of year again. Are you approaching or already Medicare age? For those 65 or older, registering for Medicare can be confusing and stressful. Don't attempt to figure it out yourself. Lean on Baron as a resource to help with the decision-making. We invite our clients and their family members to work with a Medicare expert to make sure both coverage and costs are optimized. Remember, the program is not a set it and forget it plan. Reviewing annually is especially important, so make sure you are using your Baron resources to the fullest. The period for Medicare’s Annual Enrollment for the 2023 Medicare Advantage and Part D Prescription Plans runs from October 15, 2022, through December 7, 2022. Our September 21st blog post goes into further detail.
As discussed in our last newsletter, we continue to seek out tax-loss harvesting for clients with taxable investment accounts. Also, if you are in a low tax bracket this year, you may consider a Roth conversion.
If you would like to learn more about these opportunities within Your Personal EconomySM, please reach out to us to discuss how we can help you.
We hope we have given you some positive things to consider in light of the challenges in economies and markets. Remember you can always lean on us with questions or concerns related to to Your Personal EconomySM.
You might have received a letter in the mail pertaining to the New Jersey ANCHOR benefit tax relief program. Victoria Cannillo’s video presentation provides timely information about the ANCHOR program qualifications, as well as application and deadline details. You can find the presentation in our October 11th blog post.
October is both Cybersecurity Awareness Month and Financial Planning Month. It is the ideal time to re-share our educational videos on cybersecurity. We are committed to the protection and security of your personal information. As part of our Responsible Guidance platform, we have created a multi-part video series to educate you on cybersecurity. It is important to stay vigilant to the ever-increasing cyber threats that invade our inbox.
In recognition of National Financial Planning Month, our latest video in the Baron Financial Answers Series answers questions on estate documents and will be coming to your inbox soon. For more educational content, please visit our website blog, a wealth of information on many financial topics. 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.
Remember that you can 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 firstname.lastname@example.org to enroll.
For those of you who were able to attend our Client Appreciation Event in September in New Jersey, we are thrilled that you joined us and hope you enjoyed the evening, as much as we enjoyed seeing you! For Florida residents, and those who travel to Florida in the winter, look for information for our Sarasota Spring Training Baseball Game event, which will be held on March 24, 2023. The time is still to be determined. Please save the date!
Congratulations to James and Maria Suazo on the birth of their daughter, Maria Clare! We’re excited to welcome a new member to our Baron Family!
As we do every holiday season, we will continue our support for the food pantries in Fair Lawn and Sarasota, in hopes that we can ease the burden for those who are less fortunate.
We hope you have a healthy and happy holiday season!
Baron Financial Group, LLC
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 October 14, 2022 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.