Q1 2023 – Market Update
By Contessa Archuleta on May 4, 2023
2023 Q1 – The Markets – Nizhoni Redmond
If you have been following the markets closely this year, you may feel mixed emotions about how the market has shifted. The market performance has reflected uncertainty around several economic variables. The markets finished January at a full run, with the S&P 500 up 6.6%, and the Nasdaq up 11.4%. Within a brief period, we were seeing valuations of stocks increase alongside increases in fixed income yields. For portions of the first quarter, the two-year Treasury was yielding over 5%.
In March, we experienced a banking crunch directly followed by a Fed rate hike which added volatility to the markets. However, in the final weeks of the quarter, banking anxieties eased some, and we saw the markets recover to finish the quarter. Investors may continue to feel hesitant about the economy and market as we move forward into the year, and many investors still have recession fears looming in the back of their minds.
Following Silicon Valley Bank’s collapse, gains in the market diminished along with a rapid decrease in fixed income yields. Ultimately, many areas of the market recovered their gains near the end of the quarter. The S&P 500 closed the quarter up 7.03%, the Dow Jones up .38%, and the Nasdaq Composite roaring up 16.77%[1]. The yield on the two-year Treasury note fell to 4.126%. This is still historically high when we look at the two-year Treasury note in January of 2020, which hovered around 1.5%[2] but it is a notable drop from what was the highest treasury rate since 2007[3].
This year, volatility in the market is not only possible but expected. So far, the market has navigated the year with determination as it awaits further news on rate hikes from the Fed as well as incoming economic data. In 2022, the Fed raised rates seven times increasing by a cumulative 4.25%[4]. We have had two more rate hikes to start the 2023. Many believed the Fed would pause their hikes in March given significant banking concerns, but Jerome Powell reiterated that the Federal Bank’s focus is on price stability. The market continues to watch the Fed to see if they will come to a stop on rate increases or even just possibly take a period of time to pause before their next increase.
Increasing interest rates affects the economy in multiple ways. The average 30-Year fixed rate mortgage is currently 6.32%, slightly down from the highest point of 7.08% in October of 2022[5]. The cost of borrowing money is significant, which will deter growing businesses, reducing consumer interest in taking on any significant financing. Many households have felt the increased strain on their budgets as they attempt to navigate the increasing costs of many of their household goods. Housing starts have decreased from 1.7 million in Q1 2022 to 1.4 million in Q4 2022. House prices have started to stabilize or even decrease. This has not necessarily made homes more affordable due to simultaneously elevated mortgage rates.
The market has been optimistic this year even with recession fears, inflation, and potential interest rate hikes by the Federal Reserve. The unemployment rate reflects a strong job market. In January, unemployment fell to 3.4%, the lowest level in 53 years[6]. Jobless claims have remained low, meaning, even as we see layoffs in many industries, we are not seeing significant increases in filings for unemployment benefits. However, in 2022 only 26% of those unemployed who worked in the last 12 months applied for unemployment insurance. It is quite possible that this metric would underestimate a slowdown in the job market. In February, job openings decreased[7]. The Federal Reserve is looking for a reduction in economic activity; they would like to see signs that inflation is decreasing, and the economy is slowing down. We are beginning to see signs of the data that the Fed is looking for. It is difficult to forecast their path moving forward into the remainder of the year.
As we move into 2023, continuing to manage risk in portfolios remains in the forefront of management strategy. The market will likely continue to be faced with uncertainty this year, but there are other portions of the market where there is opportunity. There is the opportunity to produce income in portfolios. Fixed income yields remain elevated, as high-quality bonds are yielding over 4.5%. Understanding portfolio diversification and checking in on your short and long-term goals and time horizon will be essential throughout this year.
Safety, Opportunity, or Risk? – Kyle Burns
In their efforts to combat high inflation, the Federal Reserve is trying to slow the economy down. Many could see that there would be broad ranging impacts in different areas of the economy and the markets when the Federal Reserve started down the path raising interest rates. Just two years ago, investing in higher risk technology ruled as interest rates were near zero and it was believed that there was no alternative to putting your money in the stock market. The sentiment quickly changed in 2022 as interest rates rose and investors reallocated to cash and more value-based investments. So far in 2023, investors have shifted away from cash and value investments, instead investing in bonds, money market funds, and growth companies as they see interest rates peaking and move their sights to the future.
With constant changes in the market, we are always trying to better understand investments for the components of safety, opportunity, and risk. It is great to have technology stocks in a portfolio when they are going up, but it can do serious damage to a portfolio on the downside if we are not properly thinking about the risk. Each investment made is done with an understanding of how it might fit into capturing the right components of safety, opportunity and risk. U.S. Treasuries are very low risk investments, and they may fit within portfolios with an understanding of liquidity needs over the short and long term.
When the Federal Reserve begun the process of increasing interest rates, we knew that the increase in rates would create a temporary strain on the value of bond held within client portfolios. There is an inverse relationship between interest rates and the prices of bonds. When yields go up, prices go down or vice versa. While bonds may fluctuate in price, the return is typically set when you purchase a bond assuming that you don’t sell or there is a default prior to the bond’s maturity. Without properly understanding liquidity needs, an investor may be forced to sell bonds when they are down.
In March, Silicon Valley Bank (SVB) was forced to sell off a portion of their bond holdings to create liquidity for the cash needs of their depositors. Because interest rates had risen so rapidly in the past year, many bonds held by SVB had decreased in value from their purchase date. The bonds sold by SVB were sold for a loss of $1.8 billion[8]. Only two days later, federal regulators had taken control of SVB. The bank failed on a Friday and the FDIC made all insured deposits available to customers of SVB by Monday. Shortly after, the federal government stepped in and provided funds for uninsured deposits.
The failure of SVB, and other banks, made many nervous about their deposits at various financial institutions. People wondered whether it made sense to open multiple accounts at various banks to make sure they would have full FDIC insurance on all their cash holdings. When these questions are asked it makes sense to go back to ask about the safety of the financial institutions where we hold assets. What are the risks if we are above certain thresholds for insurance? For a large majority of people there is less risk than what is perceived. Many financial institutions carry insurance beyond the levels offered by FDIC or Securities Investor Protection Corporation (SIPC). The recent turmoil has given institutions an opportunity to reevaluate their holdings or raise additional capital to avoid the same fate as SVB.
It is worth a conversation with your advisor if there are concerns about the safety of your assets and where they are held. There may even be some opportunities to move assets around to capitalize on the current high interest rate environment.
At What Age Will I Retire? – Contessa Archuleta
As a mid-career professional, my husband and I frequently evaluate and discuss how long we will have to work to retire comfortably. Without a pension or defined benefit plan, I need to carefully review my 401k and IRAs to determine if I’m on a path to accumulating sufficient assets to maintain a modest lifestyle during a retirement that includes helping my children when they are grown, occasional travel and unplanned expenses like fixing a roof or a medical emergency.
In the U.S., the average retirement age is around 64, but ranges from 61 to 67 depending on where you live.[9] Over the years, the age of retirement has risen because people are living longer, living and medical expenses have increased, and there are fewer employer pensions. Social security benefits increase the longer you wait to collect. At age 62, you qualify for benefits but would collect the most if you wait until age 70. In recent years, questions have arisen as to the sustainability of these benefits.
In France, President Emmanuel Macron is attempting to raise their retirement age from 62 to 64 to help make sure benefits remain into the future. Currently, this is below the norm of other European countries and many other developed economies where most receive retirement benefits at 65. [10] Pensions in France are better than most with almost 14.5% of GDP in 2018. Their workers and employers contribute to payroll taxes to fund pension checks for retirees.
This proposal caused a series of protests and civil unrest by the French people earlier this year. In addition to the millions who took to the streets, government workers are striking which had led to garbage piling up on the streets and public transportation cancellations. Just like the U.S., France is considering how to sustain the pensions for their citizens. According to Macron and his proponents, something has to be done now so that these retirement benefits can continue to be provided. As people live longer and the population gets older, the system will not be able to sustain the benefits for the long-term under these conditions.
Like France, the U.S. will eventually need to address the sustainability of its social security retirement benefits. This is not a popular subject, and the federal administration will need to tackle it sooner than later. A recent study reported that the U.S. Social Security fund is expected to be depleted in 2033, which is a year earlier than previously estimated.[11] President Joe Biden’s administration is proposing to raise Medicare taxes on the wealthy in an effort to save the program. According to a recent trustee’s report, the Social Security Disability Trust Fund combined with the Social Security Fund will only be able to pay 80% of its scheduled benefits after 2034. [12]
Social Security is not expected to go away because people will always be paying into the program, however, lawmakers will most likely need to raise taxes, cut benefits, or do both to sustain it in the long-term. The situation with social security, makes it even more important for us all to do some extra planning and saving now to ensure we can successfully retire in the future.
Women’s History Month
In March, we celebrated Women’s History Month and the contributions women have made to events in history and our society. It coincides with International Women’s Day which was celebrated on March 8th. We are proud that our team at The Rikoon Group is comprised of 50% women in a traditionally male-dominated industry. We celebrate the women on our team who have overcome adversity and obstacles in their life to become active contributors to the finance industry and specifically our team. We praise the women in the world who have fought for equality, justice and opportunity. We will be offering more women-focused events over the next few months and would love to hear your thoughts or ideas on topics that interest you. Please reach out to one of us on the team if there is something you would like us to present or have a conversation about.
Staff Updates
Rob: These last several months have been productive, both in New Mexico and North Carolina. Shovels are in the ground and dirt is starting to move at several locations in the Asheville area. Closer to home, the series of steel figurative sculptures I have been working on for the past several years looks to be almost concluded as the last and largest work, an 11 feet high Shiva figure, is in the finishing stages.
My daughter, Hannah is considering moving back to Santa Fe once her third year residency program in naturopathic medicine, based in Portland, Oregon, concludes in October of this year. She has been specializing in women’s health, particularly focused on fertility and aging issues. Robyn‘s artistic Directorship at the Santa Fe Palyhouse has taken a particularly active turn this Spring with her directing a recent Pulitzer Prize winning play, “Sweat” on the main stage, premiering in early May. We are all in relatively good health and spirits and hope you are as well!
Kyle: It is wild how quickly time flies. James and Johnnie are moving into the final stretch of their seventh-grade school year, my nieces are attending their junior proms, and my nephew just left for a two year post high school trip to Peru. It feels like yesterday that they were all just little kids. The start of the year always leads to a flurry of activity in office as we work through yearend reviews and prep for tax season. We try to make sure we find those moments to focus on capturing some of the time that it feels like it would just fly by if we didn’t make an intention to slow it down. We celebrated the new year in Phoenix and took the kids to the Fiesta Bowl. In February, we snuck away for a ski trip to Durango with Tabitha’s Family. We have several trips planned throughout the rest of the year and are looking forward to getting that time as a family.
Jeff: Our granddaughter, Ariah, turned 2 years of age in the first week of April. I have written previously that she was diagnosed with retinoblastoma (eye cancer) at 9 months of age and despite lots of medical treatments, she ultimately lost her sight. She is a real trooper and so that hasn’t slowed her down much at all. She has a playdate once a month at the New Mexico School for the Blind and Visually Impaired in Albuquerque and she loves touching and playing with all of the great things that they have there. They have a large drum with about a 4 or 5 foot diameter so that all of the kids can sit around it and hit on the drum at the same time. Ariah likes to climb up and lay on top of the drum to feel the vibrations while all of the other kids beat on the drum. Her language development had been lagging a bit, which is typical with blind children because they can’t see how to shape their mouths to form some of the sounds. However, her language has really exploded and caught up in the last few months. She is now a very good mimic and so we must be much more mindful of our words around her because she hears and repeats almost everything. Ariah loves music and she can sing along with many songs. I particularly enjoy that she can already hear and sing the correct music note pitches. She has become quite a music critic and very picky about what songs she wants to hear at a particular time. If I start to sing a song that she doesn’t want to hear at that moment, she says – “no, no, no, no, no” and won’t stop until I finally stop singing that song. She will keep on saying “no” to songs until I finally select a song that she approves of at that time. We call this the Ariah Gong Show.
Keren: Spring is one of my favorite times of year in Santa Fe. Many complain about the wind, which I do understand. As a Californian become New Mexican, I count on our sunny, blue, winter skies, and this year we had more than a few grey days. I will never complain about moisture, but I eagerly awaited the shift of seasons to warmth this year more than any other. When we are blessed with more than a few days or weeks of this season, it is glorious to see the high desert burst from the beige and browns of winter dormancy to the brilliant pinks, greens, yellows and various other colors of tree blossoms and flowers. It has been, and continues to be, a time of great transition in many areas of my personal life. I take comfort and joy from this time of growth and renewal.
I am also happy to share I was invited to join the Hightower Well-th and Well Being Steering Committee, which is comprised of advisors from twelve firms across the county. As a group, we focus on creating and offering both online and written resources for clients that focuses on challenging life moments, important life events, and a holistic approach to the Well in Wealth. I look forward to working with them to speak in more depth to both the joyous and more somber moments of our clients’ financial journeys.
Anthony: In February, my family and I took a week long vacation down to the Caribbean and visited the island of Turks & Caicos. This is the 4th island my wife and I have been able to enjoy in the Caribbean, however, this time was especially fun as our daughter Amaya was able to join. The Caribbean in February is usually our go to, avoiding high season, the extreme heat and to celebrate our Wedding Anniversary, with this trip marking 14 years of marriage. We always find it a great time to hit the reset button from the chaos of the holidays and enjoy a fresh start to the new year. An important reminder for us all to pause every once and a while and enjoy/visit your happy place. Now with Spring Fever in the air comes hopefully more outdoor activities, but also plenty of chores around the house. I hope everyone is doing well and able to get outside and enjoy the outdoors.
Nizhoni: I started this year with many goals in mind for the future. The beginning of the year is often used to help create the mold for the year ahead. This year has been full of late season snow and windy storms. Lots of time to take care of routine appointments, taxes, cleaning up, and clearing out. I find this time of year to be a great period to complete a deep dive into my records to make sure everything is in order, but also to see if anything should change moving forward. Spring cleaning begins, and as a sentimental person I often find myself with more material items than I need. These last few months have been illuminating as I aspire to keep things minimal while also selectively holding on to my many books and mementos. I spent a lot of time with family these last few months, with lots of exciting things to celebrate. My aunt has been a large part of this as she has been working on many projects; one of which has me singing on her upcoming album which I had not done since I was about four years old. I took some time outside of Santa Fe to get together with some friends from college, who are sprawled across the country. Being able to take time for my family, in its many definitions, has been a rejuvenating way to begin the year. I look forward to the warmer seasons ahead.
Bonita: Spring has arrived to blow away the tax season. 2023 seems to be the year of love for family and friends. I kicked off the year in Denver reuniting with college friends for a traditional Bengali Wedding. I am spending some time in Cancun, Mexico for a wedding, then to Los Angeles in November for my best friends wedding. I, however, have spent the winter months anxious for warmer weather and summer adventures. I look forward to exploring some of New Mexico’s unique landscapes and monuments. I am re-energized by spring cleaning, de-cluttering, and setting goals for the rest of the year.
Gayle: Today is National Colorado Day, or so my local government website informs me. Some of the “national this or that days”, are actually hoaxes. Kind of like our spring! We are hoping it’s the real deal; bulbs planted last fall have peaked from their winter slumber, the Rockies look beautifully white, and there’s no snow left in our neighborhood. Until maybe tomorrow…No blurb would be fitting without commentary about my grangirlz. Do you remember the Pepe’ Le Pew skunk cartoons? When Pepe’ had a gas emission, the cartoon showed green smoke. Driving the highway it was obvious a skunk was nearby, and Violet (now 5) quipped from the backseat “Is there green smoke?” Her older sister Claire, who is 8 and 5/6 (she likes math) rolls her eyes at her sister’s antics. Both continue to play soccer and my heart is warmed at the fierceness of their determination.
As I’m sure you are, I look forward to sunshine, summer play, and more adventures. Patience will be required due to recent shoulder surgery, so golf, pickle ball, water skiing and other team sports, may be delayed. No reason to let that stop me from enjoying life however. And speaking of teams, the Rikoon Group is here for you and looks forward to continuing to grow our relationships with you. Have a blessed, safe and fun filled summer.
[1] https://www.wsj.com/articles/wild-quarter-for-markets-might-foretell-further-turbulence-ce97741c?mod=markets_lead_pos2
[2] https://home.treasury.gov/resource-center/data-chart-center/interest-dates/TextView?type=daily_treasury_yield_curve&field_tdr_date_value=2020
[3] https://www.cnbc.com/2023/03/07/us-treasury-yields-investors-anticipate-fed-chair-powells-remarks.html
[4] https://news.yahoo.com/we-have-more-work-to-do-the-complete-story-behind-the-feds-historic-shift-in-2022-114004343.html
[5] https://fred.stlouisfed.org/series/MORTGAGE30US
[6] https://www.wsj.com/articles/investors-worry-too-hot-economy-will-put-fed-on-more-aggressive-rate-path-bf41e230?mod=article_inline
[7] https://www.bls.gov/news.release/jolts.nr0.htm
[8] https://www.wsj.com/articles/bank-collapse-crisis-timeline-724f6458?mod=Searchresults_pos3&page=1
[9] https://www.yahoo.com/lifestyle/average-retirement-age-u-140021169.html
[10] https://www.cnn.com/2023/03/24/business/pension-age-developed-countries-oecd/index.html
[11] https://www.reuters.com/world/us/us-social-security-fund-seen-depleted-2033-year-earlier-than-previous-estimate-2023-03-31/
[12] https://www.cnbc.com/2023/03/31/social-security-trust-funds-depletion-date-moves-up-to-2034.html
