Q1 2023 Returns By Asset Class

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This post contains the usual returns by asset class for this past quarter (by representative ETF), last year, last five years, last ten years, and since the covid low (3/23/2020).  While there is still no predictive power in this data, I’ll continue to post this quarterly for those of you that are interested. 

Last Quarter (1/1/23-3/31/23)
Last Year (4/1/22-3/31/23)
Since Covid Low (3/23/20-3/31/23)
Last Five Years (4/1/18-3/31/23)
Last Ten Years (4/1/13-3/31/23)

A few notes:

  • Q1 2023 felt like it was much longer than just one quarter. After starting with one of the strongest January month’s on record, the next month and half were a disaster for markets as inflation proved to be stubborn, leading to more hawkishness by the Fed. By the end of February, markets were pricing in near 6% short-term rates for the end of 2023. In early March, Silicon Valley Bank and Signature Bank failed after a bank run and fears grew of a much bigger banking crisis. The anticipation of a pullbank in credit stoked recession fears, which were already present due to the pace of Fed rate hikes over the last year. Interest rates tumbled and by the third week in March, markets were pricing in substantial Fed rate cuts by the end of the year. In the last week of the quarter, fear of contagion in the banking sector relaxed a bit after the sale of a large portion of SVB’s assets by the FDIC and substantial investments in other regional banks by some of the stronger players in the space. Rates rebounded somewhat, but stayed in check as markets tried to balance inflation trends with growing concerns that further rate hikes would continue to pressure banks and the economy. With imminent additional bank failures seeming less likely, but interest rates still down considerably from the beginning of March, stocks rallied in the last week, making the quarter a positive one overall. Ending a quarter positive after the 2nd largest bank failure in US history, once again shows us that trying to predict the stock market’s short-term movement is a fruitless endeavor.
  • International Developed Stocks led the way for the quarter (+8%) with US Large Caps close behind (+7.5%). Small Caps (+3.7%) fared a bit worse as smaller companies in general need more access to credit than large ones and a banking crisis would increase borrowing costs while decreasing the availability of credit. Additionally, the regional banks, some of which became a concern after the SVB failure, make up a decent portion of the small cap indexes. Real Estate Investment Trusts gained 1.7% after being down as much as 6% in the quarter. Again credit fears and recession put pressure on REITs, with borrowing costs up, housing prices falling, and high vacancies in the corporate real estate space. On the bond side, local currency Emerging Market bonds let the way (+5.2%) as the dollar took a breather on lower rate expectations. High-yield (“junk”) US bonds were up 3.7%, with the Aggregate Bond Market Index up 3.2%, all due to lower rates, which move inversely with bond prices. Shorter-term bonds gained 1-2% in the quarter. Commodities lagged all other asset classes, down 6.3% in the quarter as future inflation expectations cooled and recession fears grew.
  • Not shown in the charts above, but growth outperformed value sharply in Q1. Lower future rate expectations seemed to flip a switch that turned everything that fell in 2022, back to growth in Q1 2023. It will take a lot more to undo the carnage in growth stocks, but Q1 was a good start. ARKK, which I’ve mentioned in previous quarters as being one of the most speculative areas of the market, was up 29% in Q1 2023, but is still down 67% from it’s high in Nov 2021.

FDIC, SIPC & Bank Runs

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I’ve recently gotten a few questions from clients about FDIC insurance and keeping money safe at banks and other institutions, in light of the failures at Silicon Valley Bank and Signature.  I thought it’d be helpful to create a post on this topic that you can all refer to in the future.  I think everyone knows the FDIC magic number by now…  $250k  How that $250,000 applies to different types of assets, accounts, and institutions seems less understood. 

For cash accounts, FDIC insurance covers $250k per person, per account type (individual, joint, IRA, corporate, trust, LLC, etc.), per bank.  It is not $250k per account.  If you only have individual accounts at a bank, regardless of how many accounts over which that money is spread, then your coverage is simply $250k  If you have only have joint accounts at a bank, then each person on the title of the joint account has $250k of coverage, regardless of the number of accounts.  If you have individual and joint accounts at a bank, then you have $250k of coverage on your individual accounts (in aggregate), and separately, you and each of the other owners each have $250k of coverage on your joint accounts (in aggregate).  I won’t get into the nuances of trust accounts and corporate accounts, because our clients don’t generally have that much cash sitting in those types of accounts, but if you want to read the rules, straight from the proverbial horse’s mouth, the FDIC website does a great job of explaining how FDIC insurance applies to all different account types.  The limits apply per bank, so if you want a higher limit, you just need to spread your cash across more than one bank.  Again, FDIC insurance only covers cash in bank accounts.

FDIC insurance is important because with bank accounts, your deposits are the working capital of the bank, used to make loans or investments to generate a profit for the bank.  A bank run causes a bank failure if the bank’s assets are illiquid and/or have fallen in value too much to safely cover withdrawal requests from depositors.  That’s when regulators step in and close the bank, like they did with Silicon Valley Bank and Signature Bank.  They attempt to sell off bank assets while repaying depositors with those proceeds (oversimplified, but that’s the general process).  In those situations, the FDIC guarantees immediate availability of insured deposits to depositors either using the bank’s assets, the FDIC insurance fund, or other borrowing facilities set up by the Federal Reserve and Treasury.  They typically pay a dividend on uninsured deposits as well, from the leftover bank assets after accounting for all insured deposits.  As other assets are sold, additional dividends are paid in an attempt to make all depositors whole.  However, if there aren’t enough assets to do that (remember, the regulators step in when it looks like there aren’t going to be enough assets), then uninsured depositors lose their money.

Unlike with banks, in brokerage accounts, your securities (stocks, bonds, mutual funds, etfs, derivatives) are completely segregated from the assets/liabilities of the broker.  Only fraud or other illegal actions by the broker could expose your securities, and regulation requires strict internal controls and audits to prevent that.  That’s why it’s important to use a US-based broker with an established history (or a foreign broker with similar characteristics and similar foreign protections if you are outside the US).  Most of our clients have their brokerage accounts at TD Ameritrade, which is owned by Schwab (and will soon be integrated into Schwab), and Schwab definitely fits that description.  There is no risk to brokerage accounts as a result of a bank run.  Schwab bank could completely fail and Schwab as a business could file for bankruptcy, and while it would cause a headache and potential service disruptions, none of that would expose you to loss of your securities.  In practice, even if Schwab bank were to fail, it’s just one division of the company, and a likely suitor would come along and purchase the non-bank divisions, possibly facilitated by the US government.  Additionally, each brokerage customer is protected with up to $500k of SIPC insurance, which guarantees the securities that are held (in a segregated manner) with the broker.  Finally, most brokers purchase additional insurance protection for customers.  For example, TD Ameritrade provides each customer with $149.5M of protection for securities, above and beyond the SIPC insurance, subject to aggregate policy limits. SIPC’s only currently open case is that of Bernard L. Madoff Investment Securities LLC (a classic example of why you want to have your assets in accounts in your own name, in the custody of a brokerage that is not also your investment advisor!).

Cash in a brokerage account is a hybrid between cash at a bank and securities in a brokerage because brokers “sweep” cash into a bank account to earn interest.  However, unless you have more than $250k, that cash is FDIC insured in those bank accounts, so no risk there either.  Most brokers use multiple sweep accounts at different banks, so you really have $250k times the number of banks in the program as an insured cash limit.  We don’t hold anywhere near that amount of cash in client accounts unless a deposit is made or a withdrawal is being facilitated in excess of the insured amount.  Even then, the cash is only held for a very short amount of time.

To summarize:

  • You should keep bank account cash below $250k per person per account type at any one bank if you want to stay within FDIC insurance limits.  Split your assets between banks, if necessary, or add them to brokerage accounts and invest them in assets like US government t-bills if they are assets upon which you don’t want to take any risk.
  • FDIC insurance is what protects your assets in the case of a bank run.
  • Cash held in a brokerage account that is swept to a bank account is treated just like cash held at the bank account and is subject to the same FDIC limits.
  • Brokerage assets (other than cash) are not exposed in a bank run because, unlike bank deposits, they are segregated from the assets of the broker and are not subject to the broker’s creditors.
  • Brokerage assets can be at risk in the case of fraud or other illegal activities by the broker (as in the case of Bernie Madoff’s fraudulent broker which conveniently “held” the assets of those who hired him as their investment advisor).  That’s always the case and that’s why brokers are highly regulated, required to have internal controls in place, and are audited regularly.  In the case any securities are lost, SIPC and additional insurance provided by the broker guarantee the return of the securities, up to insurance limits.

2023 State Tax Changes

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The Tax Foundation released a fantastic list of notable state tax changes for 2023. It was so good, I wanted to post it here, rather than just tweeting it out, since not everyone uses Twitter. Here’s the link to the site, which includes personal income tax rate changes, corporate tax changes, sales and use tax changes, and a host of miscellaneous new and changed provisions.

SECURE 2.0 Act

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In late December, as part of budget appropriations for 2023, Congress passed and President Biden signed into law, the SECURE 2.0 Act.  For those interested in the full text, see Division T of HR 2617.  It can be found on pages 2046-2404 of the 4,155 page document.  SECURE 2.0 is an add-on to the original Setting Every Community Up for Retirement Enhancement (“SECURE”) Act of 2019, most of which went into effect in 2020.  SECURE 2.0 is filled with a ton of tax, retirement, and other provisions, many of which are extremely complex and will require additional guidance from the IRS on implementation.  Below are the provisions I noted that are most likely to impact some PWA clients, now, or in the future (I tried to sort these in order of most interest to least for the average client, so the more important ones are listed first.  This makes the list NOT follow the sections of the bill at all).

  • Rollover of unused 529 plans to Roth IRAs – SECURE 2.0 allows for penalty-free rollovers from a 529 plan to a Roth IRA for the beneficiary of the 529 under certain circumstances.  The lifetime limit is $35k per beneficiary, but annually, can’t be more than what the beneficiary could contribute to a Roth IRA (that may or may not include the need to have earned income… we’ll need more guidance on that).  The 529 account must have been open for at least 15 years to make such a transfer and the transferred amount must have been in the account for more than 5 years (i.e. you can’t contribute and then immediately convert…  this is really intended for leftover education savings after school is complete).  Interestingly, there are no income limits to making these rollover contributions, so we have another “backdoor Roth” type opportunity.
  • RMD begin date – Required Minimum Distributions from pre-tax retirement plans must start in the year that a taxpayer turns 72 (up from 70.5 due to SECURE 1.0).  SECURE 2.0 extends this to age 73 starting in 2023 and to 75 starting in 2033.
  • Missed RMD penalty reduced – from 50% to 25%, or 10% if the correction occurs in a timely manner (generally, within 2 years).  Starts in 2023.
  • Additional 401k catch-up contribution – for those ages 60-63, the catch-up contribution amount is increased to $10k (from the current $7500) or 50% more than the regular catch-up contribution, whichever is greater, starting in 2025.
  • Catch-up contributions must be Roth – Currently, catch-up contributions to a 401k/403b can be pre-tax or Roth as decided by the plan participant.  Starting in 2024, all catch-up contributions must be Roth, unless the participant’s previous year compensation is less than $145k (indexed for inflation).
  • Matching contributions can be Roth – Currently all 401k/403b employer matching is done on a pre-tax basis to a Traditional 401k.  Starting in 2023, plans can allow participants to direct whether they want the match to be contributed to the Traditional or Roth 401k/403b.  If Roth, the match will be considered taxable income in the year the contribution is made.
  • Student loan payments will count for 401k matching purposes – when employers offer a 401k match, if the employee doesn’t contribute to the plan, they don’t get the match.  SECURE 2.0 changes that by allowing employers to count student loan payments as contributions to 401ks for the purpose of calculating how much matching an employee will get.  Starts in 2024.  Another seemingly difficult one from an administration perspective.  I’m sure there will be more guidance on how the employee proves the loan payment to the employer and by what deadline to receive the match.
  • SIMPLE and SEP plans can be Roth – starting in 2023, both SIMPLEs and SEPs can allow Roth contributions (would need a SIMPLE Roth IRA and SEP Roth IRA, respectively.
  • Use of 401k funds in Federally Declared Disasters – up to $22k can be withdrawn penalty-free (but not tax-free) from a 401k for a federally declared disaster.  The amount is taxable over 3 years, to allow the impact to be spread rather than potentially bumping the taxpayer up in bracket in the year of the disaster.  The amount can also be re-contributed within three years and then no tax is due.  In addition, loans from 401ks get a boost if you live in a Federally declared disaster area.  Instead of the max loan being 50% of the vested balance or $50k (whichever is less), it becomes 100% of the vested balance or $100k (whichever is less).  Effective for disasters occurring after Jan 25, 2021.
  • IRA Catch-Up – the extra amount that you can contribute to an IRA if you’re over age 50 will now be indexed to inflation (was previously a flat $1k).  Starts in 2024.
  • Qualifying longevity annuity contracts (QLACs) can be larger – the are annuities that start payment after age 72.  Previously limited to 25% of account value or $125k max, up to $200k can now be purchased and is exempted from Required Minimum Distributions (RMD).  Start is in 2023.
  • Qualified Charitable Distribution (QCD) easing – SECURE 2.0 indexes the $100k annual QCD limit to inflation, and allows a one-time $50k QCD to a charitable gift annuity, charitable remainder unitrust, or charitable remainder annuity trust.  Starts in 2023.  Note, QCDs can still be made by those over 70.5 years of age, despite the RMD begin date being pushed back from the year you turn 70.5 to 72 (by SECURE 1.0) and now 73 or 75 (by SECURE 2.0).
  • Roth 401k RMDs eliminated – While there has never been a Required Minimum Distribution for Roth IRAs, Roth 401ks did have an RMD.  SECURE 2.0 eliminates this starting in 2024.
  • Retirement plan distributions for Long-Term Care insurance – Up to $2500 can be distributed per year penalty-free (but not tax-free) to pay the premiums for LTCI.  Starts in 2026.
  • Penalty-free “emergency” distributions from 401ks – Can withdraw up to $1k per year as an emergency expense without penalty.  Tax is due unless the amount is repaid within 3 years.  No additional emergency withdrawals are allowed until the amount is paid back or the 3 years has passed.  Starts in 2024.
  • Emergency Savings Accounts – SECURE 2.0 allows (but does not require) employers to offer Emergency Savings Accounts to non-highly compensated employees, linked to their retirement plan.  These would function like Roth 401k accounts (after-tax) with a max of up to $2500/yr in contributions, would qualify for matching, and would allow up to 4 penalty-free withdrawals per  year.  At termination, the remaining amount can be rolled to a Roth 401k or Roth IRA>
  • 401k auto-enrollment – if you start a new job, you may find that more employers are auto-enrolling employees in their 401k, unless they opt out.  SECURE 2.0 mandates this as part of new plan setups, with initial contributions ranging from 3-10% and auto-increase annually up to 10-15%.  Starts in 2024.
  • SIMPLE plan changes – contributions limits will increase by 10% starting in 2024.  Additionally, employers contribute more to employee SIMPLE accounts (up to the lower of 10% of compensation or $5k).
  • Nannie SEPs – Domestic employees can participate in Simplified Employee Pension (SEP) plans.  Starts in 2023.
  • Starter 401k plans – Employers without a 401k (or 403b) can sponsor a starter 401k (or safe-harbor 403b) that doesn’t require any onerous non-discrimination testing.  Employees would be auto-enrolled and can contribute up to the maximum amount that would allowed to an IRA for the given year.  Starts in 2024.
  • Saver’s Credit becomes Saver’s Match – the current Saver’s credit provides a tax credit of 50% of the first $2k contributed to a retirement plan for low income individuals / families.  SECURE 2.0 changes this to a Saver’s Match which is deposited into the saver’s retirement plan account (seems like a much more difficult plan from an administration standpoint, but perhaps it will provide a bit better incentive to contribute as the Saver’s Credit was not a popular program.  Starts in 2027.

Q4 2022 Returns By Asset Class

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This post contains the usual returns by asset class for this past quarter (by representative ETF), last year, last five years, last ten years, and since the covid low (3/23/2020).  While there is still no predictive power in this data, I’ll continue to post this quarterly for those of you that are interested. 

Last Quarter (10/1/22-12/31/22)
Last Year (1/1/22-12/31/22)
Since Covid Low (3/23/20-12/31/20)
Last Five Years (1/1/18-12/31/22)
Last Ten Years (1/1/13-12/31/22)

A few notes:

  • Q4 was a strong quarter (even stronger if we could erase December) that ended a terrible year for everything other than commodities. Developed foreign markets led the way (+17%) as the US dollar finally cooled. Emerging market stocks, emerging market bonds, US small caps, and US large caps all had solid performance of +7-9%. High yield (junk) bonds returned +5% with real estate just below at +4.3%. Commodities ticked slightly higher (+2.4%) and after a miserable year, bonds crawled ahead as interest rates finally took a breather. Short-term corporate bonds were up 2.2% with the aggregate bond index up 1.6%.
  • While many will remember 2022 as an excess of destruction in financial markets, it really was a destruction of excess. The areas that fared worst were those that saw substantial gains in previous years, leading to rich valuations by virtually every measure. I’ve mentioned Large Cap Tech multiple times in previous “market update” posts as an area of concern in an otherwise fairly priced market. 2022 brought it back to reality with the Nasdaq 100 falling more than 30% and individual well-known names falling much further. The ARK Innovation ETF (ARKK) closed the year down nearly 68%. The once-loved Tesla finished down 65%. Meme stocks like Gamestop (-50%) and AMC (-76%) also came back toward reality. And crypto, perhaps the most obvious representative of speculation, was also crushed with Bitcoin down 65%, Ethereum down 68%, and many of the smaller coins/tokens down substantially more. On the contrary, US Large Cap Value (perhaps the least representative of excess) held up quite well, down only 2.1% on the year. Destruction of excess is often a requirement of the start of a new bull market. Without a crystal ball, we can’t know when that will begin (or if it already has), but it would be very difficult to have one without cutting the excesses out of the market overall.
  • 2022 was the worst year for the aggregate bond index in history, closing down 13%, after being down as much as 17% earlier in Q4. Bond prices move in the opposite direction from interest rates and with the Fed raising rates at a pace never before seen (started the year near 0% and ended near 4.5%!), in hopes of bringing inflation back toward their 2% target, bond prices tumbled. The shorter the term on the bond or bond fund, the less impact the increase in rates has though, so short-term bonds outperformed longer-term bonds. This should intuitively make sense… the shorter the time to maturity, the less time you have to wait to redeem your low-interest paying bonds and reinvest in new higher interest bonds. The longer the time to maturity, the longer you’re stuck with the low interest rates, so if you want to sell those bonds, no one will pay anywhere near your principal amount (i.e. the price falls). The good news is that we’ve gone from a world of negative and zero interest rates everywhere, to one where we can now get 3.4% in a bank account, 4.75% on a 1-year treasury note, over 5% on many high-quality corporate bonds.
  • Commodities were the one bright spot in 2022, with the Bloomberg Commodity Index returning over 17%. Commodities still have a long way to go to catch up to other financial assets over the past 10 years though as you can see from the charts above. It feels like oil, gas, etc. are all high now, but remember that 10 years ago, oil was $120 vs. today’s ~$80.

Updated 2023 Tax Numbers

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The IRS has released the key tax numbers that are updated annually for inflation, including tax brackets, phaseouts, standard deduction, and contribution limits.  Due to rounding limitations, not all numbers have changed from last year, but tax bracket thresholds have increased by just over 7% (higher than usual due to higher than usual inflation over the last year).  The notices containing this information are available on the IRS website here and here.  Some notable callouts for those who don’t want to read all the way through the update:

  • Max contributions to 401k, 403b, and 457 retirement accounts will increase by $2,000 to $22,500 (+$7,500 catch-up, up $1k, if you’re at least age 50).
  • Max contribution to a SIMPLE retirement account will increase by $1500 to $15,500 (+$3,500 catch-up if you’re at least age 50).
  • Max total contribution to most employer retirement plans (employee + employer contributions) increases from $61,000 to $66,000 (+$7,500 catch-up, again for those 50 or over).
  • Max contribution to an IRA increases from $6,000 to $6,500 (+$1,000 catch-up if you’re at least age 50).
  • The phase out for being able to make a Roth IRA contribution is $228k (married) and $153k (single). Phase out begins at $218k (married) and $138k (single).
  • The standard deduction increases by $1800 to $27,700 (married) and by $900 to $13,850 (single) +$1,850 if you’re at least age 65 and single or $1,500 each if you’re married and at least 65.
  • The personal exemption remains $0 (the Tax Cuts & Jobs Act eliminated the personal exemption in favor of a higher standard deduction and child tax credits).
  • The child tax credit remains at pre-2021 rules at $2,000 per child, phasing out between $400-440k (married) and $200-220k (single).
  • The maximum contribution to a Health Savings Account (HSA) will increase to $7,750 (married) and $3,850 (single).
  • The annual gift tax exemption increases by $1,000 to $17,000 per giver per receiver.
  • The lifetime gift / estate tax exemption increases to $12,920,000.
  • Social Security benefits will rise 8.7% in 2023.  The wage base for Social Security taxes will rise to $160,200 in 2023 from $147,000.
  • Updated mileage rates for 2023 are due out later this year.

You can find all of the key tax numbers, updated upon release, on the PWA website, under Resources.

Q3 2022 Returns By Asset Class

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This post contains the usual returns by asset class for this past quarter (by representative ETF), year-to-date, last 12 months, last five years, last ten years, and since the covid low (3/23/2020).  While there is still no predictive power in this data, I’ll continue to post this quarterly for those of you that are interested. 

Last Quarter (7/1/22-9/30/22)
Year-To-Date (1/1/22-9/30/22)
Last 12 Months (10/1/21-9/30/22)
Since COVID Low (3/23/20-9/30/22)
Last 5 Years (10/1/17-9/30/22)
Last 10 Years (10/1/12-9/30/22)

A few notes:

  • After spending the first half of Q3 building up significant gains, all asset classes struggled in the second half, closing down for the quarter, and, with the exception of Commodities, down for the year. International Stocks, both Emerging and Developed markets, as well as US Real Estate performed worst (-11% to -12%) for the quarter. “Best” performers for Q3 were High-Yield (junk) bonds, Short-Term Corporate Bonds, and US Small Caps (all down ~2%). US Large Caps (S&P 500), Commodities, Emerging Market Bonds, and US Aggregate Bonds finished the quarter in the middle of the pack, down 5-6% each.
  • The turning point for the market was the Federal Reserve’s annual meeting in Jackson Hole in August. There, chairman Jerome Powell reiterated a tough stance against inflation, indicating the Fed was poised to continue to raise rates considerably and willing to accept the “pain” (likely recession) that would result, in order to tame inflation.
  • As a result of the Fed’s action, bonds had another tough quarter too in Q3. Long-term treasuries (TLT, not shown above) were down another 11.6% in the quarter, now down ~31% YTD as rates spiked, and prices (which are inversely correlated with rates) sank. We generally keep the bond side of client portfolios much shorter in duration, and include inflation-protected bonds, both of which faired much better again. Short-term inflation protected treasuries were only down ~2.5% for the quarter., with short-term investment-grade credit down less than 2%.
  • On the bright side of the bond rout, higher rates means higher yields going forward. Short-term treasuries now yield ~4%, with junk bonds over 8%. Holding funds with bonds that mature soon means that those holdings are soon to be replaced by new bonds that pay today’s higher rates. Short-term losses are made up for quickly by higher yields going forward.
  • Interestingly, the ARK Innovation Fund (ARKK), which I’ve mentioned here in previous quarters due to it’s awful performance, did not make a new low for 2022 in Q3, despite the market as a whole doing just that. It’s still down 60% year-to-date though as the values of high-growth stocks have been destroyed by high interest rates.
  • Markets in general are still sharply up from the 2020 Covid lows and over the last 5 and 10 years. US Large and Small Caps have dominated global performance over the last decade.

The Inflation Reduction Act Of 2022

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On August 16th, President Biden signed the Inflation Reduction Act of 2022 into law.  I’ll stay out of the debate on whether the Act will actually reduce inflation, but whether that’s true or not, the 273 pages of changes and additions to existing law will have some effect on many of our clients.  Many of the provisions of the Act impact corporations exclusively (including a new 15% minimum tax, and the new 1% excise tax on stock buybacks), so I’m going to leave them out of this summary.  The changes for individuals include the following:

1) Modifies the Non-Business Energy Property Credit (this is the credit for energy efficient windows, doors, roofs, etc.) starting in 2023 by extending it through 2032 and making it more robust:

  • The $500 lifetime limit is changed to a $1200 annual limit, though individual types of property have lower limits.
  • The rate increases from 10% of the cost to 30%.
  • Home energy audits (30% up to $150) are now included as eligible for the credit, as well as exterior doors (30% up to $250 per door, $500 total), windows (30% up to $600), insulation (30% up to $600), heat pumps (30% up to $2k, not capped by $1200 overall max), HVAC units /  water heaters / furnaces / boilers (30% up to $600), electrical panel upgrades to at least 200 amps as part of other energy efficient improvements (30% up to $600). 

Energystar.gov will have updated information on each credit by end of 2022.  That’s the most reliable site for ongoing energy credit information.

2) Extends the Residential Energy Efficient Property Credit (think solar panels on your roof) through 2034.  This 30% credit had started to phase out and was reduced to 26% for 2022, on its way to zero in the coming years.  Instead, 2022’s credit has been restored to 30% and that continues through 2032, phasing down to 26% in 2033 and 22% in 2034.

3) Replaces the old Qualified Plug-In Electric Vehicle credit ($7500 for qualifying electric vehicles but only for the first 200k vehicles sold by manufacturer) with the new Clean Vehicle Credit.  This new credit:

  • Runs from 2023 through 2032.
  • Remains capped at $7500 (lower, depending on vehicle sourcing and assembly).
  • Includes other alternative powered vehicles (e.g. hydrogen fuel cell)
  • Has income restrictions…  $150k single, $225k head-of-household, and $300k married filing jointly (though can use the lesser of the income in the year of purchase or the previous year to qualify).  These are cliffs meaning that if you are even $1 over the limit, you receive no credit.  It does not phase out slowly like most credits / deductions.
  • Has MSRP restrictions…  cars with MSRP over $55k and SUVs / light trucks over $80k are excluded.
  • Requires that final assembly of the vehicle occurred in the US and that a certain percentage of the minerals used to make the battery were sourced from North America or certain other countries that have trade agreements with the US.  These restrictions get tougher in later years (40% by 2024, 100% by 2029).
  • Does not have manufacturer sales caps (i.e. Tesla’s that meet the above requirements would qualify).
  • Allows purchasers to transfer their credit to the auto-maker starting in 2024 (means you get the credit as a discount off the purchase price, vs. having to pay full price and claim the credit on your taxes.  No details on how this will actually work.

For 2022, the old rules apply, except that the new assembly requirements are in effect as of the signing of the Inflation Reduction Act.  The Dept. of Energy has published a list of qualifying vehicles.  If you were in a contract for delivery prior to 8/16 and receive delivery prior to the end of 2022, a special transition rule allows you to treat the vehicle as delivered on 8/15 (i.e. no assembly requirements). 

The provisions of this credit are very complex.  The conclusion here is to check with the manufacturer before making the final decision on what kind of car you want to buy and assuming the credit will be available.  The sourcing / assembly restrictions, combined with the MSRP limits could make it tough for vehicles to qualify, especially early in the life of the credit.

4) Creates a new Previously Owned Clean Vehicle Credit that:

  • Runs from 2023 through 2032.
  • Is valued at the lesser of $4000 or 30% of the vehicle cost.
  • Applies to clean vehicles that are at least 2 years old.
  • Has income restrictions…  half those of the credit for new vehicles ($75k single, $112.5k head-of-household, and $150k married filing jointly (though can use the lesser of the income in the year of purchase or the previous year to qualify).  These are cliffs meaning that if you are even $1 over the limit, you receive no credit.  It does not phase out slowly like most credits / deductions.
  • Has vehicle value restrictions…  vehicles over $25k are excluded.
  • Has use restrictions…  Can only use the credit once every 3 years. The credit can also only be applied once per vehicle.

5) Creates the new High-Efficiency Electric Home Rebate Program.  This program provides qualifying low and middle-income families a total rebate of up $14k to purchase energy-efficient electric appliances.  This includes up to $8,000 to install heat pumps, $1,750 for a heat-pump water heater, $840 for a heat-pump clothes dryer or an electric stove, $1600 to insulate and seal a house, $2500 on improvements to electrical wiring, and $4000 toward upgrade of electrical panels.  The program will be administered by the states (states have to apply for their share of the $4.5B of Federal funding and there doesn’t seem to be any guarantee that all states will, or that their programs will exactly match those described above) and only those earning less than 1.5x the area’s median household income will qualify.  The rebate can’t exceed 50% of the cost of the project if the family income is between 80-150% of the area median income.

An additional, more generalized rebate program, also administered by the states is also available.  A retrofit that reduces a home’s energy use by at least 35% via insulation or other improvements is eligible for up to an $8k rebate, or 80% of the project cost, whichever is less.  For smaller projects that reduce usage by 20-35%, a $4k rebate is available.

6) Extends two ARPA provisions dealing with the ACA (“Obamacare”) through 2025.  As a result, those earning more than 400% of the Federal poverty line will still qualify for subsidies if their cost of purchasing a benchmark health insurance plan exceeds 8.5% of income.  Without this extension, in 2022, the income cap would have been $51,520 for an individual in most of the country, and $106,000 for a family of four.

7) Modifies Medicate Part D and Medicare Advantage Plans to:

  • cap monthly insulin costs at $35, starting in 2023.
  • eliminate additional out-of-pocket costs, starting in 2024, for enrollees who end up with enough covered prescription drug bills to qualify for catastrophic drug coverage.  This differs from today’s structure where enrollees still pay 5% of the bills even after they hit catastrophic coverage protections.
  • cap annual out-of-pocket drug costs at $2000, starting in 2025
  • allows Medicare to negotiate certain drug prices with manufacturers for the first time starting in 2026.

8) Increases funding for the IRS by $80 billion.  While this isn’t a provision directed at individuals, it’s possible it could impact you since a bigger IRS budget means more enforcement (i.e. audits), but, on the bright side, better taxpayer service.  Commissioner Rettig has written a letter describing what the IRS plans to do with the money, in case anyone wants his perspective.

Q2 2022 Returns By Asset Class

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This post contains the usual returns by asset class for this past quarter (by representative ETF), year-to-date, last 12 months, last five years, last ten years, and since the covid low (3/23/2020).  While there is still no predictive power in this data, I’ll continue to post this quarterly for those of you that are interested. 

Last Quarter (4/1/22-6/30/22)
Year-To-Date (1/1/22-6/30/22)
Last 12 Months (7/1/21-6/30/22)
Since Covid Low (3/23/20-6/30/22)
Last 5 Years (7/1/17-6/30/22)
Last 10 Years (7/1/12-6/30/22)

A few notes:

  • Q2 was an awful quarter for stocks across the board. Emerging markets performed best out of the major asset classes (-9%), with foreign developed (-14%), US REITs (-15%), US Large Cap (-16%), and US Small Cap (-17%) lagging behind. Continued interest rate hikes by the Federal Reserve to battle continued increases in inflation have pressured asset values and sparked fears of a sharp economic slowdown as a result. Whether we’re technically in a recession now (two consecutive quarters of negative GDP growth) or not, it’s clear that the Fed is determined to slow inflation at all costs right now, both by raising rates and via Quantitative Tightening (QT), or selling assets from their balance sheet.
  • Bonds had another tough quarter too in Q2. Long-term treasuries (TLT, not shown above) were down 13% in the quarter, now down 22% YTD as rates spiked, and prices (which are inversely correlated with rates) sank. We generally keep the bond side of client portfolios much shorter in duration, and include inflation-protected bonds, both of which faired much better again. Short-term inflation protected treasuries were only down 1.2% for the quarter., with short-term investment-grade credit down 1%.
  • Even commodities turned in negative performance for Q2. After being up as much as 11% for the quarter in early June, a sharp downturn across the board, and especially in energy delivered a -6% quarter.
  • The worst performing areas of the market in Q2 were the same as in Q1. The ARK Innovation ETF (ARKK), down almost 30% in Q1, tumbled another 40% in Q2, and is now down almost 75% from its 2021 peak. On the flip side, US value stocks are still holding up relatively well, down only 9% YTD vs. the S&P 500’s -20%.
  • Markets in general are still sharply up from the 2020 Covid lows and over the last 5 and 10 years. US Large and Small Caps have dominated global performance over the last decade.

Has Inflation Peaked?

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As I’ve wrote back in May, inflation, leading to higher interest rates, leading to fear of a sharp economic slowdown, seems to be dominating stock/bond market performance of late (and not in a good way). I’ve been seeing some signs of inflation cooling of late and wanted to share a few, because you generally don’t get early/good signs of stuff like this on the news. Remember though, it’s very doubtful that overall prices will ever come back down to where they were. What’s were looking for is the increase in prices going forward to moderate back toward 2% per year. Below are some signs of actual price moderation, which would likely start to flow through the economy and ease the rate of growth of other prices. Has inflation peaked? No one has a crystal ball, but I’d say the below charts are a good sign for the short-term.

1) Baltic Dry Index – benchmark for the price of moving the major raw materials by sea. Moderating after the huge spike in late 2021.

Source: Trading Economics

2) US Natural Gas – a heavy input into the price of electricity in the US. Sharp decline from recent peak as exporting to Europe has been disrupted by facility issues.

Source: Trading Economics

3) Total Homes Currently For Sale – rising sharply after hitting all-time low levels that drove up prices over the last year. When combined with higher mortgage rates, this should slow down an overheated housing market.

4) Lumber – key input into new home construction costs, down over 60% from 2021 peak and more than 50% from winter 2022 just a few months ago.

Source: Nasdaq

5a) Gasoline Futures (RBOB) – we all know prices at the pump are a LOT higher over the past few months, but the price of gasoline futures is down pretty sharply from peak a few weeks ago. That takes a while to filter through the system since prices come down only a cent or two per day via competition between stations. But it’s a good sign. The current front month futures price of $3.55/gallon would generally translate to ~$4.35 national average at the pump.

Source: Nasdaq

5b) Gasoline Futures (RBOB) – In addition to the front month futures contract trending down, the shape of the futures curve is also down with Jan 2023 down to $2.70/gallon and Dec 2024 all the way down to $2.25.

Source: Chicago Mercantile Exchange

6) 5-year Breakeven Inflation Rate – by comparing the interest rate on Inflation Protected Treasuries (TIPS) vs. Non-Inflation-Protected Treasuries, we can estimate the inflation rate that the market has priced in over the next 5 years on average. After rising considerably (though still nowhere near the current 8%+ / year actual levels, the breakeven rate has fallen and is getting closer to the Fed’s comfort range ~2%.

Source: St. Louis Fed (FRED)

So maybe, just maybe, we’ve seen the worst, at least for the short-term. Much depends on both controllable factors like policy responses (hint: cutting the gas tax and handing out cash aren’t going to help increase supply or decrease demand) as well as non-controllable factors like the war in Ukraine. (global energy and food supplies this winter are going to be tight). Even if food/energy inflation stays high, if the “core” inflation moderates, it will give the Fed room to be a bit more dovish, and that’s likely to be taken positively by the financial markets.