EOY 2022 and Q1 2023 Update

‘22 IN THE REARVIEW

In Shakespeare’s Hamlet, Claudius laments, “When sorrows come, they come not single spies, but in battalions.” That quote feels like an appropriate description for 2022. The challenges for the U.S. economy seemed to come from every direction--a bear market for stocks, rising inflation and interest rates and consequently the worst rout in the bond market in decades.

The Federal Reserve continues its balancing act of raising rates to curb inflation but trying to do so in a way that prevents an economic stall and a deep recession. Many economies around the world are currently in or near recession due to the continued economic drag of the pandemic, the war in Ukraine, and rising interest rates as central banks try to wrestle inflation back to normal levels. Economic data in the coming weeks will likely confirm that the U.S. is also in recession.

Due to the continued headwinds of high inflation and rising interest rates, it is expected that the U.S. economy will shrink in 2023 by 2%. As interest rate increases continue to work their way through, causing borrowing costs to rise, sales of homes and other big-ticket items are falling. The unemployment rate remains low at around 3.7% but the super tight, post-pandemic labor market has started to ease up and as manufacturing and other areas of the economy slow, job losses may begin to occur. Layoffs in the hard-hit tech sector have already begun.

NOW WHAT?

Unpleasant as they are, recessions and market corrections are inevitable and a necessary part of the economic cycle that occurs when assets have become overpriced. Recessions bring desired asset prices back to more reasonable levels that astute and patient investors wait for. Stocks or bonds that we want to own, are now on sale relative to prices before the downturn. Recessions clear out market excesses and allow for growth moving forward.

So, from an investment perspective, what is there to feel good about for 2023? Plenty. For perspective—

• Recessions are typically short. The average recession lasts less than a year—approximately 10 months. The average expansion—about 3 years.

• Stocks tend to be a leading indicator, and to recover before a recession ends.

• The lowest market point is never known, and the biggest gains usually occur at the beginning of the recovery that follows. Waiting for an economic turnaround often causes investors to miss those times of rapid upward movement in the stock market, so we remain invested and do not attempt to time the market.

• Since 1950, bull markets have had an average return of 279%, compared to a loss of 33% for bear markets.

• Well-managed companies will survive and flourish moving forward. Prices fluctuate and may have declined but the value of good companies is solid, and those prices will eventually rebound.

Some positive aspects of the U.S. financial system could allow us to experience a mild versus a deep recession, like the one we experienced in 2008-2009. Here are a few examples—

• U.S. gross domestic product increased at an annual rate of 2.6% for the 3rd quarter of 2022.

• Consumer and corporate balance sheets are strong. Household debt is low relative to gross domestic product and Americans have over $1 trillion in savings, thanks in part to Covid stimulus payments.

• Unemployment remains low and to attract workers, wages have been growing. As interest rate increases bring inflation to more normal levels, wages will likely remain stable, providing consumers with improved purchasing power.

SECURE ACT 2.0

New legislation was signed into law December 29, 2022, with the intent of promoting retirement savings. Here are some key take aways from the new legislation—

• The age for RMD (Required Minimum Distribution) from retirement accounts is going up.

• The penalty for failing to take an RMD will decrease to 20% from 50% of the amount not taken, or 10% if corrected in a timely manner.

• Roth accounts in employer retirement plans will be exempt from RMD requirements.

• Beginning in 2023 individuals age 70 ½ and older may elect as part of their QDC (Qualified Charitable Distribution) a one-time gift, limit up to $50,000, to a charitable remainder unitrust, charitable remainder annuity trust, or a charitable gift annuity.

• Most new employer retirement plans will be required to automatically enroll eligible employees, starting in 2025.

• Catch-up contributions in qualified plans will increase to $10,000 for plan participants ages 60-63, starting in 2025. For those saving in an IRA, the limit, which is currently $1,000, will be indexed to inflation.

• Beginning in 2024, employers will be able to match employee student loan payments with matching payments to a retirement account, giving employees an incentive to add to retirement savings while paying off student debt.

• 529 plan assets can be rolled over to a Roth IRA for the beneficiary, subject to the annual Roth contribution limits and an aggregate lifetime limit of $35,000.

As we continue to navigate an uncertain economy and choppy markets, we remain focused on fundamentals and what we can control. The short list of institutional money managers that we utilize are taking advantage of asset prices that have returned to more reasonable levels. Staying the course through uncertain economic periods and market upheavals is counterintuitive but is the most dependable way to reach long-term investment goals. Thank you for sharing the story of Wela with your friends and family. We appreciate your continued trust.

All the best,

— Priscilla "Cilla" McKinley

President - Wela Financial Advisory

*Brent Forrest & Associates, LLC dba Wela Financial Advisory( Wela) is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.

Wela may discuss and display, charts, graphs, formulas which are not intended to be used by themselves to determine which securities to buy or sell, or when to buy or sell them. Such charts and graphs offer limited information and should not be used on their own to make investment decisions.

‍