Bob’s Journal for 1/5/22
The Year Cash Stopped Being Trash
The Federal Reserve finally stopped supporting the prices of financial assets in 2022, and investors who didn’t recognize the policy change paid a price.
Few investment assets had positive returns in 2022. Treasury bonds, often considered among the most conservative investments, had perhaps their worst year ever. The long-term treasury bond ETF (ticker: TLT) lost more than 31%. Intermediate treasuries (IEF) declined more than 15%, and even short-term treasuries (SHY) fell 3.85%.
U.S. stocks, as you know, didn’t fare well. The NASDAQ 100 (QQQ) led the race to the bottom, falling more than 32% for the year. The S&P 500 (SPY) declined more than 18%, and the Dow Jones Industrial Index (DIA) lost more than 7%.
Smaller company stocks (IWM) also suffered, falling about 20%.
In U.S. stock sectors, only energy (XLE) had a double-digit positive return, rising more than 64%. The only other sector with a positive return was utilities (XLU), which gained 1.53%.
Losses were steep in the worst sectors of 2022. Communication services (XLC) lost more than 37%. Consumer discretionary (XLY) tumbled more than 36%, and technology lost almost 28%.
The only winners among overseas markets were Brazil (EWZ), which gained 12.19%, and Mexico (EWW), which was up 1.40%.
Commodities were the big winners in 2022, though in the second half of the year they gave up a portion of the increases from the first half of the year. Oil (USO) rose 29.05%, while a broad-based commodity index (DBC) increased 19.39%.
In individual stocks, the big winners of recent years were among the biggest losers of 2022.
Tesla, PayPal and Meta (formerly Facebook) each declined more than 60%. Amazon.com fell almost 50%. Alphabet (formerly Google) lost almost 40%. Apple declined about 26%.
It wasn’t a good year to follow the playbook that worked so well since the financial crisis. It was a good year to be well-balanced and own investment funds that have flexible mandates. One example is funds that can sell short to profit from market drops.
In the meantime, interest rates on many conservative investments rose from near 0% at the start of the year to 3% to 5% by the end of the year. Those yields still are less than recent inflation rates. But they’re the highest yields in years and are better than losing a double-digit percentage of your capital.
How 2022 Changed Index Funds
Index fund investors should look at how their holdings changed over the last year.
Stocks don’t move in lock step. When there are dramatic variances in the returns of different sectors, holdings in index funds change dramatically.
In the S&P 500, technology still was the largest sector at the end of 2022, accounting for more than 26% of the index. But technology’s share of the index declined more than three percentage points from the start of the year.
At the peak of the tech stock boom in March 2000, tech stocks were almost 35% of the S&P 500. At the end of 2021, they matched their previous year-end peak of 29.2%, reached in 1999.
Energy, on the other hand, was steadily declining as a share of the S&P before 2022 because of the long bear market in oil and gas. The energy sector was only 2.3% of the index at the end of 2020 and 2.7% at the end of 2021.
But the surge in energy prices during 2022 and the decline in most other sectors caused energy’s share of the index to almost double to 5.0%.
But energy is a long way from its previous peaks of more than 13% of the index at the end of 1990 and again in 2008.
The SECURE Act 2.0 Is Law
A few days before Christmas, Congress passed an omnibus spending bill that included the SECURE Act 2.0. President Biden signed the bill just before the new year began.
The SECURE Act 2.0 was pieced together from at least three bills that were working their ways through Congress during 2022. The final version is over 300 pages and has more than 100 separate provisions.
I’m working through the details of the key provisions and will discuss them in the February 2023 issue of Retirement Watch, which will be posted to the website in a couple of weeks.
The good news is responding to this law isn’t as urgent as after the original SECURE Act, which eliminated the Stretch IRA beginning only a few weeks after the law was enacted at the end of 2019.
The SECURE Act 2.0 raises the beginning age for required minimum distributions, increases catch-up contributions for some people, makes other changes in catch-up contributions and modifies employer-matching contributions.
Maximum contributions to qualified longevity annuity contracts (QLACs) are increased. That’s good news for people who are looking to defer their required minimum distributions and establish guaranteed lifetime income to begin in a few years.
The ability to use traditional IRAs to make tax-advantaged charitable contributions is expanded. Previously, only qualified charitable distributions (QCDs) were available. Under the SECURE Act 2.0, some taxpayers also will be able to use traditional IRAs to fund charitable gift annuities or charitable remainder trusts.
I’ll discuss these and other provisions of the new law in Retirement Watch.
The Data
The ISM Manufacturing Index declined to 48.4 in December from 49 in November. That is the second consecutive month below 50, which indicates the sector is contracting.
The PMI Manufacturing Index declined to 46.2 in December from 47.7 in November. This is the largest decline in manufacturing activity, according to this index, since May 2020.
Output declined at the fastest pace in two and one-half years while new orders fell at one of the fastest rates in the history of the index.
The Chicago PMI improved to 44.9 in December from 37.2 in November. The November level was a 30-month low. December marks the fourth consecutive month the index was below 50.0.
New unemployment claims increased by 9,000 to 225,000 in the latest week.
Continuing claims increased to 1.710 million from 1.669. That’s the highest level since February 2022.
Job openings declined by only 54,000 in November to 10.458 million, according to the JOLTS (Job Openings and Labor Turnover Survey) report. The number of hires declined by about the same amount while separations increased by 114,000 to 5.9 million.
The Markets
The S&P 500 fell 0.15% for the week ended with Tuesday’s close. The Dow Jones Industrial Average lost 0.35%. The Russell 2000 gained 0.10%. The All-Country World Index (excluding U.S. stocks) decreased 0.17%. Emerging market equities declined 0.36%.
Long-term treasuries rose 1.32% for the week. Investment-grade bonds increased 0.45%. Treasury Inflation-Protected Securities (TIPS) added 0.36%. High-yield bonds gained 0.20%.
On the currency front, the U.S. dollar gained 0.50%.
Energy-based commodities lost 3.11%. Broader-based commodities fell 3.29%. Gold rose 1.45%.
Bob’s News & Updates
My next book will be “Retirement Watch: The Essential Guide to Retiring in the 2020s.” The official publication date is Jan. 3, 2023. You can make a pre-publication order or learn more about the book by clicking here and here, respectively.
My latest book is “Where’s My Money: Secrets to Getting the Most out of Your Social Security.” It has received mostly five-star reviews on Amazon for telling you clearly what your benefit options are in different situations and how to determine the best choice for you. You can find it on Amazon.com or Regnery.com.
The number of regular viewers for my Retirement Watch Spotlight Series continues to increase. You should sign up because I make in-depth presentations of key retirement finance topics. You can watch these online seminars from the comfort of your home or office at times you choose. To learn more about my new Spotlight Series, click here.
A recent five-star review of my book, “The New Rules of Retirement” on Amazon.com said, “A complete retirement guide! One of the best books on this topic!” Click for more details about the revised edition of “The New Rules of Retirement.”
If you’re interested in my books, check my Amazon.com author’s page.
I’m a senior contributor to the Forbes.com blog. You can view my contributor page here.
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