#investmentmanagement

There was a big repricing of inflation expectations over February, as the January Consumer Price Index (CPI) showed an uptick in inflation and the January Jobs report was much stronger than expected. Here are 3 things you need to know:

1. 2yr U.S. inflation breakevens were up +85 basis points (bps) to 3.18%, having ended January at just 2.33%. This was the second largest monthly move higher since February 2009 after the +87bps move in October last year. (Source: Deutsche Bank, FRED Economic Data)
2. February saw the 2-year Treasury yield increase more than +70bps and the 10-year Treasury yield increase more than +50bps. Yields move inversely to prices.
3. Bloomberg’s Global Aggregate Bond Index had its worst February since inception in 1990. (Source: Bloomberg Finance LP)

Sources: J.P. Morgan Asset Management – Economic Update; Bureau of Economic Analysis (www.bea.gov); Bureau of Labor Statistics (www.bls.gov); Federal Open Market Committee (www.federalreserve.gov); Bloomberg; FactSet.

Indices:

• The Bloomberg Barclays Aggregate Bond Index is a broad-based index used as a proxy for the U.S. bond market. Total return quoted.
• The S&P 500 is designed to be a leading indicator of U.S. equities and is commonly used as a proxy for the U.S. stock market. Price return quoted.
• The MSCI ACWI ex-US Index captures large and mid-cap representation across 22 of 23 developed market countries (excluding the U.S.) and 27 emerging market countries.  The index covers approximately 85% of the global equity opportunity set outside the U.S. Price return quoted.
• The MSCI Emerging Markets Index captures large and mid-cap segments in 26 emerging markets. Price return quoted (USD).

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

2022 is not a year on which I shall look back with undiluted pleasure. In the words of one of my more sympathetic correspondents, it has turned out to be an ‘Annus Horribilis’. May the New Year 2023 be more prosperous.

Here are 3 things you need to know:

1. The S&P 500 index was off (-19.4%), the worst yearly decline since 2008.
2. Long-term treasuries were down (-30%) as interest rates rose the most since 1980.
3. Cash has the lowest real yields since 1830, other than during the Civil War, WWI, and WWII. (Source: FRB, Robert Shiller)

Sources:

Sources: J.P. Morgan Asset Management – Economic Update; Bureau of Economic Analysis (www.bea.gov); Bureau of Labor Statistics (www.bls.gov); Federal Open Market Committee (www.federalreserve.gov); Bloomberg; FactSet.

Indices:

• The Bloomberg Barclays Aggregate Bond Index is a broad-based index used as a proxy for the U.S. bond market. Total return quoted.
• The S&P 500 is designed to be a leading indicator of U.S. equities and is commonly used as a proxy for the U.S. stock market. Price return quoted.
• The MSCI ACWI ex-US Index captures large and mid-cap representation across 22 of 23 developed market countries (excluding the U.S.) and 27 emerging market countries.  The index covers approximately 85% of the global equity opportunity set outside the U.S. Price return quoted.
• The MSCI Emerging Markets Index captures large and mid-cap segments in 26 emerging markets. Price return quoted (USD).

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

By:  Thomas Steffanci, PhD, Senior Portfolio Manager

The Q3 Gross Domestic Product (GDP) growth rate of 2.6% was in line with the consensus. But it was anything but normal. The increase was entirely driven by a large increase in the trade balance. Net exports surged 2.8% due to a 1.6% increase in exports of energy commodities and military hardware, and a 1.2% decrease in imports. Inventory liquidation was lower than Q2, giving a boost to GDP.  Consumer spending rose 1%, mostly in services, offsetting a decline in consumer goods purchases. Capital spending creeped up with residential investment falling for the third straight quarter.

The big market reaction to this report came from the GDP price deflator rising just 4.1%, well below the 5.3% expected, and down more than half from 9.0% last quarter. But much of this was the result of a decline in the growth of import prices due to the rising dollar. With the dollar having declined over 4% from its September 28 top, import prices are not likely to repeat their magnified impact on the GDP deflator going forward.

Bottom Line? The report, excluding the trade balance, showed little core growth in Q3 and by itself should not change the Federal Reserve’s (the Fed) thinking/forecasts for 1-2% GDP growth. The main reason the GDP print was strong is because Europe is collapsing into a recession and is now overly reliant on US energy and weapons exports. It also did little to dispel fears that the US will eventually tip into a classical recession given the aggressive steps the Fed is taking to stamp out elevated inflation.

The decline in 10-year bond yields seems to be the ongoing reaction to the Fed in becoming more aware of the liquidity strains the strong dollar has created in global currency markets, anticipating a slowdown in their rapid ascent in the Fed funds rate. Those expectations were boosted by today’s (outlier) decline in the growth of the GDP deflator. The stock market reaction highlighted these events as both energy and industrial stocks are leading the advance.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

The IRS has released the 2023 contribution limits for health savings accounts (HSAs), as well as the 2023 minimum deductible and maximum out-of-pocket amounts for high-deductible health plans (HDHPs). An HSA is a tax-advantaged account that’s paired with an HDHP. An HSA offers several valuable tax benefits:

• You may be able to make pre-tax contributions via payroll deduction through your employer, reducing your current income tax.
• If you make contributions on your own using after-tax dollars, they’re deductible from your federal income tax (and perhaps from your state income tax) whether you itemize or not.
• Contributions to your HSA, and any interest or earnings, grow tax deferred.
• Contributions and any earnings you withdraw will be tax-free if used to pay qualified medical expenses.

Here are the key tax numbers for 2022 and 2023.

Prepared by Broadridge Advisor Solutions. Edited by BFSG. Copyright 2022.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

From the end of the Global Financial Crisis in 2009 until now, the combined balance sheets of the Fed, European Central Bank and the Bank of Japan grew from approximately $5.3 trillion to over $23.7 trillion.(1) The markets were awash in liquidity over the past decade, and the rising tide lifted virtually all financial assets. Central banks around the world are on track to hike rates more than 250 times this year while shrinking their balance sheets.(2) The FOMC post-meeting statement announced that balance sheet runoff will start on June 1. As Warren Buffett famously said, “Only when the tide goes out do you discover who’s been swimming naked.”

Here are 3 things you need to know (3):

1. The S&P 500 ended May with a gain of 0.01%, despite wild swings, a brief bear market (a drop of 20%), disappointing economic data, and pessimistic forecasts.
2. The April core PCE price index (the Federal Reserve’s preferred inflation measure) declined to 4.91% year-over-year. Core inflation was again boosted by rapid shelter inflation—which has run at the highest level since 1990 over the last year.
3. The FOMC raised the funds rate target range by 0.5pp to 0.75%-1.0%, as widely expected. The May FOMC minutes indicated a broad consensus for Fed Chairman Powell’s baseline of 50bp hikes at both the June and July meetings.

Sources:

1. Source: Blackstone Investment Strategy, national sources and Macrobond, as of 4/30/2022.
2. Source: BofA Global Investment Strategy, as of 5/5/2022.

3. Sources: J.P. Morgan Asset Management – Economic Update; Bureau of Economic Analysis (www.bea.gov); Bureau of Labor Statistics (www.bls.gov); Federal Open Market Committee (www.federalreserve.gov)
4. Indices:
   • The Barclays Aggregate Bond Index is a broad-based index used as a proxy for the U.S. bond market. Total return quoted.
   • The S&P 500 is designed to be a leading indicator of U.S. equities and is commonly used as a proxy for the U.S. stock market. Price return quoted.
   • The MSCI ACWI ex-US Index captures large and mid-cap representation across 22 of 23 developed market countries (excluding the U.S.) and 27 emerging market countries.  The index covers approximately 85% of the global equity opportunity set outside the U.S. Price return quoted.
   • The MSCI Emerging Markets Index captures large and mid-cap segments in 26 emerging markets. Price return quoted (USD).

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.