By Brant Walker
Dear Clients, Colleagues, and Grey Ledge Friends,
Below is a synopsis of our firm's thoughts and views regarding the economy and investment markets as we enter 2023. Our investment team continually monitors the investment environment and makes changes to your portfolio as time unfolds and economic and market conditions adapt to change in Federal Reserve policy, inflation data, and other relevant factors. We invite you to contact your portfolio manager or advisor if you would like to discuss these issues further.
Thank you for the trust you've placed in us.
Grey Ledge Advisors summary and outlook 2023
As we move forward in 2023, the following points relating to the U.S. economy and financial markets will be taken into consideration in the structuring of investment portfolios.
Global trade friction and inventory buildup
During the past few years, there has been a trend toward “de-globalization”, or the desire to bring manufacturing back onto American soil. This has ramifications for the inflation rate as it is generally more expensive to manufacture in the U.S. as opposed to China, for example. This trend may complicate the Federal Reserve’s desire to lower inflation via interest rate increases. In the present, more and more companies are saddled with excess inventory due in part to COVID disruptions in the supply chain, signaling a possible slowing in economic growth.
Should economic growth slow as anticipated, this will favor companies in steady growth sectors such as consumer staples (food, beverage) and health care stocks.
Federal Reserve fight against inflation and rising interest rates
The Fed’s intention to lower inflation is well underway via structured increases in short-term interest rates, namely the Fed funds rate, to slow economic growth and raise the unemployment rate a modest degree. Inflation has been running at 40-year highs, approaching 10% at times in 2022. The Fed target for inflation is the 2% to 3% range. As 2023 unfolds, particularly in the first half of the year, there is likely to be elevated volatility in the financial markets as each inflation-related data point is released in the press and parsed by the investment community.
Past periods of rising interest rates have generally created headwinds for stocks that exhibit real or perceived high growth rates and pay low or no dividends (technology and communications).
Navigating sticky inflation, slower growth, and the possibility of economic recession
The aforementioned intent by the Federal Reserve to lower inflation poses risks to the economy should the Fed push interest rates up further than the economy can withstand. Previous Fed tightening cycles have often led to a period of negative economic growth (a recession) accompanied by a bear market in stocks and ultimately, lower interest rates. We are somewhere in the middle of this cycle as we speak. Grey Ledge’s focus on quality investing should act as a buffer against possible future market volatility.
Having said this, high quality, low volatility common stocks have provided a refuge in the storm. Technology and communications stocks have suffered relative weakness and are becoming attractive on a valuation basis.
Aging populations and a shortage of qualified workers
We speak above about Federal Reserve actions to lower inflation by potentially reducing the near-term growth rate of the economy. From a demographic perspective, major world economies—including the United States, Japan, and much of Europe—are experiencing aging populations and reduced birthrates. This has profound implications for future economic growth as the number of retirees grow and is not offset by an equal number of younger people entering the workforce.
Additionally, many baby boomers have opted to retire early and live off savings and retirement benefits. This, in part, explains why the unemployment rate hovers near a 50-year low at the same time the Fed is attempting to slow the economy and create a temporarily higher unemployment rate.
Should wage growth continue to be strong, companies with pricing power can navigate with little risk to their ability to increase future earnings. Companies with pricing power can be found in many different industries. Grey Ledge Advisors’ research process seeks to identify such companies for potential future investment.
New pockets of value emerge after 2022 market weakness
2022 was a difficult year for both stock and bond investors. The broad U.S. stock market index dropped by close to 20% and the technology heavy NASDAQ index lost a third of its value. High quality, intermediate duration bonds offered little respite by dropping close to 13%. The dichotomy in performance between stock sectors was as wide as at any time since the tech bubble unwound 23 years ago in the year 2000.
Consumer oriented stocks (think food, beverage, health care) fared very well in 2022; in fact, many of these names hit all-time highs. Conversely, anything associated with the name technology likely suffered a precipitous drop in value. Many of the large technology stocks we are all familiar with dropped 50% or more in value. This is understandable during a period of rapidly rising interest rates. Investors tend to gravitate toward stable, blue-chip stocks that pay robust dividends as opposed to some of the tech names that pay no dividends and rely on future earnings growth to support their stock price. As mentioned earlier, we are starting to see value in some of these technology names and plan to reallocate to this area, on the margin, as the year progresses.
As 2023 unfolds we will be carefully monitoring events discussed above and will make adjustments to portfolios as necessary.
By Ted Reagle
In December, Congress approved the SECURE Act 2.0 to enhance retirement savings. Here’s how those changes will affect your retirement planning.
Most notably, the age at which individuals must begin taking required minimum distributions (RMDs) from 401(k) or IRA accounts increases to age 73 this year. The age for initial RMDs has been creeping upward, reflecting the longer life expectancy seniors are enjoying. Just four years ago, the age for initial RMDs increased from 70 to 72; in 2033, it will increase to 75.
Furthermore, starting in 2025, the amount of the “catch-up” contribution for individuals ages 60 to 63 who are still working will increase 50 percent, from $7,500 to $11,250.
For this year, though, the maximum employee contribution to a 401(k) plan is $22,500, plus an additional $7,500 for individuals 50 and over. January is a great time to consider increasing your annual percentage contribution to your 401(k) plan to take advantage of the tax-deferred savings and power of compound interest to grow your retirement account over a long period of time.
Also in 2023, the limit on annual contributions to an IRA will increase by $500 to $6,500. The IRA catch-up contribution limit for individuals age 50 and over remains $1,000 in 2023. Hence, if you are over age 50 you may contribute $7,500 to your IRA this year. Starting in 2024, the IRA catch-up contribution will rise annually indexed to inflation.
SECURE 2.0 makes another interesting change related to 529 college savings plans. Individuals have the option to roll over up to $35,000 from a 529 plan (such as CHET) into a Roth IRA in the name of the student beneficiary. In order to take this step, the 529 plan must have been open for at least 15 years.
Find a better savings rate
If you have a significant balance in a savings or IRA account at a bank and are frustrated by the account’s low interest rate, you can set up a brokerage account to take advantage of the higher interest rates being offered on CDs and U.S. Treasuries. Presently, these low-risk investments are earning between 4 and 5 percent interest. Give us a call if you would like more information regarding putting your savings to better work.
Feeling the pinch of higher prices?
Like many families, we’ve been feeling the impact of higher prices on our household budget. To keep our living expenses down, we started grocery shopping at a local discount grocery store and have noticed significant savings compared to the large grocery chains in our area.
If you would like to reduce your living expenses, I encourage you to give a discount grocery store a try. You may be pleasantly surprised by the selection, customer service, and (of course) the extra money you get to keep in your pocket.
To our clients,
The holidays are a time for giving, both to brighten our loved ones’ days and to give back to the community. Grey Ledge Advisors has decided to honor this spirit of giving this year by asking its employees to name the nonprofits they would like us to support with an annual donation.
We were excited to see which charitable causes our employees hold close to their hearts and touched by the stories they shared about why the selected nonprofits are important to them. Our employees recognized 13 organizations specializing in food security, health care, literacy, animal rescue, and other good work.
Funds will be distributed to:
A Place Called Hope, Killingworth
Branford Food Pantry, Branford
Chapel Haven, New Haven
Connecticut Foodshare, Wallingford
Dan Cosgrove Animal Shelter, Branford
Downtown Evening Soup Kitchen (D.E.S.K), New Haven
G.R.O.W.E.R.S., New Haven
Help Willy’s Friends, Durham
Master’s Manna, Wallingford
New Haven Reads, New Haven
Paul Dostie Kare Foundation, Guilford
Toys for Tots
We’d like to extend our warmest appreciation to the employees who helped us identify ways to make our community a better place. To them, and to our clients, we wish a season full of merry rejoicing and happy festivities.
President & CEO
Grey Ledge Advisors
One key predictor of downturns in the economy is what is known as the yield curve. This typically refers to the market for what the US government borrows, by issuing bonds and other securities that mature over different time horizons ranging from weeks to 30 years.
Each of these securities has its own yield (or interest rate), which moves up and down in inverse proportion to the security’s market value – so when bonds are trading at high prices, their yields will be low and vice versa. You can draw a chart that plots the yields of securities at each maturity date to see how they relate to one another, and this is known as the yield curve.
In normal times, as a compensation for higher risk, investors expect expect higher rates of interest for money they lend over a longer time horizon. To reflect this, the yield curve normally slopes up. When it instead slopes down – in other words, when it inverts – it is a sign that investors are more pessimistic about the long term than short term: they think a downturn or a recession is coming soon.
This is because they expect the Federal Reserve, the US central bank, is going to cut short-term interest rates in future to stimulate a struggling economy (as opposed to raising rates to cool down an economy that is overheating).
Most closely watched is the relationship between two-year and ten-year US treasury debt. The so-called spread between these two metrics can be seen in the chart below, with the grey areas indicating recessions that have tended to follow shortly after.
Spread between two-year and ten-year treasuries
https://fred.stlouisfed.org/series/T10Y2Y (click for larger image)
As you can see, the yields of these two securities are getting very close to being the same, and the trend suggests that the two-year will soon have a higher yield – meaning the curve is inverting. The key question is, does an inverted yield curve
hint at an upcoming downturn? Not necessarily. Let me explain why.
One complication is that bond yields don’t only reflect what investors think about future economic growth. They also buy or sell debt securities depending on what they think is going to happen to inflation. It’s generally assumed that prices will increasingly rise in the years ahead, and investors need to be compensated for bearing that risk, since higher inflation will erode their future purchasing power. For this reason, bond yields contain an element of inflation premium, normally with an increasingly higher premium for bonds with longer maturity dates.
The following chart shows the spread between the inflation expectations built into 10-year and 2-year treasuries. The fact that it is in negative territory suggests the market thinks that inflation may fall, and this may also explain why yields on longer-dated treasuries are lower than on shorter-dated ones. And although inflation would fall in the event of an economic slowdown or recession, there could be a situation where inflation fell but the economy remained buoyant. Hence a yield curve inversion doesn’t have to mean that we are up against an imminent recession.
Inflation expectations (ten-year vs two-year treasuries)
https://fred.stlouisfed.org/series/T10Y2Y (click for larger image)
Another factor that is potentially affecting the yield curve is the Federal Reserve’s moves to buy government debt as part of its quantitative easing programme (QE). The idea behind QE is that by buying long-term bonds, the Fed is able to keep long-term interest rates low, which decreases the rates on mortgages and other loans, thereby stimulating the economy. Conversely, when sold, lending rates will go up and economic activity will be reduced.
Earlier in March, the Fed started raising the benchmark US interest rate and stopped the asset purchases under the QE programme that it launched in 2020 in response to the COVID pandemic.
But it also indicated that it would only start selling these assets after several months of hiking the benchmark rate. Since the benchmark rate is a short-term rate, the yield curve inverting might indicate market expectations that short-term interest rates will be higher than long-term ones for the foreseeable future.
Which yield curve should we consider?
It is also sometimes argued that two-year/ten-year spreads are not the most useful ones to watch, and that instead one should focus on yields at the shorter end of the yield curve. In this set up, if you look at the difference in yields between two-year and three-month treasuries, it is actually steepening: in other words, it is hinting that economic growth is going to increase in the short term.
Economists sometimes argue that these near-term yield curve movements have stronger predictive power than those further out. At the very least, the fact that these are saying something different shows the need to be careful because different data about treasury yields can depict a different (or even opposite) picture depending on what time horizon you are considering.
Spread between two-year and three-month treasury yields
https://fred.stlouisfed.org/series/T10Y2Y (click for larger image)
To summarise, it doesn’t necessarily follow that an inverted yield curve will be followed by a recession. It certainly could mean that, in which case unemployment would likely rise and inflation would potentially come down more quickly than many are expecting. But for now, it’s too early to say. The debt market is certainly signalling that change is coming, though it’s often easier to say in hindsight what it meant than at the present time.
Some Things Can Actually Get Better With Age; Planning financially for retirement can help make aging more comfortable
Yes, there are good things about being older, such as increased happiness, less stress, better marriages and deeper friendships.
I’m in my early 60s and when my 20-something children tell me I’m getting old, my now familiar response to them has become, “Yes, that’s the plan!”
While it seems true that what was defined as “old” as little as 20 years ago might not seem “old” now; regardless of our definition, though, we’re going to be slowing down physically. What is important to remember, though, is that our expenses don’t necessarily slow down with us.
One of the biggest threats to a retirement nest egg, besides the possibility of outliving it, is the high cost of care for increasing health needs.
Things Get Better With Age
An article in Consumer Reports on Health found there are some things that actually get better with age:
1. You get wiser. Research conducted by the Universities of Texas and Michigan found that significantly more older people ranked in the top 20% in wisdom performance, and the group with an average age of 65 consistently outperformed younger participants.
Maybe there's some truth to the joke about parents seeming to get smarter as their kids get older.
2. You have fewer difficult emotions. A Gallup survey found that people in their 70s and 80s reported less stress, worry, and anger than younger respondents. Stress peaks at age 25 and steadily declines, dropping rapidly from 60 to 73. Perhaps we have something to look forward to!
3. You become happier. A study by Stanford and Tufts University professors said that aging is associated with increased emotional well-being.
4. Your marriage gets better. The Journal of Social and Personal Relationships found that older couples experience greater satisfaction and positive experiences with each other. The report also says happily married older people have better health, quality of life, and relationships with their children and friends.
This may well be a case of what statisticians call selection bias, as perhaps only the better marriages actually last into old age these days; but it does give one something to think about.
5. Your relationships get deeper and richer. While younger people have more friends, the quality of older people's relationships becomes richer. A study done by Case Western Reserve University found that volunteering was the most consistent predictor of cognitive well-being in people over age 72.
Consult Your Team
While there can be much to enjoy about a long(er) life, one key to keeping it as financially secure as possible is to keep in contact with your financial advisory team. Just like your physician and other medical experts can help keep your body working at its best (for its age), so too can your financial advisor and their team help you enjoy the security that can contribute to some of that less stressful living that awaits you!
Please feel free to contact us at Grey Ledge Advisors if you think we can help you in any way.
Don’t Get Rid of Dividend-Paying Stocks Just Yet “Money makes money. And the money that money makes, makes money.”
Since the beginning of the year, economists and pundits seem united in the belief that continuing tight labor markets, supply chain issues and outright shortages of certain products will continue propelling inflation and interest rates to levels that we haven't seen in years.
But higher rates and inflation portend peril for bonds and for stocks with high dividend yields. The yield on the 10-year Treasury bond soared from less than 1.0% in the summer of 2021 to close to 3.4% in mid-September 2022, causing the bond's price to drop. But who would blame you if you’re not a fan of Treasury bonds? Although they're very safe from a credit-quality perspective, they still pay too little and are highly vulnerable to rising rates, as their recent performance shows.
Over in the stock market, the highest yielding stocks have lagged, as all other sectors not named Energy have as well. But are you selling your dividend payers and locating better alternatives?
Remember this: dividend-paying stocks can reduce your overall volatility as dividends can often offset price declines.
What Makes Dividends Attractive
Why can dividend-paying stocks help reduce volatility and offset price declines? Well, consider that according to the Stock Trader’s Almanac, since 1945 reinvested dividends have contributed 33% of the total return in the S&P 500. In other words, maybe you could improve your performance by a third without doing a thing.
You might also already own a lot of dividend-paying stocks too. Did you know that about 80% of the companies in the S&P 500 – that’s 400 companies – already pay some form of dividends? In fact, the current yield as of mid-September on the S&P 500 is 1.69% (in August the S&P 500’s yield was 1.37%).
Other places to consider looking for dividends include utilities and REITs, which have historically (as a group) paid dividends. Remember, REITs must distribute at least 90% of their taxable income to shareholders as dividends.
Perhaps the best recipe for the year ahead will be to mix growth with income.
Finally, let’s not forget the power of compounding. As Ben Franklin famously said, "Money makes money. And the money that money makes, makes money."
Your estate planning process involves a team consisting of your attorney, your Grey Ledge advisor, perhaps an insurance professional, and you. Whether you are establishing a new estate plan or revising an existing one, only you can provide the guidance, direction, and information your estate planning team needs to develop an effective plan.
Most estate planning efforts begin with a questionnaire and an asset inventory. Although the process may seem cumbersome, the more complete the information you provide, the better equipped we will be to help you achieve your goals. Even questions that seem intrusive at first have specific purposes. Following are some examples of the kinds of estate planning information you may be asked to provide:
Assets and Liabilities. A list of your assets, their estimated net value, and documentation of the form of ownership (individual, joint tenancy, tenancy by the entirety, and other forms of co-ownership). You will also need to identify your liabilities and those of your spouse. If you live, or have ever lived, in a community property state, you will need to provide information to separate your individual and community property and to determine who is responsible for the management and control of community property.
Family and Other Beneficiaries. The names, ages, relationships, and special needs of family members and other beneficiaries. A copy of property settlements, other financial agreements, and court decrees from any prior marriages of both you and your spouse.
Existing Estate Plans. A copy of your current will, along with information on any contractual or legal restrictions on the disposition of your assets. In addition, documentation of survivorship provisions and beneficiary designations on insurance policies, retirement plans, employee benefit plans, business buy-sell agreements, and other such assets.
Health Status. Information on your current health status and that of your beneficiaries. Also, the average life spans of your ancestors and their ages at death.
Objectives and Purposes. Your objectives, purposes, and hopes for yourself and each beneficiary, along with an assessment of each beneficiary’s ability to manage money.
Benefits of Team Work
Once fully informed, your team can assist you in several important ways. We can: 1) Analyze your assets to determine which you should dispose of during your lifetime, which you should retain, and whether any special expertise may be required to value and dispose of your assets; 2) Identify which assets may be subject to probate and estate taxes and estimate the potential shrinkage due to these costs; 3) Estimate and plan for the liquidity (cash) needs of your estate, your surviving spouse, and other family members and beneficiaries (for instance, cash may be needed to help cover estate taxes, probate costs, or for income replacement); and 4) Guide you in selecting the best domicile—assuming you have a choice—to help reduce the net effect of taxes on your estate.
No Plan is Final
Bear in mind that no estate plan is permanent. Marriages, remarriages, births, deaths, new employee benefits, and legislative changes may all necessitate adjusting an existing plan or creating a new one. Also, the composition of your assets may change over time. You can keep your estate plan up-to-date by notifying us of any relevant changes as they occur, and by responding when you are alerted to legislative changes that may affect your current estate plan.
How do you get started? Call your Grey Ledge advisor and we will work with you to ensure that your final future, and that of your beneficiaries’, is aligned with your wishes.
Brian Scott-Smith talks to GLA's Senior Vice President Scott Albraccio about saving your retirement. They discuss what products are out there and why we ALL need to be taking retirement saving more seriously. Plus, they take a look at other stories making the headlines from around the region.
Click this link to watch the interview: https://www.youtube.com/watch?v=g2UXn4MLxz8
Brant Walker, Chief Investment Strategist 10/1/2022
Grey Ledge Advisors
Fixed Income Market:
What We’re Seeing: The U.S. Federal Reserve (the Fed) continues to increase short term interest rates in 2022 to quell inflation. High inflation reduces purchasing power as prices of goods and services continue to rise. High quality, short term fixed income instruments (CD’s, Treasury bonds) can now be purchased with yields of 4% or higher. The Fed is telegraphing further rate increases in 2022 and early 2023 until inflation drops to a range of 2% to 3%. Long term interest rates have not increased in tandem with short term rates as the market believes an economic recession is likely to occur between now and early 2023. If such is the case, long term interest rates would likely drop from current levels as demand for goods and services decreases and the unemployment rate increases.
What We’re Doing: As such, Grey Ledge Advisors is shifting some of our fixed income holdings from short term instruments to longer term instruments. This will lock in current yields and allow for price appreciation in the longer-term instruments should a recession occur, causing longer-term interest rates decline.
What We’re Seeing: The S&P 500 stock index is firmly in bear market territory closing in on a 25% peak to trough decline as of October 1st. Much of this downward movement is based on the interest rate scenario discussed above. Simply put, when interest rates rise, the future value of corporate earnings and dividends diminishes. The fear of a possible economic recession is weighing heavily as well as recessions temporarily reduce a corporation’s earnings power. Grey Ledge’s focus on high quality investments has acted as a ballast in many portfolios and we would expect this to continue should the stock market continue to struggle. At the same time, many high- quality companies in more cyclical industries, think technology and consumer discretionary companies, have seen their stocks decline by 50% or higher since late last year.
What We’re Doing: We will be looking to shift, on the margin, away from some of the stable earning companies (food and beverage, health care, etc.) that have held value relatively well in favor of more cyclical companies in the technology and consumer discretionary sectors. Our focus will continue to be on the highest quality companies when making any tactical changes.
If you would like to learn more about our rotation to the Tech Sector, please listen to our latest Thoughts from The Ledge podcast https://www.greyledge.com/podcast.html
RAMP Conservative Portfolio
The conservative portfolio is the most risk averse of the four RAMP platforms. The asset allocation approximates 55% fixed income, 40% common stocks and 5% gold. The year-to-date total return for the portfolio is minus 10.6%. The S&P 500 stock index is down 21% this year and the Barclay’s aggregate bond index (a high- quality bond index owning bonds maturing from five to ten years) is down 11%. The RAMP conservative portfolio has fared slightly better than the Barclay’s aggregate index despite having 40% in common stocks. Due to the conservative nature of this portfolio, close to 40% of the portfolio is invested in utility stocks, gold, consumer staples stocks and short- term high quality bonds. These have all buttressed the portfolio having negative returns in the single digits as opposed to the -11% return of the Barclay’s bond index and the -21% return of the S&P 500.
RAMP Balanced Portfolio
The balanced portfolio takes a further step out on the risk spectrum with an allocation of 60% common stocks and 40% fixed income. The year-to-date return for the portfolio is minus 12.7%. This makes sense as the balanced portfolio is more exposed to equities compared to the conservative portfolio. A 60% common stock / 40% fixed income portfolio could be expected to be down closer to 17% based on the numbers stated above for the markets. The balanced portfolio has also benefited from a weighting of 25% in utility stocks, consumer staples stocks and short- term bonds. These areas have held value well and helped insulate the portfolio, to some degree.
RAMP Growth Portfolio
The growth portfolio further steps out on the risk spectrum having essentially 100% of the portfolio invested in common stocks. The portfolio is well diversified having exposure to US large company stocks, mid cap stocks, small cap stocks, International developed stocks and emerging markets stocks. The year-to-date return for the portfolio is minus 18.4%. Mentioned earlier was that the S&P 500 stock index is down 21% this year and the growth portfolio has fared somewhat better. Exposure to emerging market stocks, clean energy stocks and large cap US value stocks has buffered the return compared to the S&P 500. These same areas underperformed in 2021 and are showing some improvement in 2022.
RAMP Aggressive Portfolio
The aggressive portfolio is also invested in 100% common stocks, but the weightings differ somewhat from the growth portfolio. The aggressive portfolio is down 17.6% this year, which is slightly better than the growth portfolio due, perversely, to a higher weighting in the more volatile sectors. We would generally expect the aggressive portfolio to be down in value somewhat more than the growth portfolio in a market environment similar to 2022. However, the more volatile sectors performed relatively poorly in 2021 and thus far in 2022 have held up relatively well.