Investors went into the third quarter increasingly confident that a recession was unlikely this year, thanks in large part to a continued healthy job market and consumer spending. Despite the many predictions for a recession in 2023, economic growth has remained robust in 2023. Whether this can continue is an open question, but in the worst case a recession has been postponed to 2024.
As the final quarter of the year begins, markets continue to grapple with rising interest rates and continued economic uncertainty. These factors led the S&P to decline 3.3% (with reinvested dividends) during the third quarter while the U.S. Aggregate bond index lost 3.2%. Other factors including the narrowly averted government shutdown and cracks in China’s economy have also added to investors fears.
Despite heightened volatility in the third quarter, the S&P 500 held onto positive gains with the S&P generating a total return of 13.1% through the third quarter, with dividends, and the Nasdaq gaining 27.1%. This is in sharp contrast to last year’s bear market and is further evidence that markets can rebound with little notice. Household spending power benefited from the sharp fall in inflation from more than 9% to the current 3.7%.
There are still challenges facing investors in the coming months. This is a reminder that while markets tend to rise over long periods of time, they never do so in a straight line. This is true even when the market and economic environment are improving, especially when compared to what investors had expected just a year ago.
One reason that investing over the course of a lifetime is difficult is the tendency to focus on the negative. In psychology, this is often referred to as negativity bias, an effect that causes individuals to allow a few seemingly bad events to outweigh the overwhelmingly positive ones. Investors are prone to this cognitive bias because positive news tends to be slow-moving, the result of small gains that compound over time. In contrast, bad news tends to occur suddenly and without notice, resulting in dramatic changes to expectations. Thus, an important discipline for long-term investors is to maintain perspective in order to properly weigh long-term gains against short-term risks.
SAVINGS ACCESS FOR ESCAPING AND REBUILDING (SAFER) ACT
An important part of SECURE 2.0, this act allows for an Internal Revenue Code Section 72(t) withdrawal, without the 10% additional tax on early distributions, from qualified retirement plans for survivors of domestic abuse. It was enacted with the larger law last year.
For the purposes of the legislation, domestic abuse is defined as physical, psychological, sexual, emotional, or economic abuse, including efforts to control, isolate, humiliate, or intimidate the victim or to undermine the victim’s ability to reason independently, including abuse of the victim’s child or another family member living in the household.
According to the Department of Health and Human Services, there are 1.3 million victims yearly. In 2022, the National Domestic Violence Hotline received 770,000 calls/contacts, a 25% increase and the highest in nearly 30 years. Nearly three in four survivors (74%) report staying with an abusive partner because they did not have the financial means to leave.
Access to funds through the SAFER Act allows survivors to address their unique and specific needs without administrative hurdles or limitation on use. The maximum aggregate amount which may be treated as an eligible distribution is the lesser of $10,000 (inflation-adjusted) or 50% of the value of the employee’s account under the plan. The distribution must be made during the one-year period beginning on a date on which the individual is a victim of domestic abuse by a spouse or domestic partner.
YEAR-END REVIEW
As the year-end approaches and situations change from year to year, individuals should take stock and ask themselves basic questions, such as:
- Financial goals – are they still on track?
- Should you reassess your risk tolerance?
- Do you need to minimize your tax bill?
- Review your investment performance. Is it time to rebalance your portfolio?
- Review current participation rate. Will your current contribution level get you to your retirement goal?
- Review all Beneficiary information. Have life events affected existing designations?