2022 Tax Documents Reminder:
Today the 2022 1099-R forms were mailed to clients that received a distribution from their retirement account in the calendar year 2022. The forms are also available online in the Liberty system today. All other tax reporting forms will be mailed on February 15th to those of you that held “taxable” accounts (non-retirement plans) last year. As always, we can email your tax preparer a file to download your tax information direct to save you time. Just drop Chris an email (chrisjurrens@figfinancial.com) with the email address of your tax preparer and we will see that they get the pertinent information.
What’s in this update?
2023 has started out on a positive note for the financial markets and our client portfolios have benefitted with a fast start so far this year. There is currently an abundance to cover as we review last year and look to 2023 moving forward. Here are the highlights in this update:
- Just as the internet revolutionized the world in the 1990s, we see the same possibility occurring with artificial intelligence (AI).
- In 2022, bonds suffered their worst loss with over 250 years of data.
- Most commodity prices, including natural gas, have fallen, alleviating concerns about continued high inflation.
- Despite the headlines, the housing market’s fundamentals remain strong, with only a slowdown in activity.
- Most business commentary remains downbeat, with the actual numbers telling quite a different story.
- The “debt ceiling” should take the headlines over the next few weeks, which remains of little concern to us.
Bonds Make History
Last year marked the worst year for bonds and fixed-income performance when looking at over 250 years of data. It created a challenging investment environment, especially for more conservative investors. This was primarily driven by the Fed doing an about-face on fiscal stimulus and accelerating interest rate hikes at a pace not witnessed since the 1980s. As previously discussed, the Fed was doing this to make “money” or loans more expensive in hopes of slowing down the economy. We also discussed how we’ve seen many commodity prices come tumbling lower over the last several months, which alleviated our concerns about severe long-term inflation. And much to the Fed’s demise, the American economy is still going strong, giving them justification to continue hiking rates. We are hopeful to see the pace at least slowed or moderated.
Prices Decline, Economy Strengthens
One of the most significant surprises comes with the severe 70% price decline in natural gas from its peak of $10 barely four months ago to below $3. This dramatically helps utility operators and power providers, as almost 40% of utility power in America comes from natural gas. This should provide temporary relief for some, while others may not benefit as gas hoarding in fear of inadequate supply caused many to fill up much of their storage capacity at those high levels. It could also temporarily slow supply as producers may choose to store more production as the forward curve has finally normalized again, something that many analysts believed was not possible for quite some time. We will watch the energy markets closely, as Europe’s demand curve is similar to the US, where power demand peaks in the summer. If these markets experience a squeeze again, it could adversely impact Europe. We have invested client portfolios in companies like New Fortress Energy (NFE). This low-leveraged power provider’s founder still owns a third of the business, announced a generous dividend policy, and should triple its capacity in the coming years. Essentially, they produce power, which we believe will be in high demand for years to come.
Housing Markets Stable, Companies Stronger
Now that the energy markets have stabilized since last year, one frequently discussed topic is the housing market and its apparent “collapse.” We disagree with this view, as we have mentioned in the past that we see strong fundamentals backed by meager supplies and elevated demand. Housing-related activity has seen a temporary halt, which we had said to be a by-product of the “ripple” economy. And the market seems to agree with this outlook as most home builders’ stock prices continue marching to new highs as well as those in the construction-related businesses and distributors.
PulteGroup (PHM), a US-based home builder, just announced earnings, and you would have believed it to be a satire Onion article if compared to the current media headlines prophesying the collapsing housing market. Permits have undoubtedly come down sharply, and new-home supplies remain elevated; however, housing supplies remain extremely suppressed when factoring in all homes, not just new ones. This is likely to keep prices elevated after much of the country witnessed the most significant price surge in history. PHM specifically saw explosive growth across their business with accelerating margins and sales, which many homebuilders have also seen. The market has not only benefited the upper-income levels, but all types of home builders continue to perform well. But that’s not to say there hasn’t been an outsized benefit to the luxury side of the market.
The world’s richest person is no longer Elon Musk, the CEO of Tesla, but Bernard Arnault, the CEO of LVMH. Bernard has overtaken Elon by an astounding $35 billion spread, as LVMH has surged to record new highs. And what does LVMH do? It is known for all things luxury, from clothing and leather goods by companies like Louis Vuitton, Christian Dior, and Fendi, to name a few, to wine and spirits from companies like Belvedere and Dom Perignon, and even jewelry, perfumes, and much more. But ultimately, they sell expensive, luxurious goods. A company’s stock dependent on discretionary spending would not be one you’d expect to trade at an elevated multiple if the world was going into a severe depression. Their customer base is probably not directly impacted by higher rates; however, they would be exposed to economic forces, which we believe continue to be strong and stable despite the continued rate hikes by the Fed.
Listening to businesses outside the luxury space, they see continued strength in actual numbers, despite their downbeat comments and outlook. Spotify grew premium and ad-supported subscribers to a record high of now nearly 500 million people, over 6% of the world’s population. GM’s sales jumped higher than expected, and GM delivered more vehicles than any other OEM (Original Equipment Manufacturer). Upwork, a freelancing network, reported that 60 million Americans work on their platform, nearly 20% of the country. Apple saw weaker demand for their lower-end phones due to demand soaring for their higher-end pro lines, showing consumers spending even more on their handsets than ever before. China has re-opened and is witnessing soaring domestic and international travel demand. Expedia saw a 51% boost in sales relative to last year, showing signs of returning to pre-COVID levels.
So, economically, the US, and even the world, is in a good spot. The Fed and other central banks want to slow the economy down, believing inflation is running hot due to everyone doing too well and the economy being resilient despite the excessive rate hikes. Prices appear to be falling for most commodities, but how long will it take to translate to consumers? Consumer inflation indices are always lagging. The Fed has also mentioned they want to recalibrate the jobs market, as there are too few unemployed for every job opening. With the jobless rate at a record low of 3.5%, 1.67 jobs remain open for every unemployed worker, meaning workers remain in high demand with plenty of options for work. This metric is down from a high of 2 to 1. This has caused wages to rise rapidly almost across the board. Recently, many tech heavyweights have been announcing massive layoffs to reduce staff from over-hiring during the pandemic. This could have an impact on the labor markets. However, it has yet to show up in the data. Small businesses continue to hire, offsetting much of this impact.
Where does this leave the Fed on their next rate hike decision? Ultimately, if we’re forced to give an opinion, we believe they’ll save face by continuing to hike rates, even if only by 25 basis points at a time. They had previously been hiking 75 basis points each meeting until the last meeting, where they hiked 50 basis points. Due to trailing data, inflation appears elevated and job markets incredibly tight; it seems difficult for them to hold the rate constant based on their previous comments. Although, time will tell, and ultimately does not impact our investment decision. If we believed they were to hike another 75 basis points instead, that would be a different story. We do not see this as the case. They will announce their decision tomorrow, February 1st after their first meeting of 2023.
Artificial Intelligence, finally the next frontier
We wrote an article in December of 2021 about how well-off Americans are yet how pessimistic they remain. That remains true, especially when reading our opinions above. Within that article, we said, “That’s not even factoring the explosion of efficiencies we’ll most likely see in the next decade from AI (artificial intelligence) alone, but we can save that discussion for another day.” Well, that day has come much sooner than we would have believed. Many of you have probably heard of ChatGPT by OpenAI, which has been taking the media by storm. If not, it is essentially a “chatbot” that you can chat with and ask questions with a near-instant response. Think of Google, except communicating with the computer in your language quickly and efficiently instead of searching and scrolling yourself.
Some benefits to society are hard to measure. For example, what value would you place on having access to the internet? Think of all the facets now made possible by the internet, such as streaming your favorite show, FaceTiming with your loved ones, and being capable of working or communicating from nearly any place in the world. Where is this measured in GDP (Gross Domestic Product, a measure used to express the economic value of a country or area)? It’s not. It may be of a different value from one individual to the next. However, it’s undeniable that there is value. The same will be valid for what artificial intelligence will bring and already is. With the release of ChatGPT, these realities are even easier to see, as it shows the difference between communicating with it vs. a human as nearly indistinguishable. These advancements are now only going to compound exponentially.
While the world once feared manual labor would soon be automated and obsolete, on the contrary, it now appears the intellectuals and “experts” are more at risk. As with any new innovation, it can be used for good or for bad. However, we look at it optimistically, as we believe it can be used as a tool by more individuals to learn and explore knowledge unlike ever before. As we previously asked what the value of the internet is to one individual, what about the value of having an expert in nearly every industry at your fingertips that can instantly answer your questions? We’ve been able to trial ChatGPT for a couple of months now and have been astounded by the breadth of information. It was able to articulate in-depth information about international building standards and codes. It could adequately answer niche tax questions. It can write code and computer programs in nearly any coding language by you simply prompting it what you want the code to do. It can write papers, stories, legal documents, and narratives and is almost limitless based on what you choose to ask.
This application is simply a glimpse into what is coming. Countless companies have already announced the release of competing products. At the moment, most are applicable to generalities. Eventually, it will be more personalized. Imagine having Siri or Google Assistant actually being able to perform complicated tasks and essentially allowing everyone to have a true executive assistant in their pocket. For our business, both on the financial planning and investment side, we do see risks. However, we hope to integrate applications and processes for clients that will enrich the financial planning process, much like MyWealth does today. But the possibilities of what it can become are fascinating, and we couldn’t be more excited to take advantage of them.
The Debt Ceiling
Now that we have intoxicated everyone with our over-exuberant optimism, we did want to briefly mention something that will begin overtaking headlines if no imminent solution is sought: the debt ceiling. Essentially, the US government is bound by how much debt it may assume. This limit is being reached, which despite the headlines, is extremely common and forces Congress to up the limit time and time again. Obviously, this limit was implemented to force fiscal conservatism, which has since been become a joke, but we digress. It was just in October 2021 that we last had to write about this, showing the government had fully shut down twenty-one times since just 1974.
We’ll let you flip to our previous article to review the history, but we will summarize that we do not factor this risk into investment portfolios. In the worst-case scenario, the government cannot increase the limit and is forced to perform “magic tricks” for a set period until the eventual increase of the limit occurs again, until the next time. Any “detriment” to the economy would be extremely short-term and quickly reversed. If the government truly defaulted, it would cause some drama, just like in 2011 when the US government debt was downgraded for the first time in history. But the US controls its own currency, and it can be made, unfortunately, as infinite as quickly as a computer can add zeros to the end of the number.
Our outlying concern is still about geopolitical risks, such as the war in Ukraine. Russia has been escalating efforts there, and it could pose short- and long-term risks to Europe next year. We do not have any expertise in predicting or analyzing these events other than remaining acutely aware of them. We will continue watching them as they unfold and trying to assess portfolios to the best of our abilities to preserve and potentially even grow clients’ wealth by the end of these events. Other concerns are seen in the yield curve (inverted at present-when short term rates are higher than longer term rates); we believe much of this concern was alleviated by the 2022 correction. Some have opined that this indicator is now front-run by the markets due to its increased accuracy in forecasting recessions. If we were to see a recession in 2023, we would sit in the camp that it should be moderate and potentially unnoticed by many and only a by-product of the “ripple economy.”
As always, we are here to serve and if you have any questions or concerns, please don’t hesitate to email or call us. Also, we would urge all of you to take advantage of our offer to provide each of you with your personal long-term financial planning at no extra cost. Many of you are utilizing our planning services, but several of you still haven’t started the planning process. Why not start today? Set up your overall planning meeting now!
God Bless,
Your TEAM at F.I.G. Financial Advisory Services, Inc.
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Uncertainty and Volatility