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2023 Market Outlook: Financial Factors Shaping the Year Ahead

2023 Market Outlook: Financial Factors Shaping the Year Ahead

For the first time since 2018, the S&P 500, along with most other major indices had a negative return for the calendar year in 2022. Financial buzzwords like inflation and interest rates appeared constantly in the media and social media, and rightfully so with the role they played. Meanwhile, conflict abroad, unfortunately, came into the spotlight with the invasion of Ukraine, sending a global shockwave that had a large impact financially.

Those were just a few of the headlines we saw last year. While they undoubtedly shaped the financial picture for many, there was plenty more at play. We explore the investing trends that developed – or continued to develop – in 2022, and look toward the year ahead in our third annual market outlook. You can read the entire outlook and more about each of the pieces in this year’s publication below.

Questions about any of the pieces in this year’s outlook? Send us an email at [email protected].

Syl Michelin, CFA

Syl Michelin, CFA

US Expat Financial Advisor

A Bear Market in Search of a Recession: 2022 Recap & 2023 Market Preview

In his cover story for this year’s outlook, Syl Michelin, Walkner Condon’s resident Chartered Financial Analyst, addresses the question of whether we’re headed toward a recession. Drawing on data from prior recessions as well as data on current economic conditions, Syl points to the idea that perhaps a recession isn’t imminent.

Mitch DeWitt, MBA, CFP®

Mitch DeWitt, MBA, CFP®

Financial Advisor

Playing It Safe? The State of the Fixed Income Market

One of the investing topics we heard a lot about in 2022 – and that we covered on the Gimme Some Truth podcast – was the bond market. In a bad year for stocks, bonds also had a rough go of things. Mitch DeWitt dives more into the state of fixed income heading into 2023.

Nate Condon

Nate Condon

Financial Advisor

Geopolitical | Conflict Plays Pivotal Role in Tumultuous 2022

The war in Ukraine had wide-reaching consequences in 2022 and played a large part in the financial challenges throughout the year. Nate Condon discusses the geopolitical headlines from 2022 and how they affected the markets.

Jonathon Jordan, CFP®, CEPA

Jonathon Jordan, CFP®, CEPA

Financial Advisor

Housing Market | Will Rates Stay This Way?

Mortgage rates had a record year in 2022, but not in a good way. According to data from Freddie Mac’s Primary Mortgage Market Survey, mortgage rates rose more than any previous year on record, climbing by 3.2% to end 2022 at almost 6.5% on average. Jonathon Jordan covers what we saw in the housing sector last year and what might be on tap in 2023.

Alicia Vande Ven, MS, Candidate for CFP® Cert.

Alicia Vande Ven, MS, Candidate for CFP® Cert.

Financial Advisor

Slice of Life | How to Stop Making Bad Financial Decisions

Many of us know that a financial decision may be unwise before we make it. Yet, we still go through with it. In this piece, Alicia Vande Ven dives into the behavioral psychology of making bad financial decisions, and how we can correct the thinking that leads us astray. 

Clint Walkner

Clint Walkner

Financial Advisor

Investment Trend | The Rise of Direct Indexing

A hundred years ago, people primarily invested in individual stocks through stockbrokers. Mutual funds changed the game, followed by the further advances – and a decrease in investing costs – brought on by exchange-traded funds in the early 2000s. As Clint Walkner, explains in this piece, direct indexing, one of the newest investment options targeted toward high-net-worth individuals, is a move back to the future, of sorts. 

Stan Farmer, CFP®, J.D.

Stan Farmer, CFP®, J.D.

US Expat Financial Advisor

Currency | The End of the Dollar Bull Run?

Along with the outperformance of U.S. stocks compared to international stocks over the past decade, the dollar has also been in a period of outperformance compared to other currencies. In this piece, Stan Farmer assesses the factors at play that could contribute to a potential end to that run for the dollar, and how investors, particularly Americans living abroad, can adjust accordingly in 2023.

Keith Poniewaz, Ph.D.

Keith Poniewaz, Ph.D.

US Expat Financial Advisor

International | A Tale of Two Markets

Drawing an analogy with Charles Dickens’s “Tale of Two Cities,” Keith Poniewaz analyzes the international markets in 2022 (not quite the best of times, but not as bad as U.S. equity markets) and foreign currencies being hit hard by the dollar (the worst of times). The conclusion? There may be opportunities in international markets in 2023.

What Assets Get a Step-Up in Basis at Death?

What Assets Get a Step-Up in Basis at Death?

With the death of a loved one, one question we often get is, “What assets are entitled to a step-up in basis and what assets aren’t entitled to a step-up in basis at death?” To define what we mean by step-up in basis, sometimes referred to as stepped-up basis, here is an example:

Your mother purchased 100 shares of XYZ company at $10 per share in 1950, costing her $1,000, which is her “basis.” She holds the shares without selling until she passes away in 2022. The share price is $1,000 per share at her date of death. 

Despite the fact that she has a significant gain of $99,000 in this example, the basis “steps up” on the date of death to the share price on that date – or $100,000. If the beneficiary of this stock decides to sell it a few months later, their basis is $100,000 and the gain or loss is simply the value of the shares sold minus the basis. For example, if they were sold at a value of $110,000, they would owe tax on $10,000 of capital gains (and in this case, short-term capital gains).

Examples of Assets That Step-Up in Basis

  • Individual stocks, bonds, mutual funds, and exchange-traded funds (ETFs) held in taxable accounts.
  • Real estate – this includes many forms, such as multi-family residences, primary residences, vacation homes, and office buildings. 
  • Businesses and the equipment in the business.
  • Art, collectibles, home furnishings – such as antiques that may have increased in value.
  • Cryptocurrencies.
  • Non-fungible tokens, or NFTs.

Examples of Assets That Do NOT Step-Up in Basis

  • Individual retirement accounts, including IRAs and Roth IRAs.
  • 401(k), 403(b), 457 employer-sponsored retirement plans and pensions.
  • Real estate that was gifted prior to inheritance.
  • Tax-deferred annuities.

We encourage our clients to seek out the counsel of a qualified estate planning attorney to plan out their wishes and assure that they are making good choices regarding future taxation of their assets and avoiding unintended consequences of their actions.

Note: We are not CPAs. Please consult a tax professional if you have any tax questions specific to your own personal situation.

ABOUT THE AUTHOR

CLINT WALKNER

FINANCIAL ADVISOR

Clint Walkner is one of the co-founders and managing partners of Walkner Condon Financial Advisors. He is a fee-only, fiduciary financial advisor who works with clients locally in Madison and around the country.

What is Index Investing? History, Construction, Weightings and Factors

What is Index Investing? History, Construction, Weightings and Factors

The subject of index investing is one of the most popular topics of the investment industry. It is written about constantly in business magazines, newspapers, and websites and generally comes with the author’s opinion on the topic whether you are interested in their opinion or not. As often as it is covered, I rarely find a piece that explains indexes and index investing in an easy-to-understand way. The goal of this article is to provide a general overview of indexes, the differences in how indexes are constructed, including equal-weighted indexes versus market capitalization-weighted indexes, and passive and factor indexing strategies. 

A BRIEF EXPLANATION AND HISTORY OF INDEX FUNDS

One of the most notable indexes is the Standard and Poor’s 500, more often referred to as the S&P 500. Simply put, the S&P 500 tracks the stock performance of the 500 largest companies, primarily based in the U.S. Investment companies took this idea and developed a way to purchase this basket of 500 companies in one investment as opposed to buying each stock as its own investment. The index itself was created in 1957 and is used to provide a broad representation of the overall stock market’s daily performance. The Dow Jones Industrial Average, which is arguably the most well-known index, is made up of only 30 stocks and, therefore, gives a more narrow representation of the market. The first S&P 500 index fund was created by Vanguard in 1976. This was the beginning of an entirely new way of investing. The vast majority of index investments, including Exchange Traded Funds, that exist today have been created within the last 20 years

An Exchange Traded Fund (ETF) is a different form of index investing. The first ETF was created in Canada in 1990, with the first U.S. ETF created shortly thereafter in 1992. One of the fundamental differences between index funds and ETFs is that ETFs trade throughout the day on a given exchange and, therefore, have price fluctuations intraday. Mutual funds only change their price per share once per day after the market has closed. With ETFs behaving more like individual stocks, they tend to be more tax-efficient than mutual funds as well. 

THE EXPANSIVE WORLD OF INDEXES

Since the beginning of the 2000s, the index investing world has exploded with offerings. The bellwether indexes of large companies, mid-sized companies, and small companies have given way to more niche and exotic indexes such as cybersecurity, photonics, and global blockchain, to name a few. A recent estimate put the total number of ETF investment products at more than 7,000; however, the number fluctuates by the day. The splintering of the ETF market also creates challenges in comparing what appear to be similar index investments, only to find out they can be vastly different. If we look at three Small Cap US ETFs from Vanguard (VB), iShares (IJR), and Charles Schwab (SCHA), we find three very different investments.

This chart represents a one-year performance comparison between the three mentioned ETFs. While this is a relatively short time frame for performance, the chart highlights the drastic difference between these investments, even though they all appear to be similar by title. The biggest reason for this performance variation is the makeup of each of these investments, which represents a different investment philosophy. The Schwab ETF owns the most small-cap companies in its basket with 1,761, then the Vanguard investment with 1,560, both of which dwarf the iShares offering with 684 total holdings. These are three of the most popular, passively managed U.S. small-cap index investments. It is fair to say that not all small-cap index investments are created equal. 

INDEX CONSTRUCTION

The development of index investments has evolved drastically over the past two decades. Let’s start with the most basic – the S&P 500. The purchase of an S&P 500 fund will yield you a basket of the 500 largest, mostly U.S.-based companies. The methodology used to determine the 500 companies that make up the S&P 500 is agreed upon by the investment community as a whole, in that, the list of companies that make up the index is published and accepted. That said, the construction of S&P 500 index funds can be quite different because the relative weighting of each of the 500 stocks can be different. Many of the S&P 500 funds are market capitalization-weighted, meaning that the largest stock in the index holds the largest position within the fund. This, proportionally, happens all the way down to the 500th company in the fund. By purchasing a market-cap-weighted index fund, the investor should understand they are not getting an equal slice of all of the stocks in the 500. Currently, the top five companies in the 500 make up over 20% of the index. By comparison, an equal-weighted index fund will do just that – invest an equal amount across all of the stock in the index. Here is a chart to illustrate how the performance of these two strategies may differ by using the SPDR S&P 500 market-cap-weighted fund (SPY) and the Invesco S&P 500 equal-weighted fund (RSP). 

The one-year performance chart of these two investments ends in relatively the same place. However, a closer look at the chart will show how the two investments behaved differently throughout the year. This next chart, representing the five-year performance of both investments, shows the more dramatic separation. 

This isn’t to say that one method is superior to the other, but rather, to illustrate the differences in index investing as well as the importance of knowing what you own in your investment portfolio. 

PASSIVE VERSUS FACTOR STRATEGIES

In the infancy of index investing, the idea was to model a well-known stock or bond index and simply follow the performance of the stocks in the basket. This eliminated the need for dedicated portfolio managers to use their expertise to pick stock or bond winners for their portfolios. The logic was simple: Why try to beat the performance of said index year-in and year-out when you can participate in the performance of the index. This is the way it went for many years until the development of factor strategies. Factor investing was a groundbreaking idea that would theoretically take a good idea – index investing – and make it significantly better. Typically, factor strategies will start with an index and use factors such as profitability or price-to-earnings ratios to weed out underperforming companies and then rank the remaining companies in the index. The idea is centered around the thought that not all of the companies in any given index are solid investments. Why own the bad with the good? Of course, this idea also relies on the correct combination of factors to determine what defines a “good” company and what defines a “bad” company by way of their investment merit. While the past five years have been difficult for many of the factor investment strategies, there are also periods when they dramatically outperform.  

When index investing was created and began to gain traction in the 1990s, it was difficult to see where it might lead. Many investment ideas have come in quickly, had their day in the sun, and went away almost as quickly. Index investing is not one of those ideas. It is as popular today as it has ever been, and the daily creation of new funds is evidence of that growth. Investment companies will continue to tinker with different ways to package their index offerings and try to build a better mousetrap. But, in the end, millions of inventors still prefer to own the funds from the early days, and that isn’t likely to change any time soon. 

Nate Condon

2022 Investment & Market Outlook Guide

Syl Michelin’s piece is part of Walkner Condon’s 2022 Investment & Market Outlook Guide, a comprehensive reflection of 2021 and glimpse at the factors impacting the year ahead in 2022.

2022 Investment and Market Outlook Guide

2022 Investment and Market Outlook Guide

Walkner Condon’s team of experienced financial advisors explores key topics that are top-of-mind as we transition out of 2021 and into a new calendar year, featuring the market outlook and review from Syl Michelin, a Chartered Financial Analyst™. Other topics include index funds, sector & factor performance, a pair of U.S. expat-focused pieces, and more.

Below you can find a breakdown of the individual pieces in this year’s outlook. 

1. The Year of Impossible Choices: 2021 Market Recap & 2022 Outlook
Syl Michelin, Chartered Financial Analyst

Through a lens of current and historical data, Walkner Condon’s resident CFA® explores the last year in the markets, with an eye on factors that may impact 2022. 

2. It Only Gets Harder from Here: Valuations, Bond Environment & Wage Growth
Clint Walkner

With a multitude of market highs throughout 2021 and a long stretch of gains post-2008 financial crisis, it would appear the “easy” money, if we can call it that, has been made. In this piece, Clint dives into the three main challenges as we move forward into 2022.

3. Reviewing 2021 Sector and Factor Performance and Positioning in 2022
Mitch DeWitt, CFP®, MBA

The markets were up routinely throughout 2021, but that doesn’t mean the gains were shared equally. Mitch discusses the sector winners (and losers) of the last year, along with what factors – things like high beta, value, and quality – had their day in the sun. He also goes into what might be on the horizon this year.  

4. Exploring Index Funds: History, Construction, Weightings & Factors
Nate Condon

The goal of this piece from Nate is to provide a general overview of indexes, the differences in how indexes are constructed, including equal-weighted indexes versus market capitalization-weighted indexes, and passive and factor indexing strategies.

5. Three Reasons to Look at Investing Internationally in 2022
Keith Poniewaz, Ph.D.

Though the U.S. dollar had its best year since 2015 in 2021, Keith explains several reasons to think about international investments in 2022, including the very strength of that U.S. dollar, valuations, and the rest of the world’s growth in GDP.  

6. Top Five International Destinations for U.S. Expats in 2022
Stan Farmer, CFP®, J.D.

One of our U.S. expat experts, Stan jumps headfirst into possible locations for Americans to consider in 2022 if they’re thinking about a move abroad – or even if they’re just wanting to dream a little bit. Stan covers ground in South America, Europe, and Asia in this thorough piece, perhaps his first crack at being a travel journalist in his spare time.