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  • Writer's pictureMichael Handy

First Quarter 2023 Newsletter

First Quarter 2023 – The first quarter continued the gains from the fourth quarter of 2022. The gains were uneven with large cap technology leading the indexes. The graph below best shows the advantage of a balanced portfolio. Investments across different asset classes are a necessity for a long-term horizon.

Bonds (PIGIX) and real estate (DFREX) did not perform well due to interest rates. Other asset classes performed well over three-month and three-year periods.

Statistics are from Morningstar Advisor Workstation which are considered reliable.

The Market Recoveries Nine Month Recovery – The S&P 500 bottomed out in mid-2022. The market is nine months into recovery. This is the short-term current market recovery.

Three-year recovery – This three-year Covid recovery period goes from March 20, 2020 to March 31, 2023. Viewing it over this longer term, the S&P index went from 2,303 at March 20, 2020 close to 4,109 at March 31, 2023. This is a total increase of 78% for the three year plus period. The time frame does not match exactly with quarter end, but accounts for the 18.53% annual increase for DFUSX (a large US company). The market had two downturns and two recoveries in the last three-year period. With a recency bias, one would tend to see DFUSX down -7.82% for the one-year period, forgetting about the 18.53% annual return for the three-year period.

Labor and Employment – The jobs market remains healthy. Seasonally adjusted unemployment is at 3.5%. There are 1.5 jobs available for each job seeker according to Barron’s. This is a decrease from the 2.0 ratio a few months ago. Layoffs at large tech companies make the news, but total employment in tech is a low percentage of US employment. With the current job market, many companies are reluctant to lay off employees. They foresee difficulty replacing them when business improves.

The Fed – In financial circles, news about moves by the Fed and the effect on the market proliferate. Chairman Powell said reducing inflation is the Fed’s top priority, and it seems to be working. Looking at inflation increases for the last six months look better than the last year. All industries are showing slowdowns. The prospect of a mild recession looms. The hope remains for soft landing. It is better to fight lessening inflation with a job than unemployment benefits.

Social Security – The social security topic is hot again with changes coming. Congress does not like to discuss this for several reasons. Any plans to decrease benefits creates an uproar among seniors receiving benefits.

Congress itself has a pension retirement plan. It provides benefits at retirement age with only five years of service! Would Congress view the issue differently if they had 401k’s like the rest of us, and Obamacare for their health benefits?

Pensions are not that complicated, and have been around as retirement plans since the late 19th century. It is all about the time value of money. There is a retirement base, or the investments in the pension, there are contributions from entities, and distributions to retirees and qualified disabled beneficiaries. Pensions also have a life expectancy feature in the computations.

From here, a likely scenario has high wage earners paying social security on all wages, rather than the first $160,200. This provision would apply to 6% of the population, or about eleven million workers who make more than the

$160k cap. This provision is like unlimited withholding for Medicare. There may also be a cap on annual social security benefits in retirement.

What’s ahead for the market – The market can only increase with higher sales and profits. Many businesses are softening. It is good to keep in mind that businesses are still very profitable. There is still a mismatch between supply and demand in many parts of the country. The prognosis is for a healthy market when inflation is lowered, and supplies are aligned with demand. This good news time frame continues to get pushed down the road.

Portfolio Changes in Cash – Investments in US Treasuries have increased in most portfolios. Cash is transactional cash, and US Treasury cash. Transactional cash provides for distributions for a month or quarter. Transactional money market funds pay interest at about .4%. Short term and mid-term treasuries are paying 3% to 4%.

Preferred Stocks – Preferred stock investments have increased in many of your portfolios. The investments are primarily investment grade US banks like Bank of America and Morgan Stanley as well as Allstate Insurance and Duke Energy. As a group, the preferred stocks had total returns of 8% to10% in the first quarter of 2023. Last year many of these preferred stocks sold below their $25 par value. In years past, preferred stocks sold at or near par value. Buying below par value also presents a capital gain opportunity if the stocks are called at par. Most preferred stocks have a call provision five years from the issue date.

For example, MS-O (Morgan Stanley) is recently trading at $18.95, with a 4.25% coupon for a current yield of 5.61% ($1.0625/$18.95 = 5.61%). If the preferred is redeemed at $25 par @1/15/27, the total return on investment would be 12.66%. Morgan Stanley may choose not to call or redeem the preferred stock. Then you continue to get your 5.61% dividend based upon your cost.

We maintain the following four lists:

· High Grade Preferred Stocks

· Short/term US Treasury Investments

· Publicly Traded Debt

· Real Estate Preferred Stocks

Most US company preferred stocks pay dividends taxed at capital gains rates. Real estate preferred stocks pay dividends taxed at ordinary tax rates. This makes RE preferred stocks suitable for IRA type accounts.

Food for thought – A familiar saying – Insanity is doing the same thing and expecting to get a different result. The Real Clear Politics polls show not one national politician has an approval rating over 42%. 65% of the people think the country is on the wrong track. How can we expect a different result if we continue to send the same people to Washington and our state legislatures?

Highlights from Jessica’s Desk

RMDs – We will be distributing the 2023 annual RMDs in the next few months. If you have any changes to how you would like your funds distributed, please contact me at 503-635-6100 or to let me know, and I will make sure we update your file.

Financial Planning – Now that tax season has come to a close, it’s a great time to focus on financial planning. Call us today to schedule a financial planning appointment!

E-mail Newsletter – Remember, you can opt in to receive your quarterly report and newsletter via email rather than paper mail. Call or email Jessica to go paperless.

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