What a difference a year makes.
At the beginning of 2022, prices were spiking higher in the U.S. thanks to pandemic supply chain breakdowns and consumer bank accounts stuffed with cash. Remote work seemed here to stay and unemployment was near all-time lows. For many, there was a real sense that the pandemic economic crisis was behind us.
Not every observer was so sanguine, however, and it didn’t take long for runaway inflation to become a major headache for markets and regular Americans.
After some hesitation (remember transient inflation) the Federal Reserve pledged to crush rising prices by hiking interest rates. The stock market tanked, taking bonds along for the ride, making it a miserable year for investors.
With 2022 drawing to a close, the S&P 500 has clawed its way out of bear market territory but remains down 17% as of this writing. As we look ahead to 2023, here are nine investing trends that can help parse the cautionary tales from the opportunities.
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1. America Remains an Inflation Nation
Inflation was the economic glitter of 2022—it stuck to everything. From the gas pump to the grocery store to your 401(k), investors have higher costs and less valuable dollars to invest in the future.
The big question for 2023 is whether inflation will drop toward the Fed’s 2% target rate. Many experts suggest that’s unlikely, although it’s worth noting that the Fed’s six 2022 rate hikes will take a while to work their way through the economy.
Morningstar predicts that the Fed will ease monetary policy and lower interest rates to roughly 3% by the end of 2023. If that happens, it won’t help the inflation fight. That suggests that Treasury Inflation Protected Securities (TIPS) and I bonds should remain popular inflation-fighting investments.
2. The Bear Market Could Stick Around
The Covid-19 stock market rocketship crashed and burned. June 2022 ushered in the second bear market since 2020, sending investors scrambling for cover.
While stocks have officially emerged from the bear market in the second half of 2022, stock markets remain down by double-digits.
Ordinarily, bonds would take the edge off a bear market. However, aggressive interest rate hikes have bond yields falling along with stock prices. In the third quarter of 2022, the venerable 60/40 portfolio suffered greater losses than its stocks-only counterpart, causing questions about whether the O.G. portfolio needs to go.
Improving investor sentiment will likely be tied to easing inflation, so the year ahead could prove tricky for traditional asset allocation models.
While putting a “buy low” mantra into heavy rotation on your morning meditation playlist is never a bad idea, 2023 may prove that buy-and-hold investors need more than equities and fixed income to hedge against unpredictable markets.
3. Consider Alternative Investments
Speaking of broader diversification, 2023 holds promise for alternative investments finally earning a place in everyday investor portfolios.
The portfolio for 2023—no matter your net worth, risk tolerance, or time horizon—should include an increased allocation to alternatives. With their low correlation to traditional asset classes like stocks and bonds, alternatives could blunt inflation- and recession-induced volatility and buoy returns more than dividend stocks alone.
Previously reserved for accredited investors and seasoned traders, everyday investors can easily access alternative asset strategies like commodities and managed futures through a decent selection of low-cost exchange-traded funds (ETFs) and mutual funds.
While expense ratios trend higher than the average fund, the performance of alternative assets may outweigh the higher costs.
4. Savings Bonds Are Still Sexy
If there’s a silver lining to the inflationary cloud, it’s the newfound popularity of savings bonds—specifically Series I savings bonds. In April 2022, the I bond rate jumped to a historic high of 9.62%, contrasting the S&P’s year-to-date 15% decline.
Investors eager to lock in that phenomenal rate bought $979 million in I bonds on Friday, Oct. 28—the last purchase day before the semiannual rate reset—and crashed the Treasury Direct website. You’d think the U.S. Treasury was selling Taylor Swift concert tickets.
For those seeking alpha for their extra cash, I bonds at the lower (yet still phenomenal) 6.89% rate are available through April 30, 2023. While illiquid for one year after purchase, it’s tough to argue with a guaranteed rate of return backed by the full faith of Uncle Sam.
4. Watch Out for Layoffs
The hashtag of the year on social media could be #layoff. Since mid-November, tens of thousands of employees have been laid off from tech behemoths like Meta, Amazon, Lyft and Twitter.
While boldface tech names have seen very high-profile waves of labor force reductions, other industries have seen their own losses. Real estate startups like Better, Redfin and Opendoor have slashed headcounts as rising rates and home prices dried-up mortgage applications, closed sales and corporate revenues.
As cash-strapped public companies try to shore up their balance sheets ahead of a potential recession, the year ahead could see the undoing of the historically strong U.S. labor market. While experts predict that new college grads won’t be at a loss for job offers, entry-level positions have less impact on corporate bottom lines.
That mid-career—especially in tech-centric specialties—could weigh on unemployment figures. Companies seeking to whittle payroll may pursue leaner staffing protocols, leaving plenty of talent on the sidelines to appease shareholders.
5. Can Crypto Recover?
It is pretty easy to argue that 2023 has to be a better year for crypto than 2022 since it could hardly be worse.
Multiple stablecoins slipped their pegs in 2022—including TerraUSD and Tether, fueling a midyear crypto crash that wiped out hundreds of billions in value. Crypto exchanges, meanwhile, were hobbled by growing pains and layoffs (Coinbase)—not to mention the sudden implosions of FTX.
Moving into 2023, look for cryptocurrency businesses to woo investors with stories of cash reserves instead of trendy coins and celebrity endorsements. And look for big developments in cryptocurrency regulation from Washington, D.C.
The Fed launched its 12-week central bank digital currency (CBDC) proof-of-concept project in mid-November, and legislators remain excited to advance crypto regulation legislation.
Unfortunately, many blockchain conversations will likely be colored by the debacle at FTX instead of the technology’s long-term, untapped potential.
7. New Interest in Renewables
The landmark $1.2 trillion infrastructure bill of 2021 and the Inflation Reduction Act of 2022 make trillions of federal investments available for renewable energy projects.
While supply chain issues stymied clean energy developments from electric vehicles (EVs) to solar panels over the last two years, 2023 could be a very good year for renewables.
With battery storage and EV adoption inextricably intertwined, BDO Global predicts a banner year for renewable energy storage systems. Increased competition in the EV market from newcomers like Rivian, Lucid, Ford and Chevy could put mainstays like Toyota and Tesla on their heels.
And natural gas shortages stemming from European Union conflicts have increased policy momentum for clean and renewable sources.
8. Hybrid Robo-Advisors May Have a Moment
Recent data from Parameter Insights show that investors exited self-directed investment tools like robo-advisors and brokerage accounts at a staggering pace in 2022. Theories on the exodus abound, but two lead the charge: Wealthier investors may be flocking to traditional financial advisors, and DIYers may be content to wait out a market recovery with cash in hand.
No matter the reason, hybrid robo-advisors—those that offer algorithm-driven investing plus access to traditional advisors—may be teed up for a lot of interest in 2023.
With consumers demanding more value for their money during inflationary times, the low-cost/expert advice behind hybrid robos hits the zeitgeist. By offering a combination of services like automatic rebalancing and tax-loss harvesting with financial advisor access, and at a fee typically lower than traditional advisors—
Price-sensitive economies make investors more value-driven than ever, which positions hybrid robos as the best of both worlds for investors eager for guidance but anxious about costs.
9. Estate Planning Enjoys an Upward Trend
Even if the year ends with the death of Twitter at the hands of a petulant billionaire, 2022 was an excellent year for end-of-life preparations. A study from Caring.com found that the number of Americans undertaking estate planning is rising.
As of 2022, 54% of respondents with postgraduate degrees now have estate plans—a 15% increase over 2021 figures. Moreover, the number of young adults with a will has also increased by 50% compared with pre-pandemic levels.
But with stock market returns lagging and inflation muddying 2023’s outlook, what could inspire investors to continue estate planning’s upward trajectory?
In a time where much seems beyond control, estate planning and the asset protection it can provide is 100% within an investor’s control. Holly Geerdes, an estate planning attorney at the Estate Law Center, says that estate planning isn’t so much about death or assets. Instead, it’s about taking control and having your say on what your wishes, wants and concerns are today to live on in the years ahead.
Forget ChatGPT — an AI-driven investment fund powered by IBM's Watson supercomputer is quietly beating the market by nearly 100% – Yahoo Canada Finance
While the language bot ChatGPT has gone viral, a Watson-powered ETF is making nearly double the returns of the broader market.
The AI Powered Equity ETF is up 10.4% in 2023, whereas the Vanguard Total Stock Market Index is up 5.67%.
IBM’s Watson supercomputer helps balance the fund’s portfolio holdings.
The popular language bot ChatGPT has shown a humanlike ability to render articles, emails, and even dating-app messages. But if you ask it to generate a portfolio that can beat the market, it spits out boilerplate information and reminds you it doesn’t have access to live stock data.
Yet, the $102 million AI Powered Equity ETF (AIEQ), which launched in 2017, has been quietly fulfilling that request so far this year. Issued by ETF Managers Group in partnership with the fintech firm Equbot, the fund leans on IBM’s Watson supercomputer to balance its portfolio.
That 114-holding portfolio is up 10.4% so far in 2023, while the Vanguard Total Stock Market ETF is up 5% over the same stretch.
Still, as ETF.com highlighted, the former is actively managed, and thus more expensive than the benchmark fund, cutting into actual returns to investors. The AI-powered ETF charges 0.75%, whereas Vanguard’s costs 0.03%. Both funds include JPMorgan and UnitedHealth Group in their top-10 holdings.
Chris Natividad, the chief investment officer of Equbot, said the Watson-powered fund can look beyond standard market data and cull information from tweets and earnings calls, according to ETF.com.
“We’re focused on investment related data, looking at how these different types of signals impact security practices across different time horizons,” Natividad said, per ETF.com.
“The best days of the fund are still ahead of it,” he added. “And just as you’ll see ChatGPT’s responses change and evolve with time and data, so will our fund.”
Meanwhile, ChatGPT’s parent company, OpenAI, this month secured a $10 billion investment from Microsoft this month, and the technology continues to make waves across sectors.
Online media outlet BuzzFeed announced last week it plans to leverage the technology to create content, educators are warning about the bot’s repercussions in schools, and chipmakers are poised to cash in.
Read the original article on Business Insider
Pension funds suffer largest investment losses since 2008 financial crisis
Canadian defined-benefit pension plans collectively suffered their largest losses since the 2008 financial crisis in 2022, recording a median decline in assets of 10.3 per cent despite a partial recovery in the final months of the year, according to a survey from Royal Bank of Canada RY-T.
Pension assets suffered heavy losses in the first two quarters of 2022 before starting to recover in the back half of the year. In the final quarter, pension assets returned 3.8 per cent, as measured by the RBC Investor and Treasury Services All Plan Universe, which serves as a benchmark for performance.
Pension plan investors were battered by unusually volatile markets driven by high inflation and rapidly rising interest rates, as both stocks and bonds returned losses, instead of helping offset each other as has often been the case in past market downturns. And although plans earned positive returns to finish the year, they are facing many of the same pressures in 2023.
“In the next few months, plan sponsors will need to be attentive to risk factors such as the economic impact of the central banks’ actions, ongoing geopolitical tensions and ongoing efforts to contain the COVID virus outbreak in certain emerging markets,” Niki Zaphiratos, managing director for asset owners at RBC I&TS, said in a news release.
Canadian pension plans’ bond portfolios had median losses of 16.8 per cent in 2022 – the largest annual decline in more than 30 years – and also trailed the benchmark FTSE Canada Bond Index. The losses were driven by the drastic action central banks took to tame inflation by raising interest rates, with longer-duration bonds that are most sensitive to inflation accounting for some of the largest declines.
Yet for pension plans, there was a silver lining to rapid interest-rate increases, which caused future liabilities to fall. As a result, more pension plans finished 2022 in surplus, meaning their assets were greater than their liabilities. And higher yields from fixed-income securities could also give pension plan investment managers more options to reduce risk-taking in their portfolios over the coming year.
Stocks also suffered, rather than acting as a counterweight to falling bond prices. Foreign equities returned 9.7 per cent in the fourth quarter, but closed the year down 11.3 per cent, according to RBC I&TS. And Canadian equities returned 6.3 per cent in the final quarter of the year, bringing their annual loss to a comparatively modest 3.6 per cent. In general, value stocks performed better than higher-risk growth stocks in the quarter.
The last time pension assets declined so sharply was in 2008, when Canadian defined-benefit pension assets posted a median loss of 15.9 per cent.
Defined-benefit pension plans pay fixed benefits for as long as a beneficiary lives based on their contributions and years of service.
Intel Cuts Pay Across Company to Preserve Cash for Investment
(Bloomberg) — Intel Corp., struggling with a rapid drop in revenue and earnings, is cutting management pay across the company to cope with a shaky economy and preserve cash for an ambitious turnaround plan.
Chief Executive Officer Pat Gelsinger is taking a 25% cut to his base salary, the chipmaker said Tuesday. His executive leadership team will see their pay packets decreased by 15%. Senior managers will take a 10% reduction, and the compensation for mid-level managers will be cut by 5%.
“As we continue to navigate macroeconomic headwinds and work to reduce costs across the company, we’ve made several adjustments to our 2023 employee compensation and rewards programs,” Intel said in a statement. “These changes are designed to impact our executive population more significantly and will help support the investments and overall workforce needed to accelerate our transformation and achieve our long-term strategy.”
The move follows a gloomy outlook from Intel last week, when the company predicted one of the worst quarters in its more than 50-year history. Stiffer competition and a sharp slowdown in personal-computer demand has wiped out profits and eaten into Intel’s cash reserves. At the same time, Gelsinger wants to invest in the company’s future. He’s two years into a turnaround effort aimed at restoring Intel’s technological leadership in the $580 billion chip industry.
Gelsinger will keep using cash to reward shareholders, meanwhile. Intel said last week that it remains committed to offering a competitive dividend. Analysts have speculated that the company may lower its payout to cope with the slowdown.
Under Gelsinger’s plan, the company is looking to introduce new production technology at an unprecedented pace. It will also build new plants in Europe and the US and try to win orders from other chipmakers as an outsourced manufacturer. That move will put Intel in direct competition with Taiwan Semiconductor Manufacturing Co. and Samsung Electronics Co., two Asian companies that have passed it in the rankings of chipmakers by size and capabilities.
Intel isn’t the only big company trimming executive pay. Apple Inc., one of the few tech giants to forgo major layoffs, is cutting the pay of CEO Tim Cook by more than 40% to $49 million for 2023. Some high-profile finance firms have made similar moves, with Goldman Sachs Group Inc. CEO David Solomon seeing his 2022 compensation trimmed by about 30% to $25 million.
Intel is taking other steps to rein in expenses. That includes headcount reductions and slower spending on new plants — part of an effort to save $3 billion annually. That figure will swell to much as $10 billion a year by the end of 2025, the company has said.
Intel, which informed staff of the latest cutbacks earlier Tuesday, is also reducing the match it offers to pension contributions. The Santa Clara, California-based company thanked employees for their patience and commitment.
Hourly workers and employees below the seventh tier in the company’s system won’t be affected.
(Updates with spending plans and earnings report starting in fourth paragraph.)
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