Stock and bond prices ripped higher during November, as many investors have come to expect that the Fed is going to lower interest rates during 2024, which would justify higher stock and bond prices. For 2023 so far, all the asset classes we track in the table below have positive returns except Long Term Bonds, which is the most interest rate sensitive asset class.
When we compare the Year-to-Date 2023 column to the 2022 column, we can see that no Equity asset classes have totally recovered from their 2022 drawdown**, but most are close. On the other hand, Bond asset classes have had a tougher time digging out of their 2022 performance hole. This will take time as today’s higher interest rates provide investors with much higher monthly and quarter coupon payments than they were receiving two years ago.
** The Dark Side Of Compounding - Remember that negative returns impact portfolios more severely than positive returns. For example, the 29.1% loss for US Growth Stocks in 2022 will require a 41.1% positive return to fully recover. The difference between negative and positive returns can be hard to believe until you see an actual example.
Large Cap Growth stocks had the highest returns in November, as momentum for Artificial Intelligence related companies continued. Valuations for many of these companies have reached sky-high levels (not quite 1999 tech bubble levels, but in the neighborhood), which often portends the end of a momentum run and a change in leadership.
The table below shows quarterly returns for the last 3 years for US Stocks, Non-US Stocks, and Bonds. I shaded the negative returns in orange to clearly highlight the streaky periods of investment security price depreciation that we have seen during the last few years. I added a chart with 10 Year Treasury Yields right below it to show how the negative/orange return periods in the table coincide nearly perfectly with periods when interest rates jumped up. I expect that interest rates are nearly done rising and that the overall market environment for 2024 will be less risky than the last couple years because the specter of rising rates has largely abated. However, I won’t go as far as many of my peers and forecast rate cuts for 2024. I expect that the Fed will hold off on cutting rates until we encounter our next financial crisis. While there is no impending crisis on the immediate horizon, one is always eventually inevitable, but one or two years of 5% coupon payments on bonds would sure be nice for retired investors who typically own these bonds.
Periodic scheduled tax loss harvesting and tax management for transitions in taxable accounts have the potential to improve overall wealth for our clients and are a major piece of the value proposition advisors and Advyzon bring to their clients. Every year presents unique conditions for advisors when it comes to tax management for investment accounts. 2023 is no different. The Advyzon Investment Management trading team has been reviewing accounts for harvesting opportunities during the last few weeks and we are finding that the high volatility for market returns, coupled with the high degree of correlation of return among asset classes for the last few years have left us with unique situations that can be grouped roughly around the date the original investments were made into the market.
Long term accounts – 2019, 2020, and 2021 were such good years for market returns, that accounts that were invested before this period will typically have few unrealized losses to harvest, which is terrific for investors, but leaves tax loss harvesting strategies largely ineffective. When we look at market returns for the last 5 years, only a couple asset classes have slightly negative returns and unrealized losses that might be harvested, including; international bonds, international real estate, and long term government bonds. However, even in these well tenured accounts, there can still occasionally be particular tax lots that were purchased more recently that can be carrying unrealized losses that can be harvested.
Mid term accounts – The S&P 500 hit its all time high of 4,796 on 1/3/2022. If you have accounts that invested around that time, you are likely to find many investments that are sitting on unrealized losses today. Total returns for nearly every asset class (except very short term bonds and some energy related investments) are negative between 1/3/22 and 12/4/23. With ample opportunity to realize losses in these accounts, some advisors and investors will elect to harvest all losses and build up a carryforward for future tax seasons, while some investors will target offsetting current realized gains plus an extra $3,000 to write off during this year’s tax season (the maximum you can realize in any single year).
Short term accounts – Newer accounts that opened around the start of this year should be sitting on very healthy gains and won’t have any opportunity for loss harvesting. Per the YTD column in the first table of this writeup, 2023 has been a good year for market returns.
You do not need to have a Master of Business Taxation degree to incorporate shrewd tax loss harvesting moves in your client portfolios – Advyzon has included features throughout each app to help advisors with this task. It is simple to identify securities that currently have unrealized losses on Advyzon’s Holdings – Gain/Loss screen. Quantum users can quickly and easily act upon this information by running Tax Loss Harvest Rebalancing. The Model Portfolios app allows advisors to set up default Tax Loss Harvest replacements for each security in their portfolios to streamline the process. For advisors who currently use a lot of mutual funds and ETFs, moving equity allocations into Separately Managed Accounts found in Nucleus Model Marketplace can open up a lot more opportunity for future harvesting, as gains and losses are not aggregated up to a fund level. Advisors who want to engage a seasoned, efficient partner for this task can hire Advyzon Investment Management to do the work for them.
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