Broker Check

Monday Money Report

| December 19, 2022

Last week the Federal Reserve did exactly what was expected and raised interest rates by half of a percent. Given that this was expected, what happened to the market? The S&P was down over 2% last week. Fed Chair Jerome Powell’s comments when announcing the rate increase indicated that the Fed’s target interest rate is 5.1%[1], which is higher than expected. Investors are worried a recession is coming.

Another worry is the tax bill that’s coming for many investors.  When the manager of a mutual fund buys or sells a stock or bond, a gain or loss is generated.  These accumulate throughout the year and are paid to everyone holding the fund on the record date, usually around mid-December.  In down years, as people get scared and sell, the funds incur large capital gains – and those are paid out to everyone who has stayed invested.  You can see a big drop in the value of your funds and have a large capital gain that you need to pay taxes on. That gain does add to your cost basis, so you won’t pay taxes on that amount when you eventually sell the fund.  But it does seem like adding insult to injury to get a tax bill when the market’s down.

You may also see a drop in the Net Asset Value, or NAV, of your mutual funds. When those gains are distributed, the value of the shares drops by the amount of the gain in each share. Most investors automatically reinvest their dividends, so you’ll purchase more shares at the reduced rate.  Sounds crazy, but this distribution works in your favor. Just don’t be alarmed if you see the share price drop due to the distribution.

If you’re worried about the tax bill, you still have time to harvest losses, or sell investments that have lost money, to realize the loss for tax purposes. While this should ideally be done throughout the year, now is a good time to make these trades.  You can buy something else or hold the cash for 31 days and repurchase the same investment. Talk with your advisor or CPA about this prior to yearend.

Your action item this week is to evaluate your retirement plan contributions for next year. The maximum contribution limits have increased for IRAs and employer-sponsored retirement plans like 401(k)s and TSP. If you’re turning 50, you have a higher contribution limit – the “catch up” contribution. Now is the time to adjust automatic contributions to take advantage of these higher limits.  And while you’re at it, especially if you received a raise at year end, send a bit more from each paycheck to your savings account to build your emergency fund.

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Investment advice offered through Great Valley Advisor Group, a Registered Investment Advisor.

All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. 

The opinions voiced in this show are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investment(s) may be appropriate for you, contact the appropriate qualified professional prior to making a decision.

[1] CNBC, Dow slides 500 points Friday, by Sarah Min & Alex Harring 2/16/22