Market Commentary Q2 2023

A rebound in stocks and a pivot for bonds

Now that we are halfway through 2023, it is a good time to reflect on the year’s first six months and identify opportunities available to our clients. The rebound in equities so far this year has been led by developed markets around the globe, with the S&P 500 (U.S. large-cap stocks) entering a new bull market, or an increase of at least 20% from its October 2022 low, along the way. U.S. small-mid cap and international stocks are up 9-10% year-to-date. But the good news doesn’t stop with equities. Total returns for bonds are also positive so far this year. The big story in fixed income is the switch from price appreciation to income as the main return driver. Also, as we get closer to the end of the Federal Reserve’s rate hikes to fight inflation, our clients have new opportunities to take advantage of more income and higher return potential, especially in bonds.

Since the Fed started raising interest rates last year, clients who have been wary of market volatility or want to park cash for upcoming spending needs have found higher rates in money market funds and bank CDs. We have helped many clients utilize TD Ameritrade/Schwab’s money market mutual funds for those purposes, and we believe they are still appropriate for short-term spending needs. However, it won’t be easy for clients who consider their money market funds as investments to maintain those higher short-term rates as longer-term rates begin to increase and eventually normalize. Also, many market analysts expect the Fed to cut rates in 2024 to counter any recession. The intermediate-term, investment-grade, taxable U.S. Core Plus bond fund in our clients’ portfolios has increased its average bond maturity. The managers feel that now is a good opportunity to focus on longer-maturity fixed income. While the Fed could still raise rates higher, the current higher yields can provide a buffer against these increases. Research has shown that the time to shift cash into core fixed income is as the Fed approaches its peak policy rate (i.e., before it pauses or cuts). Please see Figure 1 below, courtesy of PIMCO: 

Over the typical 19-month hiking cycle, rates initially rise and cash (3-month Treasury bills) outperforms Core Plus fixed income. This occurred in 2022 when bonds had a negative return from the Fed’s aggressive rate increases. However, before the Fed reaches its peak policy rate, Core Plus fixed income allocations begin outperforming cash. As always, we are here for you if you have any questions.

Financial Planning Concepts


The recent SECURE 2.0 Act creates several retirement planning opportunities, particularly with Roth accounts in previously restricted traditional retirement accounts.

SIMPLE Roth IRAs and SEP Roth IRAs

Beginning in 2023, SIMPLE IRAs and SEP IRAs are allowed to accept Roth contributions.  SEP IRAs are funded exclusively by the employer (i.e., employees are not permitted to contribute to SEP IRAs); therefore, all employer contributions to a Roth SEP IRA are classified as taxable compensation to the employee.  In contrast, employer contributions to a traditional SEP IRA will not be classified as taxable compensation (i.e., employees will not be taxed on employer contributions to traditional SEP IRAs).

As previously mentioned in a prior Brown Financial Advisory Newsletter, in 2024 “ALL catch-up contributions for employees with incomes above $145,000 (i.e., indexed for inflation starting in 2025) will be required to be deposited into a Roth account.”  An exception exists for SEP IRAs and SIMPLE IRAs in that the new catch-up contribution rule does not apply to these accounts.

Matching Contributions in 401(k), 403(b), and 457(b) Defined Contribution Plans

Effective December 29, 2022, employers with 401(k), 403(b), and 457(b) defined contribution plans may provide employee participants in these plans the option of receiving matching contributions on a Roth basis.  Like employee elective Roth contributions (i.e., after-tax contributions), employer matching contributions paid into a Roth account on behalf of the employee will be classified as additional taxable compensation to the employee.

After SECURE 2.0 Act, the employer’s elective contributions and matching contributions are no longer limited to traditional accounts.  Provided an employer’s plan offers the SECURE 2.0 Act’s option of receiving matching contributions on a Roth basis, employees will have additional decisions to make as to the placement of their elective retirement contributions and the employer’s contributions.  Employer-provided retirement education to the plan participants will need to address these new accounts and help guide the employee in making the right allocation of any employee and employer contributions to the proper account type.

Rolling Section 529 Education Savings Accounts to Roth Accounts

After December 31, 2023, individuals that have a Section 529 Education Savings Account for at least fifteen (15) years can elect to make a direct rollover to the beneficiary’s Roth IRA.  SECURE 2.0 Act qualifies this trustee-to-trustee transfer on Section 529 account funds (and earnings on those funds) that have been held for at least five (5) years prior to the rollover distribution to the Roth IRA.  There are several requirements and limitations to this Section 529 strategy; however, it provides a nice financial planning solution for those individuals concerned about overfunding their children’s Section 529 accounts and the resulting penalties that would be assessed for non-qualified education distributions. 

Please contact us to discuss how these provisions may impact you.