Five 2023 Financial Events and the Lessons They Reinforced

Five potted plants are lined up, four of them cacti and one flowering plant.

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published 26 December 2023

Coming into 2023, a lot of very smart people made a lot of very scary predictions about the economy and about the markets. Sitting on the other side of it, I'm sure glad they were wrong. It caused me to look back on the year to see what lessons we can learn from what did and did not happen in 2023. Below is my list of the biggest financial stories of 2023 and the timeless lessons they reinforced.

Event #1: Aggressive interest rate increases to combat inflation.

There were three main drivers of inflation: supply chain issues caused by COVID, the war in Ukraine and a domestic labor shortage. While it’s easy to highlight just how much interest rates peaked, it’s important to remember how long we were in a zero-rate environment. We grew accustomed to being paid 0% in our checking account, and 3% mortgages became the norm. But, alas, those things are not normal.

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If you’re sitting at a major bank with a major balance, you are missing out on major interest. Many of the most popular money market funds are paying 5% interest. That can change at a moment’s notice and investing does involve some risk, but beyond what you need in an emergency fund, you deserve to be paid to lend your money to the bank. After all, they are certainly charging more when they lend it out.

The Roth conversions, capital gains recognition and taxable estate-reduction strategies among certain clients follow the same pattern. If we know tax rates will increase for you in the future, we are taking advantage of today’s lower tax rates. Additionally, the individual side of our current tax code (the Tax Cuts and Jobs Act) is set to expire Dec. 31, 2025. If nothing changes before then, the marginal income rates would move up, and the estate exemption would be cut in half. Depending on your situation, it may make sense to make tax moves before that deadline.

In March, it felt like the sky was falling when Silicon Valley Bank and Signature Bank failed, followed by the collapse of First Republic Bank. Were we entering the recession that so many economists had promised? Was it a repeat of the 2008 Global Financial Crisis? Both were reasonable questions. The reality is that the three banks involved all had an unacceptable amount of interest-rate risk because of the industries they dealt with and the investments they made. They were the first high-profile victims of the Fed rate increases.

In 2017, my wife and I took a clipper cruise through the Greek islands. My guess is that the next-youngest passenger was a woman we had dinner with about halfway through the trip. I learned that she had retired from Apple in her 40s. I also learned that she was able to do that solely because of the AAPL stock acquired through her tenure. People are quite forthcoming with their personal finances when they learn what business I am in.

Wealth is often created from a concentration in one or a few things. It could be your business, your company’s stock, a real estate portfolio. It’s likely not where you want your money while you’re living off of it in retirement. Think Eastern Air Lines and Pan American Airways in 1991, Enron and PG&E in 2001, and Lehman Brothers and Washington Mutual in 2008. You get the picture. Even the biggest and most dominant companies today may not exist tomorrow.

I am, by nature, an optimist. The debt situation, however, challenges that attitude. Raising the debt ceiling does not solve our debt problem; it merely allows us to keep borrowing to finance the federal budget. That budget for 2024 is estimated by the CBO to be about $6.4 trillion. We have enough income to cover only 75% of that expenditure, according to the Congressional Budget Office. Therefore, we must borrow $1.6 trillion to keep the lights on.

Now, let’s put this in a different context. Imagine your monthly expenses total $10,000. The problem is your income is only $7,500. You put the additional $2,500 on a credit card. When you approach the limit, you call your credit card issuer and ask them to increase it. Before long, it becomes a spiral you cannot escape. You see where I’m going with this … Once again, I am an optimist, but this is an issue that needs addressing.

The movie I, Robot came out nearly 20 years ago. Artificial intelligence is not a new story. In November 2022, OpenAI made GPT-3, aka ChatGPT, free to the public. By January 2023, it had surpassed more than 100 million users. For the first time, we got a taste of just how powerful and useful these tools could be. Even in its infancy, AI seemed to spell the end of humans doing mundane white-collar work.

But let’s shift our perspective. Imagine you have an assembly line of 15 steps. The entry-level folks have steps 1-5, mid-career get 6-10, and the senior folks are tasked with quality control in 11-15. Now imagine AI takes 1-5. Everyone else shifts up. So, what do the senior people do? They innovate. They think of, and produce, more impactful products and services. They solve the bigger problems. They move society forward. That is the upside here.

Innovation creates upside beyond what we thought was possible. Technological advancements in health care didn’t replace doctors, physician assistants or nurses. They led to the discovery of vaccines, antibiotics and surgical techniques that have dramatically reduced mortality rates. Cue Ozempic ;). Technological advancements in agriculture didn’t replace farmers; they allowed us to feed a growing global population.

In December 2022, 70% of economists polled by Bloomberg predicted a recession in 2023. It seemed to be the Fed’s intent: Drive up rates so dramatically that companies will be forced to make layoffs. Once unemployment rises, consumers stop spending, prices come down with demand, and we find ourselves in a recession. The problem (only with the prediction, not an actual problem): Unemployment barely moved. Our labor market flexed its muscles, and consumers kept their wallets open.

There is war in the Middle East and Europe. It seems there is a new, devastating weather event every two weeks. Even with inflation largely tamed, things are still more expensive than they were before the pandemic. Deaths due to drug overdoses have skyrocketed. And yet, unemployment remains near 50-year lows. And, as of December, S&P 500 earnings have grown year-over-year by almost 9%. Our clients are largely reliant on the performance of U.S. companies. The longer you stretch out that time horizon, the safer that bet is. My opinion: Don’t bet against the U.S.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

After graduating from the University of Delaware and Georgetown University, I pursued a career in financial planning. At age 26, I earned my CERTIFIED FINANCIAL PLANNER™ certification. I also hold the IRS Enrolled Agent license, which allows for a unique approach to planning that can be beneficial to retirees and those selling their businesses, who are eager to minimize lifetime taxes and maximize income.