2023 Midyear Planning Outlook

June 2023

The Wells Fargo Investment Institute (WFII) "2023 Midyear Outlook: Navigating End-of-Cycle Turbulence" report highlights several factors that may have an impact on your investment planning decisions in the year’s second half. We have identified three of these factors that present potential planning risks and opportunities:

Interest rates are forecasted to continue to rise with WFII anticipating one further increase in the federal funds rate before year-end. Understanding how higher rates are likely to affect you and what to do when rates change is important as you seek to meet your financial goals.

A recession in the second half of 2023 looks likely. WFII is already seeing a slowdown in manufacturing and housing data. The good news is the analysts believe the economic contraction will be moderate and the U.S. will see a return to growth in 2024.

Declining equity values may accompany the economic slowdown over the coming months as earnings growth slows. WFII anticipates a rebound in 2024 as the economy begins to recover.

Now is the time to consider wealth planning strategies to help protect your wealth and take advantage of opportunities as these late-cycle economic and market trends play out.

What planning steps can you take today?

With this information in mind, here is an actionable checklist of current planning opportunities:

  1. How will higher interest rates impact your income? Are you nearing retirement or in retirement? Your bond portfolio will need to be carefully managed to help enable you to take advantage of higher interest rates and help protect you from future rate fluctuations as you seek to meet your income needs. WFII analysts recommend a barbell strategy where you invest in both short- and long-term bonds to help optimize returns and manage risk. Weigh your investment options with your advisor to determine whether such a strategy is right for you and discuss other income-generating strategies.
  2. How can a slowing economy help your planning strategies? If equity values decline as forecasted, the answer may lie in taking advantage of lower asset prices for long-term tax planning. For example, if you think you’re likely to be in the same or a higher tax bracket when you retire, you may want to talk with your advisor about converting your Traditional IRA to a Roth IRA. Converting allows you to reposition your current tax-deferred Traditional IRA to a tax-advantaged Roth IRA by paying federal and possibly state income tax (but without the IRS 10% additional tax for taking early or pre-59½ distributions on the taxable amount of the conversion. The benefit of a Roth conversion is qualified distributions are tax-free — unlike distributions from Traditional IRA. Qualified distributions, which are tax-free and not included in gross income, are when your account has been open for more than five years and you are at least age 59½, or as a result of your disability, or using the first time homebuyer exception, or taken by your beneficiaries due to your death.
  3. Can depressed asset prices offer other opportunities? Are there possible tax advantages in gifting assets when their valuations are lower? The answer is yes. There are several strategies you may want to discuss with your advisor. These may include gifting stock to a charity or family member as part of a wealth-transfer strategy. In both cases, the recipient may benefit more if the assets appreciate. A family member may also pay less tax. 

Some of the planning strategies referenced are complex; we recommend discussing them with your tax, legal, and investment professionals before implementing them