TOGETHER WITH  | Good Tuesday. Can you guess at what age you can start withdrawing money out of your retirement account (i.e., IRA, 401(k), Roths, etc.) without having to pay the early withdrawal penalty of 10%? a. 59.5, b. 65, c. 73. Follow the wave 🌊 below for the answer. Today's topics: - The changing winds of market sentiment
- The surprise crypto rally
- What's a 401(k) hardship withdrawal?
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MARKET OUTLOOK The Changing Winds of Market Sentiment | | | | Throughout 2020 and 2021, market patterns got exceedingly predictable as investors took advantage of a historically euphoric rebound — making it simpler than ever to play the winds of sentiment. 2022 rudely interrupted this. A bubbly period of meme stocks and easy multi-baggers came to an end at the hands of 12 months of chaos and red that left investors perplexed and drowning in analysis paralysis. Markets in review - Optimism: The price-to-earnings ratio (P/E ratio) is a metric used to value companies relative to their earnings per share (EPS), or the amount of profit produced per share. Theoretically, the higher this number is, the higher the likelihood it's overvalued. And in recent years, index-level P/E ratios show investors being exceedingly optimistic. At any given time, the S&P 500's P/E ratio hovered 10-20 points above its historical average of 16, zooming up to 40 at the end of 2020. This observation is just a microcosm of the overarching trend that we rode throughout 2020-2021, and the big idea is simply that it was easy to trade when the market's only direction was upward. Now it's back to around 20.
- Uncertainty: Good news for the economy has become bad news for the markets, indicative of higher inflation. To further complicate things, we introduced geopolitical conflict, rapidly rising rates, rising bond yields, and recession fears to the mix. Simply put, there are way too many things weighing on the minds of investors at the moment, leading to an analysis paralysis tug of war on the markets.
- Sentiment: Investor sentiment is moving the markets. In recent weeks, primary measurements of this like The Fear & Greed Index and AAII's investor sentiment survey have turned upward as markets rallied into 2023. The F&G Index has ticked up into "greedy" territory, while the AAII Investor sentiment survey has turned increasingly green as 31% of investors are feeling bullish about the next 6 months.
- Volatility: The $VIX is an index created by the Chicago Board Options Exchange specifically for tracking volatility within the S&P 500 index. Without going into the complicated methodology that would easily take a whitepaper to explain, the VIX tracks expected volatility within the index, and the higher it ticks, the more volatility the market anticipates. 12-20 is a relatively normal range, while over 20 is a high volatility rating. The $VIX volatility index is down almost 14% over the last month and roughly sitting around 20 at the time of this writing.
The bare-bones reality Does that mean markets are destined for a big, beautiful rebound year? Not necessarily. Timing the market is still impossible as we fight inflation, recession fears, job losses, and more. The markets are in a constant state of change and transition, and these last few years are simply a more extreme example of this. For at least the next 12 months or so, there's no doubt that much of the same will continue, and we can only hope the waters smoothen out sooner rather than later. Take this related lesson on this topic and earn Dibs 🟡 while you're at it: | | | |
CRYPTOCURRENCY The Surprise Crypto Rally | | | | Crypto has had a rough go of it for over a year now. Leading projects were down tremendously in conjunction with a litany of industry turmoil and fiascos, and even die-hard followers came into 2023 without much short-term hope for a recovery. Regarding macro conditions, not much has changed, yet crypto has been on the mend this month. But why? What's changed for crypto - The recap: Crypto markets plummeted throughout 2022 as a spree of bankruptcies and controversy swamped the landscape. Industry leader Bitcoin fell 65% over the year, Ethereum dropped 68%, and many other top projects were down more than 75% from their late 2021 highs.
- Recent moves: After falling 32% and 27% from July to their recent low points in November, Bitcoin and Ethereum have already put up gains of 38% and 35% year-to-date.
- Quiet catalysts: While there have been no major catalysts responsible for this price action, there are some subtle players moving coins. For one, crypto markets have become increasingly correlated with the stock market, and are also responding to economic catalysts like lower inflation. Elsewhere, recent data shows that short positions on top coins like Bitcoin have been dissipating. And "whales" — individuals or entities that own large quantities of a specific cryptocurrency — have been buying up as the average transaction size has gone from $700 to now $1,100.
- All-in-all, the most simplistic reason for all of this rallying is that the crypto faithful haven't given up hope, and the crash-worthy catalysts of 2022 have created a bit of a crypto relief rally as bulls grow frustrated with the monotony.
The view ahead Crypto has been "officially" declared dead more than 400+ times now, so it's getting increasingly difficult to count it out even during the direst of straits. Heading into 2023, the industry finds itself on the mend from some disastrous events, and any recovery would be deemed a win. It remains uncertain when the next major crack will surface. More progress is still needed and investors will likely remain circumspect for the foreseeable future. Take this related lesson on this topic and earn Dibs 🟡 while you're at it: | | | |
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FINANCIAL PLANNING What's a 401(k) Hardship Withdrawal? | | | | 401(k)s are one of the most popular ways to save and for good reason. Though they're meant for retirement savings, they can also serve as a swiss army knife of sorts if needed. One of those tools included in that package is the 401(k) hardship withdrawal, an invaluable asset available to account holders during times of exceptional need. 401(k) hardship withdrawals 101 - What is it? A 401(k) hardship withdrawal allows you to take funds out of your account in the event of a qualified emergency. Hardship withdrawals can be used for lots of different needs such as emergency medical expenses, permanent disability, separation of service, and more. A majority of employers that provide retirement plans will allow and facilitate these transactions.
- What about the penalty? Early 401(k) withdrawals (before the age of 59.5) are usually subject to a 10% penalty on top of the normal taxes you'd owe on those funds, but hardship withdrawals are often exempt depending on their use. For example, hardship withdrawals used for medical expenses that exceed 7.5% of your adjusted gross income (AGI) are penalty free, and so are things like permanent disability, terminal illness, and disasters. What's not exempt? Tuition, preventing evictions or foreclosures, funeral expenses, or the purchase of a primary residence.
- A nice option, but not ideal: Even without the penalties, withdrawing from your retirement account (especially a pre-tax account) should never be your first choice. Not only will you owe taxes on the money, but you're also taking from your future self and giving the markets less cash to work with. A hardship withdrawal is a suitable backup plan to have, but best avoided by having things like a well-established emergency fund in place.
Take this related lesson on this topic and earn Dibs 🟡 while you're at it: | | | |
🌊 BY THE WAY | - ⏳ Answer: 59.5 years old. You can avoid the early withdrawal penalty by waiting until at least age 59.5 to start taking distributions from your U.S. retirement account.
- 💰 FTX debtors identify $5.5 billion of liquid assets in 'Herculean effort' (The Block)
- 📉 ICYMI. The pitfalls of loss aversion (Finny)
- 🏠 Home prices hit a record high last year (CNN)
- 🏦 Tax season kicks off this week with boosted IRS workforce, and new technology (CNBC)
- Finny lesson of the day. An active vs. passive style of investing is a hotly discussed topic when it comes to investing. Here's a quick 1-minute refresher on the topic:
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| Finny is a financial wellness platform for employees. The Gist is Finny's twice-a-week (Tues & Thurs) newsletter covering personal finance, market trends and investing insights. The content team: Austin Payne, Carla Olson, Chihee Kim. Finny does not offer investment and stock advice. Please support our brand sponsor—Sleek—as they make rewards on our platform possible. If you're is interested in sponsoring The Gist, please reach out to us. And if you have any feedback about this edition or anything else, please email us. | | | | | | | |
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