Review
In our January 2022 newsletter, we anticipated inflation, and the Federal Reserve would dominate the headlines. How true that turned out to be. 2022 saw inflation hitting 40-year highs and the Federal Reserve raising interest rates by 4.25%. For only the third time since 1990, both stock and bond markets declined the same year (2015 & 2018). There was nowhere to hide with the Dow Jones, S&P 500 and Nasdaq down roughly 7%, 18% and 32% respectively and bond indexes putting in their worst year in history.
Outlook
Only four times since 1928 has the S&P 500 index been down two or more years in a row with all instances due to an extraordinary event:
- 4 years in a row: Great Depression (1929-1932)
- 3 years in a row: World War II (1939-1941), Dot Com Bubble & 9/11 (2000-2002)
- 2 years in a row: 1970’s Oil Crisis (1973-1974)
The underlying question for 2023 is, does the Federal Reserve raising interest rates 4.25% in one year, Covid effects and Russia invading Ukraine constitute extraordinary events resulting in multi-year declines?
Our outlook is we will continue to see a volatile, data dependent first half of the year as markets swing on corporate earnings revisions, recessionary conditions, and Fed commentary over future rate hikes. Our belief is the US consumer will remain strong and the effects of the Fed fighting inflation with prior year rate hikes will allow the US to avoid a major recession. We remain positive that economic conditions will begin to clarify in the second half of the year which may allow equity markets to see positive returns. With inflation showing signs of easing, we predict the Federal Reserve will end interest rate hikes in 2023. With stable interest rates and higher yields, the bond market has become attractive and should produce both positive returns as well as higher income. Regardless of whether equity markets produce positive return for the year, we believe diversified portfolios will hold up well with the recovery in the fixed income portion of portfolios.
Equities
We may see more volatility in equities in early 2023 as investors digest corporate earnings announcements and Federal Reserve commentary. We will be opportunistically looking for declines in the coming months to take advantage of what we believe will be a clarifying end of 2023.
Fixed Income
Fixed income is becoming increasingly attractive as we get towards the end of the Fed’s interest rate hikes. A pause in hikes will allow bond prices to stabilize and yields are now at attractive levels vs dividends on equities. This space should hold up well versus any volatility in equities during 2023.
Alternatives
Our commodities position was an outperformer in 2022 as this is historically one of the best performing sectors in an inflationary environment. We continue maintain a broad-based commodity position in client portfolios but may look to reduce this position based on declining inflation.
As always, I stress that in this ever-changing political and economic environment, sensible diversification is the key to weathering market uncertainties.
Jason M. Vavra, CPA, PFS
Email: jvavra@vcm-wealth.com Website: www.vcm-wealth.com Twitter: @VavCap
Disclaimer
The information contained herein is not considered an offer to buy or sell any securities referred to herein. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors. There is no guarantee that the figures or opinions forecasted in this report will be realized or achieved. Past performance is no guarantee of future results.
