Where we were-
As we closed out 2022, markets were in turmoil. Equities were down between 18-30%, bonds recorded their worst calendar by many standards, and 60/40 balanced investors felt the brunt of both, by having their worst calendar year since the great depression.
From an economic perspective, inflation was the main story of the year, which led the Fed to raise short-term interest rates to a near two-decade high. The combination of rising prices and higher cost of capital has created an immense strain on the global economy, which caused many investors to flee equity and bond markets in 2022. In short, it was a painful year on par with 2008 and 2002. Something not seen in a long time by the masses.
Where we are-
From an economic perspective, little has changed as we entered the first couple of months of 2023. However, we are still dealing with persistent inflation, elevated interest rates, and US corporations cutting their workforce. While this phenomenon began in the tech sector, it has slowly seeped into the rest of the employment market. It will be crucial to keep an eye on the situation as increasing costs of capital and deteriorating earnings take a toll on corporate America.
From an investment standpoint, the landscape has shifted significantly. We have witnessed a strong rebound in both equity and fixed income markets. With equity markets up by 8-15% and fixed income (bonds) up by 3-5%, investors have been able to recover a substantial portion of their losses from 2022. You read that right… a lot of the damage from last year has already been recovered. A fact the media conveniently forgot to mention. If you recall, much of the losses incurred in 2022 were due to the sudden rise in interest rates from 0-5%. This put tremendous pressure on the total return of bonds, as well as companies that heavily rely on borrowing to finance their operations. This interest rate movement, in combination with other factors, led to historically poor returns for individual stocks and bonds. As we say, “the giant reset button was pushed”.
What’s changed?
The baby who was thrown out with the bathwater, has returned to the tub… Bonds are now paying interest at a level we haven’t seen in two decades, and the “exciting/high-flying” sectors, who were destroyed in 2022, have come back (somewhat) from the dead (see chart below). These two combined have softened the blow for all the balance investors.
This chart is from a wealth of common sense as of 2/5/23.
Taking a deeper look into the individual names from this “exciting sector”, it’s pretty astonishing to see how bad the damage was and still is. Many of these stocks well surpassed depression like levels. Even with many of these recovering over 100% off of their bottoms, there is still a ways to go for the companies that will make it. It’s a very similar parallel to the 2000 market debacle and time will tell who makes it and who doesn’t.
This chart is from a wealth of common sense as of 2/5/23
What to expect from here?
Bullish Case-
- Inflation will be tamed. The Fed will win and restore normalcy.
- Forward returns from these levels are historically attractive.
- In the past, when markets go down for a sustained period of time, and negativity persists, it’s a good buying opportunity.
Bearish Case-
- S&P 500 Q4 GAAP earnings were down 20% year-over-year, the 3rd consecutive quarter of negative YoY growth and the largest decline since Q2 2020. (Sourced from Charlie Billieo)
- S&P 500 Q4 2022 sales were up 6.4% year-over-year, the slowest YoY growth rate since Q4 2020. However, US CPI was 7.1% higher than last year, meaning sales growth was actually negative after adjusting for inflation. (Sourced form Charlie Billieo)
In layman’s terms- the economy is slowing.
The Conclusion-
Markets are pricing in and adjusting for things 12 to 18 months in the future. What we see in the economy now was foreshadowed by markets last year. Conversely, earnings are backwards looking, and it’s impossible to know what inflation and rates will look like in the future. Remain patient and let things work themselves out.
Our positioning has not changed since last October. We remain overweight domestic equity, with a tilt towards low duration bonds and an underweighting to cash. We believe that the trend is similar to 2009 and markets will grind forward (as they have) well before the data confirms the economic realities.
Try your best not to be consumed by the short-term market moves and narrative. Markets are functioning properly and there is plenty to be cautiously optimistic about. The same pundits that were wrong in 2022 are equally wrong (so far) in 2023. As we say…. Don’t pay a lot of attention to the financial press.
As always, stay well and don’t hesitate to reach out with any questions, concerns, or issues you would like to chat about. We work for you and are here to support that.
Thanks,
Frank Vance
Retirement Capital Advisors
800 Battery Ave SE
The Battery, Suite 100
Atlanta, GA 30339
Office- 412-722-3795
Securities and Advisory Services offered through Commonwealth Financial Network®, member FINRA/ SIPC, a Registered Investment Adviser. Fixed insurance products and services are separate from and not offered through Commonwealth Financial Network
Disclaimer: The term markets, market, S&P 500, or any other reference to financial markets are notional concepts and not specific investment advice or suggestion. This article does not constitute specific investment advice, and none is implied or inferred. This article is for clients of Retirement Capital Advisors only. Investing entails risk of loss of principal and no guarantee of returns are inferred or implied