Investing, in most cases, is best approached with a long-term perspective, however assessing near-term risks in the market is vital in evaluating the health of financial plans as well as preparing clients for what to expect for the coming year. As we close the door on 2022 and look on to 2023, we wanted to recap the past year and provide our team’s thoughts on the market for the year ahead.
Going into 2022, market expectations were for inflation to moderate on its own, to see 2-4 interest rate hikes from The Fed and China Covid restrictions to ease. Based on the discrepancy between market expectations and reality, we can begin to make sense of last year’s poor market performance. (Data from RJ 2022 Equity Market Outlook)
Instead, what transpired was inflation as high as 9.1% year-over-year, 17 interest rate hikes (0.25% increments) to combat high inflation, and a zero-covid China economy. On top of that, we also saw increasing geopolitical tensions, putting upward pressure on oil prices and continued supply chain bottlenecks with the Russian invasion of Ukraine. With that, the US markets saw negative returns in both stocks and bonds for 2022. The S&P 500 was down 19.44% (data from factset) and the Bloomberg US Aggregate Bond Index was down 15.13% (data from factset), and for a balanced 60/40 portfolio, it was the third worst year on record being down 16.9% (data from NYU).
2023 Equity Expectations
Looking at equity markets, we wanted show Raymond James Equity Portfolio & Technical Strategy’s price targets for the S&P 500 this year. Please see below:
While these projections can be helpful in building a thesis for market direction, it is important to know that these estimates are based on several variables and expectations that can change quickly.
We believe corporate earnings will come into focus this year as the market shifts away from inflation/Fed to the economic/earnings damage from aggressive monetary policy. It is our view, based on several factors, that corporate earnings will decline in the first half of the year. We believe some of the earnings contractions have already been priced in at current market levels, but we are treating market rallies as suspect in the near-term (3-6 months) and believe it is possible for a retest or undercut of the 2022 lows.
It is important to remember that markets are forward-looking and discount the future, so while we could see a decline in corporate earnings this year and a potential recession, it is our view that the market will be looking ahead to the easing of restrictive monetary policy from The Fed, which could help stimulate equity prices and growth into year-end.
A question we are asked a lot: why not sell if we think a recession is coming?
(Data provided by Bloomberg)
2023 Fixed Income Expectations
Looking at fixed income markets, we wanted to provide some expectations going into 2023. As mentioned earlier, 2022 proved to be the worst year for bonds in the history of the Bloomberg US Aggregate Bond Index which started in 1976 (data from Bloomberg). The negative performance in fixed income was driven by the one of the most rapid rate hike cycles from the Federal Reserve. Bond prices have an inverse relationship to interest rates, so as The Fed increased rates to combat inflation, bond prices fell. What made the negative move in bonds so aggressive and quick, was how quickly rate hike expectations changed from The Fed. As we mentioned earlier, it was expected for 2-4 rate hikes going into 2022 and we finished the year with 17 (0.25% increments).
The silver lining to higher rates is that the “income” portion of fixed income now carries some weight! Which means investors can be paid a more significant income stream from bonds than we have seen in the past 5+ years. On top of this, should we see a recession or a prolonged period of contracting corporate earnings, we would expect bond prices to rise as The Fed cuts interest rates to stimulate growth (lower rates, higher bond prices). This presents, in our view, an attractive entry point to invest in bonds with higher income and potential for capital appreciation.
- Bonds – it is our view that bonds provide an attractive opportunity for investors with cash. We feel as though the ability to lock in a higher income stream than was available just 12 months ago and the potential for capital appreciation is attractive. See below info to put it into context: (data from Macrotrends)
- 10-year treasury annual yield, year open 2023: 3.79%
- 10-year treasury annual yield, year open 2022: 1.63%
- 10-year treasury annual yield, year open 2021: 0.93%
- Equities – it is our view that equities will continue to be volatile over the next 6 months and we recommend adding during pullbacks and being cautious during rallies. We favor quality, dividend-oriented stocks, but believe there are some attractive entry points into the growth space at these levels. Our recommendation is to be a buyer of equities over the next 6 months. While you may not time the bottom exactly, markets tend to turn quickly, and the average bull market provides a return of 152% (data from Raymond James)
- Cash Management – As the Fed Funds rate currently sits at 4.25-4.5%, it has created great opportunities for investors with excess cash. For short term needs, there are money market funds paying close to 4% and 1-year CD rates are at 4.5% (data from Raymond James)
After a challenging 2022, we encourage you to review your allocation and investment strategy to best position your portfolio for the years ahead. Of course, should you have any questions regarding your financial plan or portfolio, we’re always happy to help!
Best wishes for the New Year!
Gary, Chris, Will, Matt & Derrick
Treasury yields: https://www.macrotrends.net/2016/10-year-treasury-bond-rate-yield-chart
Bond performance: https://www.forbes.com/sites/qai/2022/09/22/is-this-the-worst-year-ever-for-bonds/?sh=4586f6b32b4f
The views expressed herein are those of the author and do not necessarily reflect the views of Steward Partners or its affiliates. All opinions are subject to change without notice. Neither the information provided nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Past performance is no guarantee of future results.
Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions.
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