Market Commentary: January 2023
As I look back on the last year, I would like to start with saying thank you. Thank you for trusting us to help you along your financial journey. We count it as a blessing to be able to serve you. This year was very eventful, with many trials and tribulations. I would be remised if I didn’t acknowledge that. I know this year was a struggle, but I am optimistic that we all are setting the foundation for future successes. With those acknowledgements out of the way, let’s look back at the year in markets.
The year started off at or near all-time highs for stocks. The S&P 500 started around 4,800. Investment banks and market commentators were giving predictions for the S&P 500 to end 2022 anywhere from 5,300 to 4,400. For context, we finished the year at 3,840, giving further credence that predictions are difficult at the best of times and useless in the worst. Market participants were expecting markets to continue to push higher in 2022. A few main themes that materialized in the first quarter would be persistent through the year to halt markets: sticky inflation, Russian war, and Federal Reserve rate hikes. All of these factors led to the worst year ever for the 10-year US treasury, down 16.5%. When you combine bad fixed income returns with the S&P 500 being down roughly 18%, you get a 60/40 portfolio of US stock/bonds down 17.5%. Now hopefully, you were able to position in some of the bright spots of the market, even if they were few and far between. Energy was the only sector in the S&P 500 higher on the year, and managed futures were up nicely on the year. Besides those two spots, it was a pretty rough year in traditional assets.
So, now let’s turn our attention to the future. Remember all those optimistic predictions from the beginning of 2022? Well, now the opposite is being said. The range of predictions are from 4,300 to 3,725, with the majority around 4,000. In addition to these very lackluster return predictions, almost everyone is expecting a recession in 2023. I must bring up the obvious, the same people that were telling you 2022 was going to be great are now saying 2023 will be bad. They may be right about 2023 but they definitely were not about 2022. So, what are we as investor to do? The right answer in my opinion is to do the boring. Continue to invest in a process driven, diversified portfolio. The whole reason for diversifying is to make sure you have some of the big winners and not a lot of the big losers, even in years like 2022 where the winners were hard to find. If we look at those three drivers of 2022 (inflation, Russian war, Fed rate hikes), inflation has started rolling over and the Federal Reserve has stated that aggressive rate hikes no longer feel necessary. I make no guesses about what will transpire with the Russian war. So, with those outgoing concerns, the new ones appear to be recession and earning declines. I don’t want to be dismissive of bad things happening, but there is the old adage, the market climbs a wall of worry. I don’t claim to have any secret knowledge about the future, but I do believe that you can position a portfolio to be prepared for whatever comes. With the end of a trying year, it is time to look ahead, acknowledging the present concerns but positioning as best we can for the future.
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