2023 Market Update

A Look Back at 2022

 2022 may be a year we will all quickly try to forget from a financial perspective. To describe it as challenging would be an understatement. At the cost of re-opening recently healing wounds, here are some highlights:

1. Russia’s invasion of Ukraine caused an energy crisis in Europe that eventually rippled world-wide and sent energy and commodity prices through the roof.
2. Stocks dove. After returning over 26% in 2021, the S&P 500 had fallen nearly 25% by June before rebounding slightly and ultimately closing the year down 18.11% (it’s worst performance in 14 years). The Russell 2000 had a similar fate and lost 20%. Overseas was no exception. The international index was down about 16% and emerging markets about 20%.
3. Bonds did not offer a safe haven. The U.S. bond market saw its worse performance since the 70’s and lost over 13%.
4. Inflation ran rampant. The CPI measured inflation at 6.5% for 2022. In an effort to combat inflation, the Fed implemented numerous rate hikes which left the federal funds rate target at 4.25%-5.00% to close the year.
5. Economic growth lagged. Real GDP growth was 2.1% compared to 5.9% in 2021. The historical average has been 3.13% since 1948 for reference.

 

What to Expect for 2023

 The Fed Is setting a target inflation rate of 2%. We have a long way to go to get there, and there is concern that policies designed to cool inflation could lead to a recession. The Federal Reserve recently raised rates another 0.25% and gave little indication rate hikes are over. The Fed had previously indicated a target range of 5-5.25%, which would align with two more hikes from where we are now. Fed chair Jerome Powell has said, “I wouldn’t see us considering rate cuts until the committee is confident that inflation is moving down to 2 percent in a sustained way.”

When interest rates climb, they put pressure on the economy. One area in which this is easily seen is housing, which comprises about 15% of GDP. Over the course of 2022, housing starts declined about 30%. In general, housing is much less affordable than a year ago, with mortgage rates more than doubling year over year. A slowdown in housing can be a sign of a wavering economy. When housing costs go up, American families have less to spend and need to tighten the belt. The personal Consumption Expenditures Price Index 12 month percent change dropped to 4.7% compared to 5.4% in 2021. Consumers are spending less, which puts drag on the economy. In addition, new factory orders are falling, and inventories are starting to rise.

According to an article on bankrate.com, “A December survey from business data firm the Conference Board showed 98 percent of CEOs see a recession within the next 12-18 months. Bankrate’s own survey of economists put the odds at 64 percent for 2023.”

With all this said, the economy is showing resiliency. The December jobs report showed 223,000 new jobs added. The unemployment rate also fell to 3.5%. It appears Inflation could have hit it’s peak, and if the trend continues to move in a positive direction, it could significantly lower the risk of recession. It seems possible a recession could be avoidable altogether when just two  months ago this did not appear likely.

Inflation and the Fed interest rate policy will continue to be a focus of 2023. How this progresses will have a major say in how the story of the 2023 market is told.

From what we have seen, most pundits are still calling for a rocky start to the first half of 2023 before possibly stabilizing by year end. Most seem to agree a recession is still possible, but a smoother landing than originally anticipated may be in the cards. The worst may be behind us, and the outlook over a slightly longer period of 3-5 years appears to be strong. It’s important to note that the average recession  only lasts 17 months while a bull market averages 3.8 years. So no matter what, time in the market is more important than attempting to time the market.

 

 

Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Past performance does not guarantee future results. Investing involves risk, including loss of principal.

Sources:

1. https://www.cnbc.com/2023/02/01/fed-rate-decision-february-2023-quarter-point-hike.html
2. https://www.bankrate.com/banking/federal-reserve/fomc-what-to-expect/
3. https://www.cnn.com/2023/01/02/economy/recession-or-soft-landing-in-2023/index.html
4. https://www.avantax.com/about/articles/mid-week-market-minute-2-1-23
5. https://tradingeconomics.com
6. https://www.kiplinger.com/investing/600938/bull-markets-10-things-you-must-know