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Dear Friends,
Although 2022 will be remembered as one of the worst stock and bond market return years in decades, we appreciate your patience and support of us as we enter 2023. Due to issues of inflation, interest rate increases, Federal Reserve monetary policy, and current events, this past year has been challenging for all of us – but we will continue to try our best and get through this together with you.
Below, you will find the results of the markets at the end of 2022:
S&P 500: -18%
Nasdaq: -30%
Barclays (Aggregate Bonds): -13%
Some of the major issues we’re keeping an eye on are whether equity markets have priced in lower corporate earnings, the possibility of higher unemployment, the impact of consumer spending on the economy due to inflation, signs of recession, and understanding individuals spending more on basic necessities – including food and gas.
As many of you know, inflation has been the hot topic this past year. We continue to monitor and determine whether inflation has peaked as we enter the new year. It’s possible we may see the economy and wage growth slow in the months ahead – including accelerated layoffs as recent reports suggest, and whether the core components of inflation will start to cool (which we have started to witness in recent weeks).
The sooner the Federal Reserve can curtail interest rate increases, the sooner we can hopefully avoid going into a deep recession. An important issue is whether the Federal Reserve will continue to tighten rates too much too quickly. So far, this hasn’t happened and hopefully will not. Chairman Powell and the Federal Reserve have been steadfast in their commitment to bringing down inflation since mid-2022, and this has helped paint a picture of clarity for the markets.
The good news from a historical perspective is stocks have followed years like 2022 with positive returns, and we’re cautiously hopeful this is the case for 2023. It may be reasonable to assume that current market valuations of stocks could support a more positive outcome for this year if historical perspectives remain true.
At IEM, we updated our investment models a few times last year (depending on the model) to help ease the potential impact of market uncertainty on client portfolios. As an example, heading into 2022 with a potential rising interest rate environment, we shortened the duration of the fixed income within our portfolios because in general, shorter duration bonds will hold their value better than longer duration bonds in this type of environment. Then – toward the end of 2022 after multiple interest rate increases – we decided to extend the duration on the fixed income side to benefit from the higher yields.
In the meantime, the labor market continues to hold steady for now – including signs of strength at the end of the year, when the November employment report revealed 263,000 jobs added against an expectation of 200,000. The unemployment rate remained quite low at 3.7%, which was down from the beginning of 2022.
We wish you all a wonderful, safe, and happy beginning to this year. Please contact us if you would like to speak about your specific financial situation.
Sincerely,
Ted Smith, Founder & Chairman, RHU, CLU®, ChFC®
Danica Goshert, Senior Vice President, CFP®, CDFA®, AIF®, MBA
Dan LaNasa, Associate Vice President, CFP®
Charles Stewart, Associate Vice President, CFP®
Disclosure: Certain sections of this commentary contain forward-looking statements based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.
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