Q4 2022 Investment Commentary and 2023 Outlook

Well, 2022 is over, and we are glad. Surging interest rates and the battle with inflation resulted in the worst year for stocks and bonds since 2008. 

Despite 2022 being a bad year for stocks and bonds, there were silver linings. First, we should be closing in on the end of the interest rate increases that were initiated last year. At the December meeting of the Federal Reserve, the Fed said that expected rate hikes could take us above 5%, and we are already around 4.375%. The hawkish commitment to continued interest rate vigilance is what muted the typical “Santa Claus rally” in December. These rate increases have also occurred at the European Central Bank and the Bank of Japan. Most economists feel that we have been in a moderate recession for a while, and we will most likely begin to feel better in the second half of this year. Energy was far and away the leading gainer in 2022. The continued Russia/Ukraine war certainly bolstered energy prices, and we wouldn’t be surprised to see that trend continue into this year. 

Going forward into 2023, the recovery from this level of inflation will take time. Having said that, our prognostication is that we will begin to emerge from the negative returns and slow growth later in the year. Since Beijing ended its “Zero-Covid” policy, economic upticks are beginning to take place. Therefore, we feel that while the Fed is still hawkish, there is good reason to believe that rates may have peaked. The stock market performance typically reflects sentiment about what’s to come in the future, not what happened in the past. We believe that the market is signaling better days are ahead. Volatility will still be here in the near term. While growth and earnings are expected to decline in 2023, many of these assumptions are already priced into stocks. If our American companies are as resilient as we think, it could provide a nice spark to this year. 

Bonds should be poised for a rebound this year. Here’s why: first, yields are the highest in years. Second, the Fed has signaled that the bulk of money supply tightening is over. Third, it seems likely that the CPI has been coming down; therefore, it would make sense for inflation to decline.

In summary, 2023 is the year to put fresh money to work in quality. As a firm, stocks that have characteristics often described as value-oriented, comprise more of our holdings anyway. We would recommend adding to quality. We are buying companies with liquidity, solid balance sheets, positive earnings and strong free cash flow. If we are able to pick up some higher yielding dividends in this area, we will. Investment grade bonds in maturities under 7 years is where we want to be positioned in the fixed income world. Lastly, I heard a friend of mine say the other day, “the stock market is a place where the patient make money from the impatient”, we continue to recommend patience in 2023.

Happy New Year!!!