Happy New Year from Veritas! – we hope you enjoyed the Holidays!
As we enter the 1st quarter of 2023, here is the latest new, developments, and market performance…
In the news:
After a series of several rate hikes in 2022 (there were 7 in total) including four 75 basis point increases, the Federal Reserve (Fed) raised interest rates by only 50 basis points in December after seeing more evidence that inflation has peaked. The Fed continues to pledge that they will keep raising rates based on their various economic data points to keep cooling down inflation with the hopes of avoiding a prolonged economic recession. After strong years in 2019, 2020, and 2021 Markets struggled in 2022. Stocks staged a summer rally only to give it back, and then another rally in 4Q with the Feds smaller hike. Expectations for the next hike is for a smaller 25 basis points at the next Fed meeting in February 2023 while we have seen inflation data peak, signs of a softening labor market, and improved supply chains, the markets need to see more progress in these areas before they stabilize and begin to recover o in the Mid-Term elections, we saw the Republican take a slight edge in the House. The expectation is with a split congress we will see gridlock and no major policy shifts that would impact the markets and the economy.
Development to monitor:
The Fed and Inflation – investors are closely monitoring the Fed for any changes to their plans. If we continue to see data that shows inflation cooling, the Fed will continue will smaller rates hikes, then eventually stop raising rates altogether, and finally reverse course when they feel inflation is under control contributing to high inflation readings are healthy consumer spending, high food prices, high energy prices, high rents, Russian related sanctions, and strong labor markets/wage growth Markets are forward looking so as significant inflation relief continues from the above-mentioned contributors we expect markets to begin a sustainable recovery.
Recessionary concerns – if the economy slows too much we could enter a longer than expected recession in 2023. With the economy showing resilience in many areas, it is expected that we can “handle” a short or shallow recession.
Earnings – 4th quarter earnings were lower but still better than expected. If this trend continues in 1Q it should support current market valuations and a more favorable outlook.
Market Performance for 2022:
Equity Benchmarks 1
S&P 500 (US Large Caps): -18.1%
Russell 2000 (US Small Caps): -20.4%
MSCI EAFE (International Developed): -14.5%
Fixed Income Benchmark 1,2
ICE BofAML US Corp & Govt 1-10 Yr A-Rated (Bonds): -7.8%
Barclays US Aggregate Bond Index (Bonds): -13.0%
Fixed Income markets have been impacted by the aggressive rise in interest rates causing pricing pressures for bonds
Alternative Investment Benchmark 3
HFRZ Global Hedge Fund Index (Alternative Investments): -3.5%
While we are not happy with the 2022 market performance, we know that volatility and periods of market weakness are normal for long-term investors. Short-term headlines and the accompanying volatility can be unsettling. Keep your focus on longer-term goals as we believe the worst news is behind us. We are very pleased with the performance of our Alternative Investment Portfolio which produced positive results in 2022.
With the new year upon us, we are in the process of rebalancing portfolios to reflect what our current research has identified as the best growth opportunities for 2023 and beyond, with our continued emphasis on quality, risk management, and diversification. This approach has and will continue to produce long-term and sustainable investment results.
Some highlights for the new 2023 Portfolio:
Equities: In an inflationary environment with higher interest rates and expected volatility, we will be putting even more emphasis on our Blue Chip “Value” Stocks, dividend payers, and dividend growers . While we will continue to own Growth Stocks we will be more selective as they perform better in lower interested rate environments (like the years prior to 2022 when interest rates were near zero.) The Value Stocks have more stable earnings, stronger balance sheets and cash low, higher and more consistent/growing dividends for the shareholders, and have show to perform better in this environment as they did in 2022.
Fixed Income: While 2022 was one of the worst years ever for Bonds due to the Feds aggressive rate hikes, Bonds are now looking extremely attractive. Bond prices are expected to increase while the interest rates and yields have all moved upward (due to the rate hikes). This means total returns for bonds could be in the 5%+ range. We will be positioned to take advantage of this environment while emphasizing high-quality, income-producing investments.
Alternative Investments: As previously mentioned, this area was the highlight for 2022 and we expect their long-term success to continue. Where appropriate we will be looking to add to these positions on a client-by-client basis.
Looking ahead, I will continue to monitor all market and economic developments with a particular focus on the Fed and inflation levels, and make adjustments as needed.
As always, thank you for your trust and confidence in our Team!
- Source: Blackrock
- Source: ICE Index Platform
- Source: HdegeFundResearch.com (Returns through 11/30/22)
“The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful. No reader should make any investment decision without first consulting his or her won personal financial advisor and conducting his or her own research and due diligence.” Indices mentioned are unmanaged and cannot be invested into directly. Past performance is not a guarantee of future results.
