Insights

The markets experienced a reversion to the mean in 2022. After several years of above average growth fueled by easy money policies and stimulus packages, the bill finally came due. The S&P 500 finished the year down (18.11%). The NASDAQ, which is more heavily weighted towards growth stocks, suffered a loss of (33.10%) for the year. Typically, when the stock market is not providing positive returns for investors, the fixed income market can offer safety. Unfortunately, 2022 was the rare year that everything moved together, and in this case that was down. The Bloomberg Gov/Corp Intermediate Index finished the year down (8.23%).

The biggest cause of the selloff in both the equity and fixed income markets was the resurgence of inflation. Inflation peaked at a four decade high in June with a 9.1% print on a year over year basis. The Federal Reserve started the year with the idea that inflation was transitory, but finally abandoned that stance in July with the first of four interest rate increases. By the end of the year, the Fed raised short-term rates by a total of 2.75% and appears to be committed to additional increases in 2023.

As we move into the new year, investors are attempting to discern if the interest rate tightening will lead the economy into recession or if the Federal Reserve can pull off a soft landing, meaning they stamp out inflation without sending the economy into recession. With the labor market still strong, it will be a delicate balancing act to destroy job openings without destroying jobs. The biggest issue for the Fed is once inflation gets a foothold, it is priced into labor contracts and wage expectations. This makes it very hard to bring inflation back to acceptable levels.

We have not seen a significant impact on corporate earnings from the inflation issue thus far; however, we expect earnings will suffer with the fourth quarter reports beginning in late January. Inflationary environments tend to favor value stocks over growth stocks as well as consumer, health care and energy sectors over information technology and consumer discretionary sectors. With that in mind, we will look for opportunities in value names in those sectors as we move into 2023.

It took more than six months for the inflation problem to develop, and we expect that it will take more than six months to correct the issue. We believe the Federal Reserve will stay the course to bring inflation back to a more acceptable level but perhaps not the 2% target that is being stated. Volatile markets always provide opportunities, and we will look for ways to take advantage when those opportunities present themselves.

Please feel free to reach out to us with any questions. Our team wishes you a healthy & prosperous New Year!