By Morgan Christen
CFA, CFP, CDFA, CEO and CIO
Welcome
Believe it or not, in May of 2022 California, ruled that bumblebees are considered fish.
Should we chalk it up to crazy California, or par for the 2022 course? It may sound fishy (sorry) but it was done to protect bees under the Endangered Species Act.
Beyond bees, 2022 ended up being quite an eventful year. The first trading day of 2022 was an historic day as Apple became the first company in history to reach a valuation of $3 trillion (yes, trillion).
Unfortunately for Apple and the other stock/bond markets, the next day the Fed minutes revealed Fed officials were on board to quickly reduce their asset purchase program. The Nasdaq ended down more than 3% that day.
Then came June when Jay Powell and company went big and started their first 75 basis point rate hike, ending the year in the 4.25% – 4.50% range.
These rate increases caused havoc in the overvalued technology space.
To name a few pinged by rates…
Tesla off nearly 73%
Meta off 64%
Netflix 51%
Amazon nearly 50%
Alphabet 39%
Apple off 26% for the year
If you are counting, the loss for Tesla is around $720 billion of shareholder value in 2022.
The main topic of the year in markets was interest rates, and where the Fed would take them. That narrative was driven by an inflation rate that hit its highest level in 40 years. But don’t tell that to Matchbox.
Crypto fell as FTX and other platforms imploded. For some color, there are over 9,300 cryptocurrencies in existence versus 180 government-sponsored currencies in the world. That was bound to correct.
Non-financial topics included the invasion of Ukraine, Wordle, new viruses such as Monkeypox and RSV. How do you pronounce Qatar?
We had a couple of GOATs retire, Serena Williams and Tom Brady (but only for 40 days). We said goodbye to a Queen, a Secretary of State, a Golden Girl, Danny Tanner, the Aflac duck, a Foo, Meat Loaf and Sandy.
Stocks
Stocks managed to register their worst year since 2008. You can put much of the blame on the Fed and their actions to curb inflation. But you can also blame very lofty valuations that needed to compress.
The hottest sectors took the greatest hit. You will see in the global sector chart, communications services at the bottom. Who fits into that sector? Alphabet (Google), Meta (Facebook), and Roku, to name a few.
The major indexes also had varied performance as the tech heavy NASDAQ was off 33% for the year followed by the modestly tech heavy S&P 500 suffering a 19% decline.
Much like the chart shows, industrials and staples held up as the DOW Jones Industrial average “only” fell roughly 9%.
Value stocks had their year in the sunshine as they have finally outperformed growth. A trend we feel could continue.
It was also a terrible year for bonds. As the yield curve shows, the shift in rates was quite large and took most bond investors by surprise.
Short term rates move up from the prior quarter, but the longer rates mostly remained flat.
As bad as stocks looked, you could have owned a thirty-year treasury bond and suffered a roughly 29% hit… in the “safety” of a government bond.
What Can Be Expected In 2023?
We expect the effects of interest rate increases to slow the economy. Inflation should moderate, which will allow Fed rate increases to end.
Our greatest concern is that the economy declines, and the Fed decides to cut rates. A rate cut could trigger animal excesses (again) which could spike inflation to higher levels than we saw in 2022.
We could see continued layoffs in the labor market. Currently tech is seeing the lion share, but tightening could expand beyond that sector.
Real estate will sit in no man’s land as prices in core areas could remain high, sellers have not embraced reality and really don’t need to sell. Rates will hurt buyers, but there really won’t be any supply to absorb.
Any of the VRBO hot spots could suffer. Vacation areas as well as overly purchased communities will feel the pain.
Additionally, those who bought houses during COVID may see their equity go negative, so time will tell if those buyers have staying power.
Will there be a recession? Maybe.
With the hit to stocks last year, markets have already discounted a recessionary event.
If history serves, the market will start its move up by the time we are “officially” in a recession. The Fed should have a couple more hikes in their future, but the forward curve suggests easing at the end of this year.
Casting Onward
We are cautiously optimistic about this year. Now seems to be a decent entry point for stocks, although for long term investors, we feel there is never a bad time to buy stocks.
We will most likely see continued underperformance in growth sectors as rates will remain high. External situations can always change the markets’ view, but our (and I believe other investors) greatest fear is another round of inflation.
We look forward to speaking to you over the next couple of weeks. We wish you and your family a happy and prosperous 2023. We stand ready to assist you in achieving your financial goals.
DISCLOSURES
Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Stock is the capital raised by a corporation through the issue of shares entitling holders to an ownership interest of the corporation. Past performance is no guarantee of future results, and there is always the risk that an investor may lose money. Diversification neither assures a profit nor guarantees against loss in a declining market. The information contained herein is based on internal research derived from various sources and does not purport to be statements of all material facts relating to the securities mentioned. The information contained herein, while not guaranteed as to the accuracy or completeness, has been obtained from sources we believe to be reliable. Opinions expressed herein are subject to change without notice. Information may be dated material. Charts notated with source.
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