By no measure was 2022 a good year for investors. The bond market had its worst year ever (depending on which index you use), and the S&P 500 was down 18.11%. When stocks and bonds are both down significantly, this creates a problem for investors with the “traditional” 60/40 stock/bond portfolio.
In fact, according to Morningstar, this was the worst year (-15.3%) for the 60/40 portfolio since the 2008 great recession (1). A year like 2022 shows the importance of owning small amounts of alternative assets such as gold and buffered funds. Gold, as measured by the Exchange Traded Fund GLDM, was down only .47% in 2022. A small negative return in a year like 2022 might not seem like a big deal, but it certainly helped incrementally ease the pain in many portfolios. Additionally, the buffered fund BUFD, which we implemented in many accounts on May 9, 2022, finished the year down 7.7% but only down 1.45% from May 9, 2022 - December 31, 2022.
As far as the Fourth Quarter is concerned, it actually proved to be the best quarter of the year posting positive gains nearly across the board. The market did sell off some in December but not nearly enough to give up all the gains of October and November. See below the quarter by quarter snapshot of market performance:
As you can see, the market rallied quite nicely in Q4. Value stocks appear to have led the way in the U.S. market, but interestingly, non U.S. stocks performed even better.
Now looking forward to 2023, I believe that there are three major issues that will impact the market heavily:
1. The Fed and Interest Rates
I hate the market hinging on the fed. The Federal Reserve is a necessary evil, but a group of non-elected officials driving the entire monetary policy of this country (all while giving regular speeches which whipsaw the market) seems like an unnecessary feature.
The Fed is, of course, attempting to curtail inflation by raising interest rates. Higher interest rates can hurt stock prices, but more importantly, high interest rates kill the bond market. The fear is that the Fed, in addition to killing the bond market, will raise interest rates far too fast and essentially drive the country into a deep recession.
I personally believe that we cannot see this market substantially recover until the Fed pauses, slows, or reverses interest rate hikes. Once the Fed forecasts that one of those three directions is their plan, I believe we will see a sustained recovery. Unfortunately, I do not know when that will happen. But it is my belief that inflation is finally under control and that they should pause increases in Q1.
The war in Ukraine has certainly had an impact on global asset prices. The cost of energy spiked massively during periods in 2022, as did the cost of fertilizer and other goods. This cannot be blamed solely on this conflict, but it certainly contributes. Some sort of resolution in Ukraine would breathe a sigh of relief into many supply chains resulting in, what I believe, to be a promising year for internationally developed markets.
3. China/Supply Chains
China has completely botched Covid. The communist regime has implemented the strictest lockdowns in the world, which has caused serious supply chain shortages along with abusing human rights. After seeing the World Cup air on Chinese television with thousands of unmasked spectators in the crowd, the people of China had enough and took to the streets. Although the protests were met with atrocious resistance at first, the Chinese government has begun to roll back its Covid restrictions.
It appears that China will continue to roll back Covid restrictions and join the rest of the world in reopening their economy. This would be a huge shot in the arm to the global economy, easing supply chains and putting Chinese consumers back into the global economy as spenders. (Now, if we could just get them to give up communism.)
Unfortunately, the biggest drivers of the stock market are completely out of our control and essentially impossible to predict. I don’t think that we can count on all three of the factors I listed above going our way, but if one or two of them show improvement, that could be enough to provide the market with the confidence it needs to post nice gains in 2023.
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Written by: Brice Carter