Portfolio Research Director, Kevin E. Donovan, CFA, and Senior Financial Adviser, Parker G. Trasborg, CFP®, discuss what happened in markets in 2022 and our thoughts looking ahead in 2023.
Parker:
Hi, I’m Parker Trasborg, Senior Financial Adviser at CJM Wealth Advisers, and today I’ve got with me Kevin Donovan, our Portfolio Research Director. Happy New Year, everyone. Thank you for joining us for our first quarter update of 2023.
Kevin, 2022, as we all know, was a very rough year for markets, both stocks and bonds. According to Vanguard, that we listened to the other day, it was the first time since Alexander Hamilton was the Treasury Secretary that both stocks and bonds were down double digits in the year. Can you tell us a little bit about what happened last year?
Kevin:
Yeah. I can’t tell you much about the 1800s, but last year the story basically was all about inflation and the Fed’s efforts to fight inflation. Inflation spiked to levels we haven’t seen since the early 1980s, and the Fed, in order to fight that, raised interest rates very, very aggressively. So we went from interest rates at about zero at the beginning of the year to over 4% by the end of the year. That’s an incredibly steep interest rate increase, and it just wrecked havoc with stock prices and bond prices throughout the year.
I have a couple charts to show you just how it looked, so why don’t we put those up right now? The purple line on the chart is the S&P 500, and you can see that fell by over 19% last year. Now, the S&P had been the best performing index for several years in a row, because tech stocks were on fire, and the S&P 500, its biggest components are the large technology stocks. But last year that all flipped around, and tech stocks had a really tough year, and the S&P was the worst performing major index. The Dow Jones Industrial Average, the orange line, didn’t do too badly compared with the S&P 500, it was down only 8.8%. International stocks were down by more throughout most of the year, and then in December they really came back. But they finished better than the S&P 500, but much worse than the Dow, they were down about 16.8%. Bonds, as you can see, the green line, was down 13%, the bond index there. That’s the worst performance in its history.
But if we look to the fourth quarter, you can see there was much different picture during the fourth quarter, where all these indexes that were significantly negative throughout the year, were positive in the fourth quarter. We saw an easing of inflation, inflation came off of its peak, so that provided some confidence that maybe the Fed effort to fight the high inflation is working. The S&P rose by 7%. But if you look at the Dow, it was more than double the S&P 500 return, it improved by 15%. International stocks were even higher than that, they jumped 17% as the dollar weakened, which helped the international stocks. And bonds rose about 2%, so pretty good showing for bonds in the fourth quarter.
This shows that the market began heading in the right direction, but you can see that, I mean, for the year, things were so negative that we still have those double digit declines all around and there are still risks ahead.
Parker:
Yeah, inflation was the big story all throughout 2022. We have seen that start to ease up a little bit this year. Pulling out your crystal ball, what are we seeing for 2023?
Kevin:
Well, the crystal ball is cloudy for stocks. Inflation has come off of its peak, but it’s still about 6.5% right now. So prices are still rising, they’re just rising at a lesser amount than they have been say over the summer when inflation peaked. That increases costs for companies and increases prices for consumers, as everyone knows, which could have an impact on stock valuations going forward.
In the past, when the Fed has raised rates so dramatically, so quickly, they’ve overshot and have pushed the economy into a recession. So by creating tight monetary conditions, consumers stop buying and the economy goes into a recession. Whether or not that’s going to happen this year, we don’t know, the risk is there. And if we do see a recession, that could have a negative impact on stock prices. If the Fed does stick the landing, that would be great for stocks. There’s both sides there, so the picture is cloudy.
On the fixed income side, we’re seeing a lot of optimism among our mutual fund partners on the fixed income side, so on bonds. I’ve talked to American Funds, Fidelity, we saw something from Vanguard just the other day, you and I, Parker, and they’re very positive on bonds going forward. There was a lot of pain last year in bond prices, but as the Fed begins to reduce the rate that their increasing interest rates, so they had several quarters, or several months in a row where they raised rates by three quarters of a percentage point, in December they reduced that to 50, or half a percentage point. The expectation is for the next time they do it, it’ll be a quarter of a percentage point, and that is good for bonds.
Because of all that pain, right now bonds are paying a higher yield than they have since the great financial crisis, so that’s over 15 years ago. Now you can buy a one-year treasury bill, the safest investment out there, that’s going to pay you more than 4% on an annual basis, and that’s good income for bonds. Traditionally, you would hold bonds for the stability, they’re not as volatile as stocks, but also for income. That income component hasn’t been there for over a decade, and now it’s finally back.
Parker:
Yeah. And if we do hit a recessionary patch, then the Federal Reserve might even have to shift gears and start to cut rates, which then would give us an opportunity in bonds to see some price appreciation, the opposite of what we saw last year.
Kevin:
Right, it’s a good point.
Parker:
Kevin…
Kevin:
Sure.
Parker:
Yep, go ahead.
Kevin:
I was just going to say that, yeah, recession is bad for stocks, but it’s actually good for bonds, because the Fed has to cut the rates and that makes bond prices go higher. So good point.
Parker:
So we’re definitely feeling much more bullish on bonds. Not a very exciting asset class in general, but looking forward to what we may see here in 2023 from bonds.
Kevin, thank you for joining us, that’s all the time we have for today. If anyone has any specific questions, feel free to reach out to your planner, or to Kevin directly, Kevin likes hearing from clients from time to time.
Kevin:
That’s right.
Parker:
Thank you all for joining us. Happy New Year again, wish you all the best, and we will see you next time. Bye-bye.
Kevin:
Thank you.
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