2022 was a year full of challenges in the market and economy. Inflation was the number one story with record breaking numbers not seen in 40+ years. Government stimulus and low interest rates, which helped the economy in 2020-2021 created an inflationary problem that was not anticipated or dealt with properly by the Federal Reserve. The Federal Reserve was on a mission in 2022 to crush inflation by raising the Federal Funds Rate from 0.25% to 4.50%, which was the quickest ramp up in history. Ongoing supply chain issues compounded the inflation problem in large part due to China’s zero-Covid policy. War in Ukraine created additional global uncertainty. Energy costs spiraled upwards. Labor continues to be very strong with over 10M job openings, indicating there is continuing demand for workers. Housing remained hot in first half 2022 before finally dropping lower as higher interest rates cooled demand. 2022 ended up being the worst year on record for bonds and stocks didn’t fare much better. This was highly unusual for bonds and stocks to both be in negative territory in the same year. This has only occurred a couple of times in history.
2023 Current Market Conditions
As we enter into 2023, inflation measured by Core CPI (Housing, Apparel, Medical Care, Recreation, Education, and Communication) has been trending lower for six months. This indicates inflation is slowly abating, but remains well above the Federal Reserve’s 2% targeted rate. Therefore, we are coming closer to the “Fed Pivot”, where the Fed will start pausing the rate hikes and eventually cutting interest rates. There is now a risk of overtightening, keeping rates too high and for too long. The overall goal is to cool demand for goods and services.
What is on our radar for 2023:
The main question on everyone’s minds is focused on the Federal Reserve’s interest rate policy. How high and how long will the Fed keep interest rates at high levels? The higher and longer interest rates stay elevated, there becomes a stronger risk of a deep recession developing instead of the preferred soft landing.
· We are closely watching leading indicators such as: home sales, auto sales, employment / unemployment figures, and job openings / quits. These indicators provide insights into more real time trends, which allows us to make portfolio changes as needed.
· Earnings season is starting with corporations reporting their Q4 2022 and Full Year 2022 results over the next two months. We are tracking how companies performed and importantly their forward guidance expectations for 2023 and beyond.
· China is in the process of ending their zero-Covid lockdowns. Borders are being reopened and inbound travelers will no longer require quarantining. Manufacturing is being restarted and kicked into high gear. The government has relaxed restrictions on their large technology companies and has started to inject financing in their capital markets.