The stock market was mostly positive in the fourth quarter. Large domestic companies, measured by the Standard & Poor’s 500, rose 7.1%. The Russell 2000, composed of smaller US companies, gained 5.8%. The Nasdaq Composite, heavily weighted in technology companies, did contract a slight 1.0%, while foreign firms, generally speaking, surged with the Dow Jones World Index (excluding US) up 13.5%.
Unfortunately, a positive Q4 couldn’t salvage the calendar year. The stock market turned in the worst annual performance since the mortgage meltdown of 2008, and the bond market had its worst year ever. This isn’t surprising considering Chairman Powell and associates are hiking rates at the fastest clip since the early 1980s. Large technology growth companies have been bearing the brunt of the market decline. While the Fed held rates artificially low for well over a decade, and access to funds was next to free, these stocks were the market leaders and the drivers of capitalization-weighted stock indices. Today’s analysts now have to discount projected future earnings using a much higher rate, leaving the net present value of these companies painfully lower than previous calculations. As for the fixed income markets, the inverse relationship of prevailing rate direction and bond prices is just simple math. Rates go up…bonds go down. In the vein of silver linings, when was the last time investors could earn in excess of 4% in their money market funds? Heck, that’s nearly half of the stock market’s historical annualized return, but with zero volatility and full liquidity. The TINA factor (“There Is No Alternative”) is clearly a diminished component of investor sentiment.
So what do we expect for 2023? While our regular readers know we avoid short-term market prognostication, we are optimistic about medium and certainly long-term economic prospects. Immediate headwinds including nagging inflation, tight monetary policy and geopolitical challenges are legitimate concerns, and a market downdraft revisiting the lows of last June is not highly unlikely. However, the Fed’s medicine of monetary constraint, while indeed painful, has a history of success. At the same time, the global supply chain disruptions in the supply/demand equation are relenting. We have full confidence that, over time, the returns of the major asset classes (stocks, bonds, cash) will coincide with historical returns, and portfolios built on expected returns derived from historical data will be rewarded. As such, we recommend investors avoid making wholesale portfolio changes based on 2022 market returns. Rather, we recommend investors stick to proven asset management fundamentals, maintaining one’s thoughtfully crafted long-term portfolio.
During these times of difficult market conditions, it is especially helpful to stay in close contact with one’s trusted fiduciary advisor. Please know that we welcome your calls, texts, emails, etc. And, as always, we adhere to our discipline of strategic asset allocation and style diversification; a strategy designed to mitigate overall portfolio volatility and enhance long-term returns.