Unprecedented fiscal stimulus in response to the global pandemic in conjunction with supply chain disruptions triggered levels of inflation NOT seen for 40 years[01]. To combat inflation, the FED instituted the most aggressive series of interest rate hikes in decades[02], which resulted in simultaneous Bear Markets[03] in both the stock and bond markets[04]. The old adage of Don’t fight the FED[05] certainly held true for 2022 with the yield curve inverting, which frequently portends a recession[06],as many pundits predict a mild recession[07] in 2023. The US economy remains surprisingly resilient with unemployment remaining near fifty-year lows[08] and 4th quarter GDP at 2.9%[09].
With the fastest doubling from a market bottom since World War II[10], the S&P 500 started 2022 with excessive valuations[11], especially for Growth stocks. The long-awaited rotation from Growth stocks to Value stocks[12], which are more reasonably priced, may finally be upon us. This market correction has brought stocks closer to historic valuation metrics if corporate earnings hold up. However, there are many corporate earnings headwinds[13], such as a slowing economy, labor shortages, inflation, higher borrowing cost, and supply chain disruptions that exacerbate the investment landscape[14]. A corporate earnings recession[15] probably isn't fully priced into the market.
As a result of rapidly rising interest rates, Bond funds suffered their worst rout in decades[16]. Pundits expect the terminal FED Funds rate to be in the 5.00%-5.25% range[17]. Because of labor shortages and on-going supply chain disruptions, inflation may prove to be persistent[18]. The strong dollar, which may have peaked against other currencies[19], had been a headwind for non-dollar denominated fixed income assets[20]. Given the rapid rise in the FED Funds rate, the short end of the yield curve has probably suffered the bulk of the effects from rising rates for this rate hiking cycle.
Commercial Real Estate as tracked by the NCREIF website, has the asset class plateauing in its third quarter published results[21] with Commercial Real Estate slowly drifting lower throughout the fourth Quarter and into 2023. Changes to the supply chain regarding domestic production, may benefit factories and warehousing properties as well as increase employment associated with those activities. Unfortunately, the long-term impacts of COVID are NOT yet fully known for some sectors of the Commercial Real Estate market, especially office space!
There were some notable legislative Bills enacted during 2022. The CHIPS Act[22] subsidizes the onshoring of semiconductor manufacturing to secure supply chains and bolster national security. The Inflation Reduction Act[23] enables Medicare to negotiate drug prices as well as limiting out-of-pocket expenses for seniors. Lastly, the Secure Act 2.0[24] that passed as past as part of the omnibus federal spending legislation gradually increases RMD age and makes retirement savings a priority.
With the mid-term election finally behind us, hopefully the markets can now focus on economic and market fundamentals, which remain pretty good at least domestically. The classic 60/40 stock/bond portfolio diversification suffered its worst performance in nearly a century[25]. Where markets go from here depends on a lot of unknowns. With the possibility of a recession and looming debt ceiling confrontation [26], Caution is still the watch word! [27]
If you have concerns with your portfolio because of market volatility or geopolitical events, a member of the Iron Belt Partners Team will gladly discuss those concerns and schedule an appointment to meet if necessary.
We can be contacted via phone at (724) 493-9473 or via Email at:
Lindsay M. Turchetta LTurchetta@lpl.com
John D. Martin JDMartin@lpl.com
Working as a Team to better serve our clients.
This communication is meant to be general in nature and should not be construed as investment or financial advice related to your personal situation. You should consult your tax, legal, and/or financial advisor prior to making any financial decisions. The views expressed here are those of the authors, John Martin & Lindsay Turchetta, and not necessarily those of LPL Financial. Information is based on data gathered from what are believed to be reliable sources. The opinions, and other information contained in this article are subject to change continually and without notice of any kind. Forward-looking statements are subject to numerous assumptions, risks, and uncertainties, which change over time and may not come to pass.
All performance referenced is historical and NO guarantee of future results.
Investments are not guaranteed and are subject to investment risk including the possible loss of principal.
The index references herein are unmanaged and cannot be directly invested into.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful. No strategy assures success or protects against loss.
Securities and advisory services offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC
Iron Belt Partners is a separate entity and not affiliated with LPL Financial.
[01] Source: “The worst inflation in 40 years” on msn.com by Sarah Foster
[02] Source: “Most aggressive FED rate hikes in decades” on.LPL.com by LPL Research
[03] Source: “Stocks, Bonds fall in lockstep” on trueonbuy.com
[04] Source: “Bonds enter 1st Bear Market in at least 30 years” on MarketWatch.com by Steve Goldstein
[05] Source: “DON’T FIGHT THE FED” on bakofthewest.com
[06] Source: “Economic Forecasts with the Yield Curve” on FRBSF by Michael Bauer and Thomas Mertens
[07] Source: “Bank of American chief predicts mild recession” on yahoo.com by Tobias Burns
[08] Source: “December unemployment falls to 3.5 percent, tied for a 50 year low” on PBS News Hour
[09] Source: “The US economy grew at 2.9% in the 4th quarter” on cnn.com by Alicia Wallace
[10] Source: “S&P doubles from its pandemic bottom” on cnbc.com by Yun Li
[11] Source: “S&P 500 Predictions: Targets and Geopolitical Risks” on marketrealist.com by Mohit Oberoi
[12] Source: “Rotation from Growth to Value gaining momentum” on SeekingAlpha.com by Chetan Woodun
[13] Source: “Earnings Season Preview” on LPL.com by LPL Research
[14] Source: “Review of the Current Investment Landscape and 2023 Outlook” on seekinglpha.com
[15] Source: “The stock markets biggest risk in 2023 is a drop in corporate earnings” on msn.com by Matthew Fox
[16] Source: “2022 was the worst-ever year for US Bonds” on cnbc.com by Greg Iacurci
[17] Source: “The FED projects raising rate as high as 5.1% before ending inflation battle” on cnbc.com by Yun Li
[18] Source: “Why Inflation may still persist” on PacificFunds.com by Samuel Park
[19] Source: “Dollar set to finish below key level” on morningstar.com by Vivien Lou Chen
[20] Source: “How a Strong Dollar affects International Bonds?” on marketrealist.com by David Ashworth
[21] Source: “Quarterly Returns under NCREIF Property Index (NPI)” on ncreif.org/data-products/property
[22] Source: “The CHIPS Act could be a shot in the arm for US Semiconductor industry” on financia.yahoo.com by Frank Holmes
[23] Source: “House passes allowing Medicare Drug Price negotiation” on trone.house.gov.com by Joyce Frieden
[24] Source: “Secure Act 2.0 changes 3 rule around required withdrawals” on msn.com by Greg Iacurci
[25] Source: “The Classic 60-40 stock-bond portfolio fell 22% in 2022” on TheFinancialEpress.com by Sunil Dhawan
[26] Source: “How the U.S. hitting its debt limit could hurt investors” on msn.com by Chris MacDonald
[27] Source: “Caution is the watchword for stocks” on bnnbloomberg.com