Whether you set ambitious New Year’s resolutions or simply use the beginning of the year to reset a few habits, there’s value in reflecting on the past year before looking ahead. The same is true for the markets. When we look back on 2022, let’s identify some opportunities uncovered by the challenges.
Here’s what we learned in 2022: The Federal Reserve (Fed) can and will take swift action to squelch inflation. Severe inflation coupled with the Fed’s interest rate hikes had a larger-than-expected impact on the stock market. The impact extended to bonds, with increased Treasury yields, ultimately resulting in the worst year on record for core bonds (as measured by the Bloomberg Aggregate Bond Index).
So what does all of this mean for 2023—and where are these opportunities? In the bond market, it looks like we’ve uncovered some value, especially for those income-oriented investors. This is a welcome change after nearly 20 years of difficulty finding stable income-producing investments as market interest rates fell and remained low. With higher yields now available in some durable areas of the bond market, we believe investors may be able to enhance their income-generating portfolios, while potentially taking on less risk than in years past.
In the early weeks of 2023, stocks are looking more promising. Inflation is still high, but falling. The Fed is expected to end rate hikes by the spring, renewing hopes for a softer landing for the U.S. economy. Our expectation is that the economy will either narrowly avoid a deep recession or enter a mild, short-lived recession in early-to-mid 2023. These factors have allowed investors to begin charting a more positive path forward, which we believe will continue despite some choppiness in the market. We continue to favor U.S. equities over international markets, despite pressure on domestic profit margins. The international markets have also begun to show signs of life as inflation looks to be peaking in the U.K. and Europe. Emerging markets have even bounced back slightly, although uncertainty over China’s economy remains a wildcard.
Overall, we see reason for skeptical optimism when it comes to the markets in 2023. Should the Fed pause rate hikes in the near term as expected, we may see a nice stock market rebound supported by falling inflation, reasonable valuations, and stable interest rates. Further equity market volatility remains a risk, but there’s reason to anticipate more positive outcomes from the stock and bond markets this year.
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This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
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All data is provided as of January 31, 2023.
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All index data from FactSet.
The Standard & Poor’s 500 Index (S&P500) is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
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