Summary, Fourth Quarter of 2022:
Good riddance to 2022! Q4 saw more slowing of the economy as the U.S. Federal Reserve (the Fed) continued to fight inflationary pressures, which turned out to be anything but “transitory.” Looking back at 2022 paints a much larger and event-filled picture. The last 12 months not only saw the Fed try to tamp down high inflation ignited by supply chain issues and years of “easy money” policies and stimulus packages from the Covid period, but also the Russian invasion of Ukraine, the Chinese Communist Party election of Xi Jinping as president-for-life, and the end of China’s zero-Covid policies. On the domestic front, President Biden avoided a government shutdown at the end of the year by signing a $1.7 trillion spending bill. While supply chains continue to heal, Covid is flaring up in China and slowing the recovery while the world’s second largest economy remains a threat to invade Taiwan.
The Covid-era policies of economic shutdowns and massive stimulus efforts have yet to be fully realized. Inflation is still high and stubborn. While there are signs inflation is abating, the odds of a “soft landing” are decreasing the longer this continues. At the start of 2022, the Fed forecasted 0.25% in interest rate hikes; clearly that estimate was off the mark. This time around, according to its latest “Summary of Economic Projections,” the Fed expects inflation to significantly slow to near target (2%) while the federal funds rate remains high. It also expects unemployment to rise slightly above target (4%). All of this adds up to a restrictive monetary policy designed to slow down the economy.
Stocks were pummeled in 2022 and many currently trade at attractive discounts and well below fair value. Generally speaking, we like undervalued stocks because it allows us to purchse high-quality companies that may have been overvalued previously. That holds true now. However, for stocks to begin to rally back to fair value, evidence of an economic rebound and moderating infation are needed. The first half of 2023 will likely see unsettled markets as good news comes in alongside poor economic data. This tug-of-war will create volatility and challenge investors. Once economic stability or at least more clarity is achieved, stocks should begin to rally back to fair value. For the long-term investor, now is a good time to add to equities, but we expect volatility to continue in the near term.
On the other end of the risk spectrum, bonds have gone through a horrendous two-year period but are on much better footing today. The rising interest rates of 2022 hurt bond prices but are now benefitting bonds as yields are higher. Even better for risk-averse investors, the yields on short-term bonds are higher than long-term bonds, requiring much less time spent invested in fixed income. Eventually, the Fed will stop raising interest rates and may even decrease them. Regardless of the timing of a Fed pivot, we are finally out of the fixed income doldrums because bonds are starting to offer attractive returns. While fixed income returns won’t make you rich, today’s expected returns are better than what we have seen in some time, rendering bonds useful in a diversified portfolio once again. At this stage in the cycle, we are favoring short-term, high-quality bonds.
Until next quarter,
Fixed income securities carry interest rate risk. Fixed income securities also carry inflation risk and credit and default risks. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss.
High yield bonds are not investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors.
Certain statements contained within are forward-looking statements including, but not limited to, statements that are predictions of or indicate future events, trends, plans or objectives. Undue reliance should not be placed on such statements because, by their nature, they are subject to known and unknown risks and uncertainties.
Opinions voiced are not intended to provide specific advice and should not be construed as recommendations for any individual. To determine which investments may be appropriate for you, consult with your financial professional.
Indices are unmanaged measures of market conditions. It is not possible to invest directly into an index. Past performance is not a guarantee of future results.
International investing entails special risk considerations, including currency fluctuations, lower liquidity, economic and political risks, and differences in accounting methods. Past performance cannot guarantee future results.
The fast price swings in commodities will result in significant volatility in an investor’s holdings. Commodities include increased risks, such as political, economic, and currency instability, and may not be suitable for all investors.
Securities and Advisory services offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC. Financial Planning offered through Leelyn Smith, LLC a registered investment advisor and separate entity from LPL Financial. Securities offered through LPL Financial. Member FINRA/SIPC. Additional advisory services offered through Leelyn Smith LLC, a Registered Investment Advisor Leelyn Smith LLC, and LPL are separate and unrelated companies.
This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.