The final quarter of 2022 remained volatile for financial markets but brought one welcome change: positive movement. The S&P 500 rose throughout October and November before pulling back in December and ending the quarter up 7.5%. International stocks had lagged the US considerably earlier in the year, but enjoyed a strong rally in recent months, growing 17.3% during the quarter. Bonds mostly held steady – gaining back just a slight bit of lost ground to end one of the most challenging years on record for fixed-income investments. Though it was meager for the tech-heavy NASDAQ, all the major market indexes returned positive quarterly numbers for the first time this year.
Whether assessing stock or bond markets, the overarching driver of performance in 2022 was interest rates. A year ago, the Federal Reserve indicated that a grand total of three 0.25% rate hikes were expected for 2022. Instead, we had the equivalent of seventeen 0.25% Fed rate hikes! Needless to say, the impact on financial markets was profound.
While the financial markets incorporate the policy and interest rate changes almost immediately, it takes time for the broader economy, which will likely lead to continued economic slowing in the coming months. This is already beginning to show up in certain areas of the economy, such as housing. If the effects become severe enough, a recession is possible. If that does occur in 2023, the good news is that it is likely to be mild and short lived. The job market remains especially strong and has a long way to go before it hits typical recessionary levels. People are making money and spending money, and that will provide support, even in the face of higher rates. While we do anticipate further slowing, the economic fundamentals remain surprisingly strong.
It is also important to note that a recession is not the same as a down market. Market prices are based on expectations for the future and estimates of where the economy may be in six to 12 months or more. As a result, stocks can move up during a recession, or down when the economy is expanding. In fact, since 1945, stocks have posted positive returns overall during recessionary periods.
Moving forward, the picture for stocks is relatively positive. We enter 2023 with far more reasonable valuations than we had at the start of 2022. As rates peak, the damage should subside and if they start to decline, we could see a tailwind. Bondholders are being paid competitive rates of interest for the first time in over a decade and those higher yields will become more prominent as older bonds mature and are replaced by new offerings.
During a 40-year career and 30-year retirement, you can expect to experience at least 12 bear markets. While each one is slightly different in cause and duration, markets have always gone on to reach new heights.
We hope you enjoyed a wonderful holiday season and wish you a happy, healthy, and prosperous 2023.
As always, please let us know of any questions or concerns.
The PWM Team
Tax Document Reminder
Please keep in mind that 1099 tax forms for non-retirement accounts will not be available until mid/late-February. Please schedule tax preparation appointments accordingly.
SECURE Act 2.0 Passes
The omnibus spending bill signed into law on 12/23 includes the long-anticipated SECURE Act 2.0. This contains dozens of provisions affecting IRAs and 401(k) accounts. We have recently added an overview on our websites that can be viewed here.
