Stephen Kyne
The year 2022 was an incredibly difficult year for the economy and the markets. In fact, it was the worst year for U.S. stock markets since 2008. Rapidly rising interest rates meant that there were few places to hide as an investor, since even fixed income funds sank due to interest rate pressure.
The S&P 500, the most broadly used US index, ended the year down 20 percent, while the NASDAQ suffered a 33 percent loss, according to FactSet. You’ll be in good company if you open your December statement and find that your balance dropped in 2022.
Down years happen, and it’s something that every investor must accept. The question is: Where do we go from here?
We think that the economy and markets will be impacted by several factors. The first of which will be the continued raising of interest rates by the Fed.
Caught flat-footed in early 2022, the Fed began a rapid series of interest rate increases in a desperate attempt to rein in rampant inflation, which resulted from the wanton subsidies and stimulus of the government’s pandemic response. Since interest rates are essentially the price of money, raising them should slow down economic activity, although it can be a messy and very imprecise process.
The goal of the Fed is to reduce inflation, while maintaining employment, and keeping the economy from crashing into recession. This is the so-called “soft landing.”
We expect continued interest rates increases through the first quarter of the year, and hope that, by then, the Fed will take a breather. The risk, since the Fed relies on prior-period data, is that it won’t know if it’s gone too far, until after it’s gone too far.
Recent economic data shows inflation beginning to ease, while we still have full employment, and an economy that rebounded in the 3rd and 4th quarters of 2022. One wonders, then, whether Jerome Powell would recognize a soft landing if it fell on him.
Internationally, we would be remiss if we didn’t give proper attention to the geopolitical risks facing the economy. 2022 saw much of the world deal with food, energy, and physical insecurities, all of which weighed heavily on economic activity.
The war in Ukraine, which threatens to become a wider conflict, has weighed heavily on the region, and has likely pushed Europe into recession. Europe would deserve more credit for finding alternatives to Russian energy, if it hadn’t been so reliant on it in the first place. Its fate, and the fate of its markets in 2023, will likely be closely tied to events in Ukraine.
China’s somewhat manic departure from three years of zero-COVID has thrown the region into unknown territory. While the Chinese government has not issued official figures, many outside estimates indicate that a million citizens may die in just the first four months of 2023. The question will be whether, once the initial waves have passed through the population, the country will finally be able to get back to work, and will global supply gains finally normalize.
The U.S. is, by far, the largest and most diverse economy in the world. It is two-years removed from the brunt of the pandemic. It stands the greatest likelihood of staying resilient in the face of economic pressures, compared to most of the rest of the world. That said, we do believe opportunities exist international, especially if the dollar continues to come down from its 2022 highs.
We believe that inflation in the U.S. has peaked and, barring being dragged into any major geopolitical issues, we believe the U.S. markets stand a good chance of working toward a rebound in 2023.
This not to say that we think the NASDAQ will see the 50 percent increase it would need in order to recoup its 2022 losses, but we think the U.S. economy continues to be resilient, and probably the best option for investors, relative to much of the rest of the world. We think that a U.S. recession is still likely at some point in the not-too-distant future, however the ingredients are there to help make it fairly minor.
Continue to work closely with your certified financial planner professional, as they help shepherd you through these uncertain times, and remember that markets ebb and flow and, while it’s impossible to say just when, we believe that the tide will come back in. After all, it always has.