By: Dave Chenet, CFA, CAIA®
|Close||Weekly return||YTD return|
|US Treasury 10yr Yield||3.51%|
Source: YCharts, Yahoo! finance
For our first market recap of 2023, we take a moment to both reflect on the year past and look forward to the year ahead. 2022 was a challenging year for investors; both the broad stock market and bond market finished in negative territory and a blended portfolio of 60% stocks and 40% bonds had its worst year since the 1930s. The accommodative policies enacted in response to the COVID economic shutdown were quickly reversed as inflation proved less “transitory” than government officials had hoped. As we turn the page to 2023, however, we enter the year with cautious optimism and focus on a few key areas:
- Inflation & the Fed: The Federal Reserve was forced to dramatically tighten financial conditions throughout the course of last year to dampen the inflation that had arisen as a result of both fractured global supply chains and increased consumer demand on the back of fiscal stimulus. Both Fed Funds rates and longer-term treasury rates increased substantially throughout the year, lowering bond prices and letting the air out of interest rate sensitive technology stocks.
Inflation, however, appears to have peaked. This week gave us encouraging data that the pace of inflation is slowing. While year-over-year CPI inflation remains high, the last six months has seen the growth of inflation fall to an annualized rate of 1.8% – a level that would signal the Federal Reserve tightening has had the intended effect.
- China reopening: China’s zero-covid policy has precluded an economic recovery in the world’s second largest economy, however, Beijing has begun to ease restrictions on travel and activity. Simultaneously, credit conditions have been easing in China which will likely contribute to an uptick in economic growth and spillover to growth in other economies – notably the export-oriented economy of Germany.
In summary, while short-term challenges remain, the combination of lower stock prices reflecting current pessimism, a less aggressive Fed and a relatively strong US consumer may benefit asset prices in 2023 and beyond.
On a year-to-date basis, cyclical sectors (consumer discretionary, materials, real estate, etc) have been leading the markets higher with defensive sectors (consumer staples, health care, etc) lagging. Regionally, Europe and Emerging Markets have lead US markets.
What We’re Reading:
NY Times: Tesla Cuts Prices Sharply as It Moves to Bolster Demand
FT: How do the Federal Reserve and ECB differ on tackling climate change?
Roosevelt Institute: The Causes of and Responses to Today’s Inflation
WSJ: US Cancer Death Rate Has Dropped by a Third Since 1991
Chart of the Week:
The S&P 500 fell 25% from its peak on October 12th of last year. Using data from the 10 previous instances of 25%+ pullbacks since 1940, this has been an attractive long-term entry point for investors and has offered attractive subsequent returns.
Advisory services are offered through Presidio Capital Management LLC, Registered Investment Advisers. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Presidio Capital Management, LLC unless a client service agreement is in place.