Market Viewpoints – Winter 2023

Keith Bonjour, Portfolio Manager
Keith Bonjour, CFP® Vice President, Portfolio Manager

Inflation continued to show some signs of moderating during the fourth quarter of 2022 with the headline CPI reading falling to 6.5% in December after hitting a high of 9.1% in June.  The Federal Reserve dramatically raised the Fed Funds Rate throughout the year from a starting range of 0%-0.25% all the way up to a range of 4.25%-4.50% to end the year.  Expectations are that the Fed will continue to hike rates a few more times in 2023, but the hikes will be less sizeable, in the range of 0.25% or 0.50% each.  

The consensus is showing a peak Fed Funds rate of between 5.00-5.25% this year, but that could change depending on how quickly inflation moves downward, or if there are signs that inflation starts to increase in certain parts of the economy.  Both stock and bond markets had rough years in 2022 with the S&P 500 falling over 18% and the US Aggregate Bond index falling over 13%, resulting in the bond market’s worst year on record.

The stock and bond markets have both started 2023 with nice rebounds, however we expect volatility to remain elevated throughout at least the first half of the year.  Markets continue to monitor Fed policy and inflation closely, looking for signs of when the Federal Reserve will pause their interest rate hiking cycle.  

The markets have been on edge worrying that the Federal Reserve will be too aggressive and cause a larger than expected slowdown which could lead to a recession. The Federal Reserve still has a chance at a soft-landing where they slow the economy enough to significantly 

bring down inflation, but not enough to cause a recession.  However, the Fed’s history during significant rate hike cycles has shown they are not good at threading the needle for a soft-landing, and historically the Fed tends to over-tighten causing a recession. 

Expectations are that if the U.S. economy does rollover into a recession by the end of 2023, that it would be mild since unemployment remains low and consumer spending has remained resilient even in the face of rising prices due to high inflation.  The inflation data will be important to monitor as the year progresses since this will have a huge impact on Fed policy going forward.  

The economy should continue to slow this year as Fed policy tightening works with a lag.  Both consumer spending and a low unemployment rate have helped the economy avoid a significant downturn so far, but it will become more difficult this year especially if the Fed decides to raise rates more than their current projections.  

Company earnings remained resilient in 2022, as businesses were able to pass on their higher costs to consumers, but could come under pressure in 2023 if consumers pull back on spending and the economy continues to slow.  It is important to remember the economy and stock market do not operate on the same schedules.  The stock market usually bottoms well before the economy so while economic conditions may continue to slow for the near future, we will look for clues that inflation has peaked and begins to subside indicating the Fed is winning the battle. The Fed continued its aggressive rhetoric each time the market tried to rally last year, so markets will be watching for the Fed to tilt to a more accommodative posture, which will take pressure off the market and could lead to a sustainable rebound.

 We continue to be mindful of the risks that the market faces going forward from a more aggressive Federal Reserve possibly overtightening, sticky areas of inflation remaining elevated, company earnings coming under pressure, and continued geo-political risks. 

We recommend staying the course with your investment objectives with the understanding that markets go through cycles and both the stock and bond markets will eventually find their footing. 

We recommend communicating with us if any short-term cash needs arise so we can look for opportunities to be proactive when raising cash for any necessary distributions, helping to protect against possible short-term negative moves in the market.