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The final quarter of the year provided some relief to equity markets. October 12th became the low point for the year at a reading of 3,588 for the S&P 500. In the weeks to follow, rays of hope hit the equity market as inflation showed signs of cooling and Fed hawkishness was seen as shifting more dovish. Investors, both retail and institutional, flocked to equities and a rally ensued.
What became evident as the quarter closed was how weak the bullish sentiment was, especially among investors in the Nasdaq as it gave up an 8.5% gain to end the quarter down over 1%. Moves such as this occurred three times throughout the year though new lows were not made prior to year end.
While the tech-heavy Nasdaq put up a negative number for the quarter, it was not all doom and gloom. As is shown in the chart, most of the major indexes posted a solid quarter led by the Dow Industrials.
Bonds were even positive for the quarter. In a year in which the Fed raised the Fed Funds rate at a faster pace than any other point in history, this could be a sign of things to come.
As we begin 2023, there are many headwinds the economy, bond market, and equity markets face which include:
Aside from the conflict, the other six are linked fairly closely with the Fed as a focal point. The goal for the Fed has been to drive the inflation rate from multi-decade highs back to their target of 2% by increasing the Fed Funds rate and removing liquidity from the market through quantitative tightening. Over the course of 2022, the Fed increased their benchmark rate from 0% to 4.25% and shrank their balance sheet by $400 billion. The economic impact from their actions can be seen in higher borrowing costs for consumers (credit card rates, new mortgage rates, auto loan rates, etc.) and businesses (equipment loans, building costs, etc).
What the Fed appears to seek through their actions is to reprice stocks lower, drive unemployment higher, lower inflation, and remove liquidity from the system all while not throwing the economy into a recession (a soft landing). They can’t, and won’t, outright say this but it would be the path to pain they have described. Unfortunately, employment and wage gains have remained stubbornly strong and they don’t directly control the movement of the stock market. The potential repercussions of a failure to meet their objective would be keeping rates higher for a longer period of time and pushing back, and possibly deepening, the economic slowdown.
We come into 2023 with quality as a key component of the holdings we have or look to add to portfolios. While this term, quality, is vague and subjective it will appear in your portfolio as companies, sectors, or bonds which hold up better during economic slowdowns, provide a level of hedging to a market downturn, and/or limit credit risk within the bond market. We are not outright bearish on everything market related but feel it is prudent to be cautious.
Our mission is to get you to your goals as you’ve described them to us and utilize the financial planning software to stress test. The road we use to get there will not be a straight line and likely won’t be without curves, hills, or valleys. We will navigate the road we see in front of us as well as attempt to position for sections of the road we cannot yet see. Prudence in choice and patience in execution will be key to successfully navigating through what could be a bumpy start to 2023. However, as this chart shows, the equity markets as represented by the S&P 500 are resilient over a longer period of time. Ignore the short term gyrations and focus on the long term.
We hope all of you have a safe, healthy, and prosperous 2023 and we look forward to continuing our mission to Empower you with financial confidence.
Your Darden Wealth Group Team,
Andrea, Dave, Hylan, Mark, and Marlys