Dear Clients:
Greetings and a Happy New Year to everyone! My wishes to a happy and healthy 2023. I wanted to begin 2023 with an assessment on our economy, global financial markets, and provide some thoughts on the year ahead.
In 2022 we saw the economy held hostage by The Federal Reserve’s mission to combat inflation with monetary tightening and sharp interest rate hikes. Much of this current battle with inflation was self-inflicted and they have now shown an unwavering resolve to this mission and to reestablish their credibility. This course of action had a significant impact globally on foreign currency, interest rates, and an impact on international central banks and their own economic struggles. Our employment picture here in the U.S. continues to flourish making it harder for The Federal Reserve to tame inflation. Even with massive corporate layoffs starting to hit the wire, we continue to say unemployment levels near all time lows. This theory has scared investors in that The Federal Reserve has stated they are staying the course, are willing to overshoot on this cycle of interest rate increases, and ultimately will risk recession to tame inflation. I, along with several economists you may listen to believe there needs to be a time to assess such drastic measures. And the time if takes for these measures to cycle through the economy can take up to a year in certain instances. Given this, the end is near for such hikes. The question now is for how long rates will be held at these levels. The idea of higher for longer has become much more popular as of late.
The attention has now turned to the impact all of this is having on corporate earnings. We are just beginning another round of earnings reports and the consensus is that these rate hikes will result in further contraction in corporate earnings estimates. I expect some mild contraction, not to the extent of many. This, and the following quarter or two, will be key to markets going forward. Once we have a stronger assessment of corporate earnings, we will have a more solid sense of the path of stock and bond pricing.
2023, similar to 2022, will bring market swings tied to various factors. A changing political landscape here in the United States and an impending debt ceiling debate will be an issue. A continued conflict in the Ukraine, China continuing to reopen from Covid lockdowns/our ongoing tensions there, and our constant attention to domestic economic data (housing, employment, consumer spending, consumer and wholesale prices, etc.) will all persuade markets this year.
2022 was a difficult year for stocks and bonds, both domestically and abroad. This is extremely rare to see both asset classes struggle together. You need to travel back to 1969, with the exception of 2018 where both stocks and bonds declined fractionally, to find a year when both stocks and bonds each declined by more than 3%. Despite there being pockets within the markets that performed well, 2022 was a difficult year. The themes we have preached over the years worked and I am pleased with how we managed through this period. I say this expecting much of what we saw to continue albeit with most of this in the rear-view mirror. Diversity among investments, strategic use of cash and short-term investments, staying committed to the plan we designed, and not making irrational decisions during irrational financial times, all are required to manage through volatile and troubled financial markets.
My previous correspondence discussed some ideas relating to forecasting and forward-looking theory. We used a much more macro approach versus sharp and pointed predictions in the short and medium term. We said the markets and economy were starting to find themselves in better lockstep than the previous 12 to 18 months. Since then, the markets have recovered slightly. Again, we are seeing more opportunities to invest or reinvest. Given this, and what we discussed above regarding market and economic headwinds, we are not in a place where we have an all clear. We have to work through some of these factors in 2023 before we find ourselves at a point where growth can resume.
As always, I want to stress my availability to discuss this newsletter or any other questions/thoughts you may have. No question or conversation is too small. Feel free to telephone (508-405-0065), email (jhartman@accessfits.com), or reach out to schedule a meeting in person. I also want to make myself available, at your discretion through any of the means I just mentioned, to anyone (family, friend, work associate, etc.) who you feel may find value in my services.
Kind Regards,
Jeremy M. Hartman
President, Access Financial & Income Tax Services
