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4th Quarter 2022 Market Commentary

We closed out a difficult year for the market. Indices tracking the market are almost all down for the year. Here are a few highlights: 

  • S&P 500 (Tracks US Large Cap Stocks) – Down 18.1%
  • Bloomberg US Aggregate bond index (measures total bond market) – Down 13%
  • Russell 2000 index (US small caps) – Down 20.4%
  • MSCI EAFE Index (International developed country stocks) – Down 13.9%

There was no place to hide. But the damage was actually done earlier in the year. Notwithstanding a drop right at the end of December, market indices came roaring back in the fourth quarter:

  • S&P 500 – Up 7.6%
  • Bloomberg US Aggregate bond – Up 1.9%
  • Russell 2000 – Up 6.2%
  • MSCI EAFE – Up 17.4%

2022 was an unusual year. Financial Advisors recommend holding a diversified portfolio which include bonds to lower the volatility of a portfolio when stocks go down. Everyone understands that stocks go down sometimes, but most people think bonds never go down. Yet they can.  Usually, bonds and stocks do not go down at the same time, but 2022 was different. Why? Bond performance was driven by rising interest rates and stock performance was driven by poor economic expectations. In a time of high inflation, interest rates rose while economic expectations dropped. This caused diversified portfolios that use bonds for diversification to essentially not work.

There are some factors that make me a bit more optimistic for 2023:

  • Bond yields are higher, and the Fed is slowing rate increases. This means bonds are far less likely to lose money in 2023 and can regain their role as a portfolio stabilizer. This point is proven by bond’s performance in the final quarter of 2022, where the Bloomberg Aggregate bond index rose 1.9%.
  • Inflation is going down. In fact, CPI dropped month-to-month in December. The Fed is still worried about wage inflation in the service sector and CPI is still too high year-to-year, but we are much closer to the end of rising rates.
  • Everyone is worried about a recession, but the job market is still very robust. It’s hard to believe we will have a significant recession in the entire economy with such a robust job market.

For those with a short timeframe, it is certainly a good idea to be conservative in your investments, but for those with a longer timeframe, I expect markets to recover, and a diversified portfolio will still be the best tool to help you meet your long-term goals safely. 

Something of Note: Interest rates have gone up, but many banks are still paying extremely low interest rates in their savings accounts. We have two solutions for FDIC-insured savings accounts with high rates (we do not charge for this service and make no money on it). Flourish is paying 4.15% on the first $250,000 (single) or $500,0000 (joint)  and 2.5% for balances above those amounts. Betterment’s Cash Reserve is paying 3.75% on all balances. In both cases there are no minimums or fees involved. All balances are FDIC insured. Interest rates are subject to change at any time. If you are interested, please contact us for an invitation at 201-848-6802.

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