PFA Updates
Rest in Peace, 2022 Stock Market.
Jan 03, 2023
Hello, friends.
Welcome to 2023 and a fresh start in the new year. I am glad the ugly markets of 2022, for both stocks and bonds, are now behind us. As we talk with clients, most people seem stuck somewhere between hope and fear for 2023. They hope the markets recover soon, as history has shown they do, even in the worst of times. [1] However, they also fear the 23% drop in the S&P 500 last year was just a precursor to a 2008-2009 type recession.
Nobody knows when this bear market will end, and patience is getting very thin. We draw technical information from many sources, some monthly but most daily. The consensus is that we are not out of the woods yet, and that patience is the most important virtue at this moment in history.
Our investment committee is happy we reduced risk and raised cash early in 2022. Unless clients made withdrawals for lifestyle needs last year, we still plan to hold a higher percentage of cash in our investment models until we believe it's a better time to fully reinvest in the markets.
For our clients who invest in IRAs and 401(k)s on a systematic basis, we favor stock funds because you are buying shares at a very good discount and the payoff will be in the future.
Clients often want to know what I think. Here are my opinions, and what I am telling clients at investment reviews with no guarantee that any of this will happen.
There is a strong possibility the markets will drop in the first quarter of 2023 and challenge the 3,500 S&P 500 low we saw in October of 2022. My fear is we could go an additional 10% further to around 3,150, which would get us to the average historical bear market drop of 30% or more for the S&P 500. [2] I hope and believe we will see a more sustained recovery in the second half of 2023.
The four key reasons the markets dropped in 2022 were inflation, supply chain issues, the Fed raising interest rates and the escalation of the Russo-Ukrainian War. None of these have been solved and until at least one improves dramatically, the markets will struggle.
We may already be in a recession, but it doesn’t feel like it. Typically, in a recession, corporate America slows significantly, and companies lose money, which causes them to lay off lots and lots of workers and stop spending money on expansion. On the contrary, Corporate America has been very profitable, they are busy and expanding and layoffs have been minimal, so our unemployment rate is still below 4%.
Typically, in a recession, the American consumer worries about unemployment and stops spending money. On the contrary, people are employed, jobs are plentiful, and because consumers are employed, they are spending and spending big. If you have been to a restaurant, brewery, traveled on an airplane, or been shopping recently you have seen firsthand that everyone is busy, and the American consumer continues to spend. This is good for the economy and a potential recovery.
The second half of 2023 will hopefully start a sustained recovery. If we see lows of 3,500 or below in the S&P 500, this might be the entry point for us to increase risk in client accounts to catch the wave "up" when it happens.
A divided government is good for the economy, because if Congress can pass legislation, it typically is bipartisan and better for the country. Further, we aren’t expecting any changes to income taxes through 2025. The US is in a historically low-tax environment, so we want to take advantage of all strategies that maximize moving monies to tax-free Roth accounts through 2025. We keep our eyes on politics and pending legislation, but we rarely let it influence our investment decisions.
Fear is good for the news business. No matter where you look, you can find very negative headlines about the economy and stock market. It's funny how everyone quoted is an "expert.” Some of these "experts" I have read their predictions many times over the years. As my grandfather used to say, "even a broken clock tells the correct time twice a day." If they keep beating the drum long enough their prediction may eventually be correct, even though along the way, they were wrong more than they were right.
If you keep looking, and sometimes even on the same page of a news source filled with negativity, you can find an economist who has a very positive read on the markets. Market technicians are talking about a golden cross, a death cross, and a head and shoulders chart. Long short, nobody can predict exactly what the markets will do; in the long term, the markets eventually go up to new record highs. We just have to be patient and believe.
Don't forget 2019, 2020 and 2021 had double digit growth in the markets. Let's hope 2023 gets us back on the positive train.
My favorite recent quote is from Fed chair Jerome Powell on September 22 of this past year. He said, "We have to get inflation behind us. I wish there was a painless way to do that. There isn't."
We are all feeling the pain, let's hope it does not get much worse before it gets better. We wish everyone a happy and healthy new year! If we can answer any questions regarding your financial plan or your investments, please reach out.
-Tom
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