Quarterly Market Commentary
CFG Wealth Management – 2022 Year-End Market Commentary and 2023 Outlook
2022 proved to be a particularly challenging year for investors. The market narrative was shaped by stickier than expected inflation which forced global central banks to raise rates at the quickest pace in history. The tightening led to recessionary fears, causing the S&P 500 Index to decline for three consecutive quarters, the longest quarterly losing streak since 2009 (when the market fell for six consecutive quarters). To make matters worse, the year also included a significant increase in geopolitical concerns, with Russia’s invasion of its neighbor Ukraine, sparking the largest land war in Europe since World War II, and China’s shift to a zero-Covid policy, further disrupting a global supply chain that, up to that point, was showing signs of improvement. Each of these geopolitical events added to inflationary tensions, and raised concerns that the Federal Reserve would be forced to go even further than original expectations to bring inflation under control. Similarly, among fixed-income securities, there was no refuge. Interest rates spiked across the yield curve, thereby sinking all investment-grade and high yield bonds alike. As a result, the traditional 60/40 portfolio (60% S&P 500 Index/40% Bloomberg US Aggregate Bond Index) declined the most since 2008, returning -16.07% for
- It is rare for stocks and bonds to fall in the same year, as it has happened just four times before this year going back to 1928. In summary, it was most certainly one of those years that investors would like to forget.
All three major US equity indices (S&P 500, NASDAQ 100 and Dow Jones Industrial Average) fell into bear markets during the year, suffering their worst overall declines since 2008. Value stocks managed to claw back from the lows set in late September, with the DJIA finishing the year down -8.8%, while growth stocks, which tend to be more price sensitive to higher interest rates and the prospect of a slowing economy, fared far worse, with the S&P 500 down -18.11% for the year and the tech heavy NASDAQ down a more concerning -32.38%. This dispersion of performance between value and growth stocks shouldn’t come as a surprise however, as lower P/E stocks and particularly those paying dividends offer greater downside protection when the discount rate applied to those earnings is rising. On the flip side, growth stocks that trade at high multiples are at higher risk levels, not only from a shrinking of those multiples but lower earnings growth due to the slowing economy and increased borrowing costs. This combination flattened many tech and speculative companies’ stock prices in 2022.
Bond investors will remember 2022 as a year of forced adjustment to a drastically different environment, and it happened fast. While the benchmark 10-year U.S. Treasury note yielded just 1.5% at the end of 2021, things changed quickly in 2022. The yield on the 10-year Treasury rose throughout most of 2022, topping 4% in October, a level not reached since April 2010. The importance of the rise in yields is significant for investors. For one, when yields rise, prices of bonds fall. This negatively impacts bond investments, which can be exemplified by the return of the Bloomberg US Aggregate Bond Index, which returned -13.01% for 2022, marking the worst year for bond investments in history. The Bloomberg US Aggregate Bond Index dates back to 1976 and in those 40+ years of calendar year returns there were only four down years before 2022. The takeaway, investors felt considerable pain in the part of their portfolio that typically provides steady returns with consistent income as well as defense against volatility in the stock market.
As we move into 2023, we see elements in the economic data that could avoid a harsh recession and potentially even achieve a soft landing. The back- to-back lower-than expected increases in monthly CPI numbers for November and December present a more comforting picture for financial markets. Similarly, the economy expanded in the third quarter, emerging from two negative quarters of growth. Economists are expecting that positive growth numbers will be seen for the fourth quarter as well. The war in Ukraine persists, however supply chain issues stemming from a slower Eurozone recovery and China COVID lockdowns continue to improve, which should continue to have a positive impact on inflation readings going forward. Though inflation has put a slight strain on household budgets, employment has been a relative bright spot in the mixed economic environment. Unemployment remained low at 3.7% for the November reading and job creation continued, albeit at a slower pace than in recent months. The main takeaway is that the current level of job openings is almost 11 million, which means there is still 1.7 open jobs per unemployed American. This should allow for much less job losses than what typically comes with the average recession. Finally, the S&P 500 Index entered bear market territory in 2022 as we know, and since 1950, the S&P 500’s median return after closing in a bear market is +23.9% one year later. While we wouldn’t be surprised by continued volatility, a potential bottoming in the equity markets and peak in yields should result in a mild grind higher for equity and fixed income markets; a favorable environment for diversified multi-asset portfolios.
In summary, while we expect some choppiness and volatility to continue through the start of 2023, we see opportunities for recovery in the year ahead. We see 2023 as a year where Growth stocks have room to rebound if inflation continues to moderate, and after being underweight International equities for the bulk of last year, we once again see upside potential in that segment, particularly in emerging markets. For Fixed Income, with higher yields and lower prices, bonds look attractive for the first time in many years. Based on these general themes and our outlook for the year, we recently modified the allocations in our core investment models and have re-balanced and re-allocated many of your accounts, or will have done so around the time of your receiving this commentary. The one exception are portfolios on a recurring income, or those where sizable withdrawals have recently been taken. We feel that it remains critical that we continue to be tactical and thoughtful in the cash creation for our income portfolios, with the primary goal of minimizing realized losses, and we will continue to do so until we feel enough value recovery has occurred in the equity sleeve, at which point we will re-balance our income focused strategies.
As always, we are available if you have any questions about your portfolio, our current views and plans, or if you’d like to schedule a review. If you would like to discuss anything related to your accounts or this commentary, please don’t hesitate to contact our office at (858) 550-3960 or (800) 884-5121. We greatly value your relationship and the continued trust you place in us to guide you through times like these.
Graydon Coghlan, CRPC – President/CEO
Registered Representative, Securities America, Inc.
Financial Advisor, Securities America Advisors, Inc.
CA Insurance License #0B31440
4370 La Jolla Village Drive, Suite 630
San Diego, CA 92122
(858) 550-3960 (phone)
(858) 550-3969 (fax)
All opinions and estimates included are as of the date listed and are subject to change without notice. This letter is provided for informational purposes only. It is not intended as an offer or solicitation with respect to the purchase or sale of any security or offering of individual investment advice. The S&P 500 Index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a broadbased capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928. The Barclays Capital U.S. Aggregate Index is a broad index representing the U.S. bond market. An investor cannot invest directly in an index. Past performance does not guarantee future results. *Sources: Nasdaq; Morningstar; Advisor Group
Securities offered through Securities America Inc., a Registered Broker/Dealer Member FINRA/SIPC, Advisory services offered through Securities America Advisors Inc., an SEC Registered Investment Advisor, CFG Wealth Management and Securities America are not affiliated. Trading instructions sent via e-mail may not be honored. Please contact my office at (858) 550-3960 or Securities America, Inc. at (800) 747-6111 for all buy/sell orders. Please be advised that communications regarding trades in your account are for informational purposes only. You should continue to rely on confirmations and statements received from the custodian(s) of your assets. The text of this communication is confidential, and use by any person who is not the intended recipient is prohibited. Any person who receives this communication in error is requested to immediately destroy the text of this communication without copying or further dissemination. Your cooperation is appreciated. 02/23