Turning the Page on a Difficult Year

By JR Gondeck & David Sokolovsky, CFA, CFP on December 7, 2022

In November, equity markets continued their recovery on positive inflation news and a slight shift in tone from the Federal Reserve. The S&P closed 5%, and the Nasdaq closed over 3%¹ after a large rally on the last day of trading. Despite the improvement, 2022 is on pace to book one of the worst years on record for equity and bond portfolios. Economic data continues to point in the direction of improvements in price stability and normalizing labor conditions. In December, we expect to see the final rate hike of the year, raising the Federal Funds Rate to 4.5% and bringing us closer to the end of rising interest rates.

With the end of the year quickly approaching, the primary data to watch are labor and inflation conditions. In November, inflationary pressures eased further, with consumer and producer prices dropping more than expected². Rising interest rates have led to record declines in housing prices over the last two months which will likely further reduce inflation in future reports³. The labor conditions paint a slightly different picture suggesting that wages continue to increase and hiring remains robust. If prices can continue to stabilize while the consumer is able to generate additional income, we can expect stable consumer demand in the coming year.

On November 30th, Jerome Powell held a press conference to discuss the Federal Reserve’s strategy ahead. He acknowledged, for the first time, that interest rate increases are having the desired impact and future increases will be in smaller increments. A 50-basis point rate increase looks like a done deal for December and the path ahead will see rates rising at a slower pace. Despite the Federal Reserve increasing short-term rates, medium- and long-term rates have remained relatively low, leading to an inverted yield curve. History suggests that avoiding a recession in 2023 is unlikely. 

Looking ahead to December and early 2023, we expect additional volatility and will remain cautious. Portfolio managers will look to rebalance at the start of the year, which should lead to additional entry points for investors to come in off the sidelines. We expect tech and growth companies to reorganize and find ways to reduce overall costs, likely through more layoffs. Despite operational improvements, tech companies may struggle to generate significant returns. During periods of low interest, companies were often the largest buyers of their own stock by issuing debt but that strategy will likely fade.

Despite the difficult year, the three prior years were very strong in the market. We will continue to focus on value companies that generate higher yields and have lower price-to-earnings ratios. Cash-flowing investments such as high-dividend stocks and quality bonds should continue to provide protection for portfolios.  We are delaying recognizing additional gains where it makes sense until we enter the new year. We hope you and your families have a very happy holiday season and New Year. We look forward to seeing everyone in 2023.

1. Bloomberg Data – Accessed 12/01/2022
2. US Bureau of Labor Statistics – Released 11/10/2022
3. S&P CORELOGIC CASE-SHILLER INDEX – Released 11/29/2022