TrustWell’s Quarterly Market Review: Q4 2022

By Brett Freese

2022 was a very challenging year, but many great changes and opportunities are here and are coming. 

Over the last few decades for the S&P 500 the worst 3 month return was -29.42% (9/1/2008 to 11/30/2008) the best 3 month return was +25.70% (3/2/2009 to 5/31/2009).  The best period was less than 100 days after the worst and I remember it was very, very uncomfortable to be invested in early 2009

Important note about bear markets:  In my 30+ years of investing it has been my experience that bear markets usually feel at their worst near the end of one. 

Market Highlights:

• “The 60/40 strategy is on pace for its worst year since 1936” according to Bank of America Global Research. Long-term US Treasuries are down more than 20% this year.
• The major stock and bond indices were all up this past quarter (see “Market Scorecard” below).
• Commodities were mostly up this past quarter with Gold up approximately 9.5% price per ounce and the broad basket of commodities was up 2.71% for the last 90 days. Oil was down 0.55%.
• Bitcoin is down 64.60% for the year and down 15.57% for the quarter.

Economic Notes:  Starting with challenging news and ending with some good news.

• All eyes on the Federal Reserve and how they respond to weakening employment numbers now because: 1. The November election is over.  2. Most key economic inflation numbers are coming down 3.  Under supply Issues in most areas of the economy are now moving towards over supply.  4.  Fed continues to point to wage inflation pressures as their main concern.  (Personally, I really struggle with hoping people lose their job.  Therefore, I pray for wage inflation to come down without massive job losses.)
• Interesting Note on the Federal Reserve: In November of 2021 (less than a year ago) the most hawkish member was calling for a ½ of a percent raise in interest rates for the whole year of 2022.  Look at where we are now!  If the organization that has more information than any other in the world can not predict or plan the economy accurately, then you and I can’t expect from ourselves to be more informed than them.  All the more reason to stick to the long-term plan and strategy.
• China continues to go through major growing pains as it struggles to manage a dictator-imposed communism vs the prosperity and trust of a capitalistic middle and upper class. China’s failed 0-COVID policy has greatly handcuffed China and the rest of the world.  They have just recently did an about face on the 0-COVID policy and have opened up.  The impact on spending, manufacturing, travel, oil prices, and other economic topics remain to be seen.
• The pain of inflation, supply issues, war, failed governmental policies in the US, Europe, China, and in many other countries has hit us all hard in 2022.
• The Federal Reserve moved the Federal Funds rate target range to 4.25 – 4.5%, they have stopped their bond purchases, and are letting past purchases mature (taking liquidity out of the bond market). There is an expectation by the markets for further smaller rate hikes in early 2023 (we shall see). Note: The Federal Reserve has a dual mandate to achieve both stable prices and maximum sustainable employment. I now believe that Federal Reserve is going too far with the rate hikes and should pause.
• Inflation in rents, salary and some others areas are still very high, but there are some signs in inflation breaking by looking at lower housing prices, lumber, oil and other areas. Employment is weakening, but is still at record highs.
• The unprecedented spending in Washington will have long lasting effects on the borrowing cost of the US Government especially with interest rates going up.
• As we continue to pray for people in regards to the events in Ukraine, there are short-term and long-term political and economic concerns to continue to watch. I am very concerned about an even more increasing hunger issues in much of Africa, Pakistan, Haiti, and other food challenged areas of the world.
• Mortgage rates are hitting a 15 year highs of around 7%.
• Good News:
  • This pullback in every major asset class (as painful as it is right now) sets us up for more healthy strategic asset diversification performance in the future. We need and should begin to see asset classes like US Treasuries and US Large Cap Stocks decouple from each other.
  • Bear Markets and recessions are normative. The challenge is that we don’t know when one will happen until months after it already happened.
  • The US Large Corporations still are producing strong revenue and profits, equity capital (cash on the balance sheet), and leverage (debt) is below a two+ decade average.
  • From challenging times come most of the new innovations, greater efficiencies, stronger team work, and fantastic investment opportunities, and many of those opportunities come as news, data, asset prices, and feelings get worse.

Historical Stock Market Declines:

Market declines and inclines rarely look the same or even feel the same, but they do happen and the ups and downs are a part of the process – It is important to have a plan/strategy so emotions don’t dictate buying or selling.

A 5% or greater loss occurs about 3 times a year
A 10% or greater loss occurs about once a year
A 15% or greater loss occurs about once every 2 years
A 20% or greater loss occurs about once every 3.5 years

Please know that when stock prices go down the “market collapse gurus” receive the most air time. Likewise, when stock prices go up all the “bull market gurus” talk about how the market will continue to be up BIG. Please know that most “gurus” are great with hindsight to justify how important it is to have their voice heard.

Market Scorecard for the last 13 weeks ending 12/29/2022:

US Equities:

+ 6.21%                    S&P 500 (Index of the largest US publicly traded companies)

+ 5.88%                   Russell 2000 (Index of 2000 Small-cap US publicly traded companies)

Global Equities:

+ 16.61%                 Foreign Large – Morningstar Category

+ 10.01%                 Foreign Small/Mid Stock – Morningstar Category

US Bonds:

+ 3.66%                   Corporate Bond – Morningstar Category

+ 0.49%                   Short Government – Morningstar Category

+ 3.40%                   Muni National Bond Index – Morningstar Category

Other:

+ 1.53%                   Global Bond – Morningstar Category

+ 9.49%                   Gold Price

– 15.57%                  Bitcoin

+ 2.71%                   Commodities Broad Basket – Morningstar Category

Market Indicators:

Inflation:
7.75% as of 12/2/22  (Down 0.51% from 8.26% in 9/14/22 and Down 0.83% from 8.58% in June 2022)

Unemployment: 
3.7% as of 12/2/22  (Unchanged from September 2022)

Fed Funds Target Rate:
4.25 – 4.50% as of 12/28/22  (Up from 9/29/22 of 3.00 – 3.25%)

Suggested Next Steps:

• Understand that market cycles are normal. The markets go up and down in mostly unpredictable directions and amounts. The ups and downs of investments many times seem to make sense only after they happen, however, market prediction is very difficult. (i.e. the next stock market crash has been predicted every year since 2008).
• Your investments are just one factor in the success of your life, money, and purpose. Make sure that you are confident in your full financial plan, so you can successfully have an amazing ROL (Return on Life).
• Your investment allocation and diversification are important factors in both risk management and future returns. Therefore, if you have questions about your investment plan, please schedule a phone or in-person meeting with your TrustWell Financial Advisor(s).