With the simultaneous collapse in stocks and bonds in 2022, there were few places to hide. It was the worst year on record for bonds,* e.g., long-term treasuries were down -29.3%, * and stocks were not far behind: the S&P 500 was off -19.4% and Nasdaq, after being up +27% in’21, was down -33.1%.**

The cause was a series of seven interest rate hikes by the Fed to bring inflation down from a peak of 9.1% in June at the fastest rate in Central Bank history.*** From March through December, the Fed raised the federal funds, benchmark rate from 0 to 4.25% with an immediate impact on housing as mortgage rates soared.

The market swung to extremes throughout the year: e.g., believing the Fed would pause after promising inflation data emerged in June, a huge rally ensued, retracing half its losses from the June 16th lows of -23.55% for the S&P 500 and -33.7% for the Nasdaq Composite Index.

In October, though, confusing inflation signals over the duration of both inflation and the Fed’s ongoing commitment to hiking interest rates created fresh worries about the impact on corporate earnings. Investors ran for the hills, assuming a worst-case scenario, sending the market to new, year lows.

Since then, inflation has continued to slow, but gradually and unevenly, with the Fed remaining committed to at least one more rate hike. But rates are likely near their peak, as numerous economic indicators already show slowing growth with more to come as the full and lagged impact of higher interest rates emerges.

Employment remains strong at 3.5%,**** matching its 50-year low, with wage growth slowing but strong. Consumers are still spending, albeit more slowly but not contracting, given job strength and assets greater than pre-pandemic, providing a major buffer to the economy.

The bullish case is inflation continues to decline, and the Fed backs off, auguring better economic growth.The risk is either inflation stays high, forcing the Fed to keep rates higher for longer, or the Fed overdoes it and sends the US economy into recession. The consensus***** right now though, is that any recession would likely be mild given the employment and savings backdrop. A myriad of geopolitical and economic risks remain: the Ukraine war, China’s unpredictable policy actions, dollar strength, the looming debt ceiling battle, and more.

An important question is how much the stock market is already discounting, as the stock market often bottoms six-nine months ahead of earnings troughing; not atypically, too, the year after a major down year,the market can see gains of 20% or more.******

We think there is a high probability that the 2022 headwinds described above will turn into tailwinds in 2023, with inflation weakening and growth remaining positive.

Given the current uncertainty, however, we have been cautious in putting new money to work and patient in accumulating shares in well-run companies at levels not often seen. Short-term cash is garnering yields of 3.5-4% with little risk (treasuries), but we are well positioned for the unknowable moment when the market begins a lasting and higher trajectory.

Here at BD8 Capital Partners, we continue to focus on your long-term financial future and planning needs,while managing your investments to help meet your financial goals.

Please never hesitate to contact us with any questions and concerns.

Best always,
Barbara Doran
BD8 Capital Partners LLC
Cell: 917-733-7644
Fax: 917-580-6882
https://twitter.com/barbara_doran1__* Edward McQuarrie, investment historian and professor emeritus at Santa Clara University
*** Statista
**** Bureau of Labor Statistics
***** Bloomberg

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