Fourth Quarter 2022 Review and Outlook

Written by Tim Rigby

The fourth quarter was the best quarter of the year for stock prices which was a welcome relief to a difficult year.  According to The Wall Street Journal, the returns were as follows:

 			                                                                             Quarter		    Year

The Dow Jones Average 15.40% -8.80%

The S&P 500 7.08% -19.40%

The NASDAQ Composite -1.03% -33.10%

As we have discussed, the Federal Reserve has raised interest rates dramatically to combat inflation that has run rampant this year.  The inflation spiral does appear to have peaked last summer but sharply higher interest rates may slow the economy. The decline in the stock and bond markets reflects that anticipation.  Markets also tend to look ahead so quite often a difficult year is followed by a very good year as many areas of the market have gone from overvalued to undervalued. 

The area that was the most expensive was technology stocks which are heavily weighted in the NASDAQ index.  While many of these are great companies, their stock prices were very inflated in relation to revenues or earnings.  The fourth quarter seemed to see a rotation away from these inflated stocks to more “value” types of companies.  These value companies tend to make up the core holdings of many of our portfolios, and we expect these stocks to continue to improve.  These generally have done well over the years, many pay nice dividends, and have great balance sheets.  In this inflationary period, those that have pricing power can do very well.  This means they can raise prices and not have demand for their products suffer.  If you have gone to a restaurant lately, prices have gone up sharply!  That’s pricing power.

As we anticipated the bond market had the worst year in many years.  Typically you want to invest in bonds when you can earn something over the rate of inflation.  This protects purchasing power.  Unfortunately, rates were so low over the last decade that this wasn’t possible.  Rates on CD’s and money market funds are a lot higher now, but inflation is so high bonds still have a negative “real” rate of return.  None the less, short term type bonds or CD’s are more attractive than they have been with returns of around 4% to 5% (up from zero a year ago) for clients that want part of their portfolio in less volatile investments. Our recommendation is short maturities as rates should ultimately go higher in our view as interest rate cycles are usually very long and this cycle of increasing rates has just begun.      

One general comment for all to be aware of is the increase in different types of fraud we see happening.  Be careful writing checks, wiring money, or giving solicitors of any type any information.  If you write checks, use special pens that the ink can’t be erased or “washed”.  Be careful how you mail checks as well as we have seen checks get stolen from mail boxes or even after being deposited in a Post Office!  These perpetrators then erase or “wash” who the check is written to and make it payable to themselves.

If you wire money, please double check the instructions directly with the party you are wiring money to.

Finally, if you speak with any solicitor, even those that appear to be “helping” you, be very careful giving any information to them, or allowing them to “remote” in to your computer to help you obtain a refund of some kind, or to clear up some kind of bill.  These people are very slick and can trick anyone.  Please call us if you have experienced anything similar to these experiences.

We hope everyone has a healthy and prosperous 2023!

Tim Rigby