Happy New Year?

About this time last year, just as we were putting our champagne glasses away, The Federal Reserve began to remove the “punch bowl” which we had been drinking from for much of the last ten-plus years, causing a brutal year for financial markets, which culminated in stocks being mostly negative in the final month of 2022.

The Dow Jones Industrial Average fell 4.1%, the S&P 500 dipped 5.8%, and the NASDAQ sank 8.7%. Continuing rate hikes from the Federal Reserve, investors’ unease surrounding Q4 earnings, and uncertain outlooks for 2023 halted the two-month equities rally. Only Emerging Markets finished December in the black, up 0.1%. The Dow closed out 2022 down 6.9%, the S&P ended the year off 18.1%, and the NASDAQ finished 32.5% lower.

While all eleven S&P 500 sectors were higher in both October and November, they all finished lower in December. Energy and Utilities were the lone gainers on the year, ending 2022 up 64.2% and 1.4%, respectively. Consumer Discretionary’s 11.4% decline in December also made it the worst-performing sector in 2022, down 37.6%.

“Going in one more round when you don’t think you can—that’s what makes all the difference in your life.” — Rocky Balboa

The year 2022 has left us feeling battled and bruised like Rocky, but losing one round doesn’t have to mean losing the fight, just as losing one battle doesn’t mean losing the war.

60/40 annual returns: This chart looks at the total return of a 60/40 portfolio, or a portfolio comprised of 60% equities (represented by the S&P 500) and 40% bonds (represented by the Bloomberg U.S. aggregate), rebalanced annually. The chart goes back to 1950, showing over 70 years’ worth of annual data. Last year was clearly a painful year for investors, but this chart helps to put that pain into perspective. Not only was 2022 among the worst years for a 60/40 portfolio since the mid-1970s, it was also the first time since 1974 that the bond market amplified the pain felt in stocks. In other words, it is incredibly unusual for markets to have moved the way they did in 2022.

As you can see, last year’s performance of this portfolio ranks as the 3rd worst year since 1950. So why go “one more round”? Here is why:

Humans tend to have short-term memories…2022 is freshest in our minds, but as we take a second look at the chart, we see that this same portfolio had double-digit returns in 40 of the last 72 years and was only down in 13 of those years. Of course, it doesn’t feel good during those down years, especially last year; however, the three prior years felt pretty good and far outweighed the down year. Remaining invested, although painful at times, is one of the main keys to success. The following chart further illustrates how time in the market helps narrow dispersion of returns:

Time, diversification and the volatility of returns: This chart shows historical returns by holding period for stocks, bonds and a 50/50 portfolio, rebalanced annually, over different time horizons. The bars show the highest and lowest return that you could have gotten during each of the time periods (1-year, 5-year rolling, 10-year rolling and 20-year rolling). This page advocates for a simple balanced portfolio, as well as for having an appropriate time horizon.

What first stands out in the chart above is looking at the 1-yr time periods—the negative 1-yr returns are eerily similar to what we experienced in 2022 for the bond portfolio and the 50/50 portfolio, while the stock portfolio faired a bit better last year. Time horizons to achieve investment objectives are typically more than just one year out. You will notice that in any 5-yr rolling period dating back to 1950 that this 50/50 portfolio never lost money! Past performance doesn’t guarantee future performance, but this certainly bolsters the argument for remaining invested in a well-diversified portfolio and “going in one more round when you don’t think you can—that’s what makes all the difference in your life.”

As we once again are cleaning our champagne glasses and putting them away, we are optimistic and hopeful for the new year—a story yet to be written, but for now it will still be authored in part by the Federal Reserve and how they feel and react to this most recent economic data and the new economic data to come:

Employment

November’s unemployment rate was unchanged at 3.7%, but the labor force participation rate dipped another 0.1 percentage point to 62.1%. Labor force participation stands 1.2 points below its February 2020 high. In November, 263,000 jobs were added, which topped non-farm payroll expectations of 200,000 but paled in comparison to November 2021’s gain of 647,000.

Consumers and Inflation

The year-over-year (YoY) US Inflation Rate cooled by 0.64 percentage points to 7.11%, marking its fifth straight monthly decline. YoY US Core Inflation dipped slightly to 5.96%. Both personal spending and the month-over-month (MoM) US Consumer Price Index were up 0.1%. Lastly, the Federal Reserve raised the Upper Limit Target Federal Funds Rate by 50 basis points to 4.5% at its December 14th meeting, the first rate hike in the last five meetings to be less than 75 basis points.

Please feel free to contact us should you have any specific questions or concerns.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

Companies mentioned are for informational purposes only. It should not be considered a solicitation for the purchase or sale of the securities. Investing involves risks, and investment decisions should be based on your own goals, time horizon, and tolerance for risk.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

Monthly Market Recap – December 2022