- A Look Back at 2022. The dialogue in 2022 revolved around inflation, which – brought on by pandemic-related circumstances – surged to its highest level since 1981. In response, we saw the Federal Reserve enter inflation fighting mode, embarking on its most aggressive monetary policy tightening cycle in four decades. In just nine months, the Fed raised rates by 4.25% from a starting point of zero. Higher rates increase borrowing costs throughout the economy. Stocks and bonds suffered setbacks, and the potential for a recession weighed on investors.
- Inflation Has Likely Peaked. Inflation statistics peaked at uncomfortably high levels over the past year, but are now showing signs of moderating. Historically, once inflation peaks, it tends to decelerate at a steady pace. Improving supply chains and reduced demand have relived price pressures. The annual inflation rate in the U.S. slowed for a sixth straight month to 6.5% in December. Goods prices, a key driver of inflation over the past year and a half, continues to ease as prices fell for products such as gas, computers and sporting goods. Interest-rate sensitive sectors such as housing and auto sales, in particular, are seeing a significant pullback in demand.
- Growth Headwinds. As higher interest rates filter through the system, there is growing evidence of a deceleration in global economic growth. However, consumer activity remains solid and a resilient labor market is carrying the U.S. economy. Workers continue to enjoy wage gains, albeit at a moderate rate, consistent with an improving outlook for inflation.
- Federal Reserve. Following its most recent meeting in mid-December, the Federal Reserve approved an interest-rate increase of 0.5 percentage points, and signaled plans to lift rates through the spring, though likely in smaller increments. The decision marked a step down after four consecutive larger increases of 0.75 points.
- Corporate Earnings. The upcoming Q4 earnings season will have a heavy influence in shaping market’s expectations for the new year. Having just completed their planning for 2023, we expect corporate managements to be conservative in their plans and in their expectations for business. We expect top-lines to be pressured by softer demand, offset by cost cutting, normalizing supply chains, and a weaker USD lending to more favorable currency translation.
- Outlook for 2023. We are optimistic on what 2023 might offer us as investors. Despite a difficult last year, most of stock market’s decline took place in the year’s first half. Valuations have improved, and are already reflecting a degree of forecasting conservatism. There is significant speculation about a recession in the next 24 months. Regardless of whether one occurs, we are entering it in much better shape than two previous recessions. The labor market, consumer spending, a relatively strong financial system, and the lagged effect of enormous fiscal stimulus policies remain fundamental supports that should help preclude a serious recession.
