We’re about to ring the final closing bell for 2022, and what a year it’s been. Given the number of drastically bad events this year, like the war in Europe and near-record inflation, we’re lucky that it wasn’t worse for the stock market. Still, it’s likely going to go down as one of the worst years ever for the bond market, as well as for balanced stock and bond portfolios.
For the remainder of the year, I think conditions are favorable for the market to move higher. A lot will depend on what the Federal Reserve does and says regarding interest rates when it meets mid-month. Economic data has been very mixed, with some looking like the economy is slowing down, while others pointing to an economy, especially the labor market, that is very strong.
For those reasons, I don’t think we are actually in a recession currently. As I have written, I expect one next year, and that’s helping to shape our outlook for 2023. I believe that companies will start to report earnings that are lower than 2022’s, or at least lower than had been projected. As this happens, I can see stock prices fall, since investors generally don’t want to own companies with falling earnings. Admittedly, this is short-sighted, as even the best companies don’t grow earnings all the time, and investors are rewarded for sticking with them even through slow times. If your time horizon is longer than 3 years, the downside from here may not affect you much.
With this outlook, I think that intermediate and long-term interest rates (think 5-30 year maturities, not the overnight rate that the Federal Reserve controls) could come lower in 2023. That could set up the bond market for a very good rebound next year. In fact, it wouldn’t surprise me if bond market returns outperformed stock market returns. The US Dollar may also slide, or at least stabilize next year, which could help commodity prices to rebound.
Within stocks, we’ll be looking at sectors that generally perform better in slower economies, like defense stocks, consumer staples (food and beverage), and utilities. I do not think that an investor should abandon stocks altogether, though, as markets can turn on a dime, as we’ve seen this year. Every time it feels like the smart thing to do is to sell and get out, the market seems to pop higher by 10%. So, there’s no use in trying to time all of this. In fact, a good strategy might be to overweight some of the less economically sensitive sectors and overweight the high-growth stocks that have been beaten down this year, while equal-weighting the rest, creating a barbell approach. Some of those big growth companies could well be trading at prices that are lower than we’ll ever see again.
Of course, tactics must remain fluid, and conditions change so rapidly now. I think the best advice I could give to our clients is to speak with their advisor about their Signature Life Plan to make sure that you have a well-defined strategy that meets YOUR goals and objectives. Comparing your portfolio to the S&P 500 makes very little sense if you aren’t actively seeking aggressive growth, so create a plan with your advisor that will benchmark your portfolio to your goals. Then, review that plan regularly to make sure that we are aware of any changes in your goals and to make sure that your portfolio is taking the appropriate risk to meet those goals. For decades now, our guiding principle in portfolio design is to allow our clients to reach their objectives with as little risk as possible.
Finally, if you are required to take a distribution from your IRA, please confirm that this has been done for 2022. We’re running out of time, and the penalties for not meeting the minimum are very steep. The deadline for making charitable contributions is almost upon us, too, so make sure you have these completed. The stock market will be closed on Monday, December 26 in observance of Christmas, and then again on Monday, January 2, 2023 to observe New Year’s Day. Additionally, many of us will be taking vacations around the holidays, so please don’t wait until the last minute to take care of distributions and gifting. We’ll be trying to offset capital gains with losses, so if you have any gains or losses elsewhere (other stocks, businesses, or real estate), be sure to let us know so that we can account for that.
From all of us at Signature Wealth, we wish you a Happy Holidays, Merry Christmas, and Happy New Year! Here’s to hoping that 2023 is our best year ever!