fbpx
2023 Market Outlook: Financial Factors Shaping the Year Ahead

2023 Market Outlook: Financial Factors Shaping the Year Ahead

For the first time since 2018, the S&P 500, along with most other major indices had a negative return for the calendar year in 2022. Financial buzzwords like inflation and interest rates appeared constantly in the media and social media, and rightfully so with the role they played. Meanwhile, conflict abroad, unfortunately, came into the spotlight with the invasion of Ukraine, sending a global shockwave that had a large impact financially.

Those were just a few of the headlines we saw last year. While they undoubtedly shaped the financial picture for many, there was plenty more at play. We explore the investing trends that developed – or continued to develop – in 2022, and look toward the year ahead in our third annual market outlook. You can read the entire outlook and more about each of the pieces in this year’s publication below.

Questions about any of the pieces in this year’s outlook? Send us an email at [email protected].

Syl Michelin, CFA

Syl Michelin, CFA

US Expat Financial Advisor

A Bear Market in Search of a Recession: 2022 Recap & 2023 Market Preview

In his cover story for this year’s outlook, Syl Michelin, Walkner Condon’s resident Chartered Financial Analyst, addresses the question of whether we’re headed toward a recession. Drawing on data from prior recessions as well as data on current economic conditions, Syl points to the idea that perhaps a recession isn’t imminent.

Mitch DeWitt, MBA, CFP®

Mitch DeWitt, MBA, CFP®

Financial Advisor

Playing It Safe? The State of the Fixed Income Market

One of the investing topics we heard a lot about in 2022 – and that we covered on the Gimme Some Truth podcast – was the bond market. In a bad year for stocks, bonds also had a rough go of things. Mitch DeWitt dives more into the state of fixed income heading into 2023.

Nate Condon

Nate Condon

Financial Advisor

Geopolitical | Conflict Plays Pivotal Role in Tumultuous 2022

The war in Ukraine had wide-reaching consequences in 2022 and played a large part in the financial challenges throughout the year. Nate Condon discusses the geopolitical headlines from 2022 and how they affected the markets.

Jonathon Jordan, CFP®, CEPA

Jonathon Jordan, CFP®, CEPA

Financial Advisor

Housing Market | Will Rates Stay This Way?

Mortgage rates had a record year in 2022, but not in a good way. According to data from Freddie Mac’s Primary Mortgage Market Survey, mortgage rates rose more than any previous year on record, climbing by 3.2% to end 2022 at almost 6.5% on average. Jonathon Jordan covers what we saw in the housing sector last year and what might be on tap in 2023.

Alicia Vande Ven, MS, Candidate for CFP® Cert.

Alicia Vande Ven, MS, Candidate for CFP® Cert.

Financial Advisor

Slice of Life | How to Stop Making Bad Financial Decisions

Many of us know that a financial decision may be unwise before we make it. Yet, we still go through with it. In this piece, Alicia Vande Ven dives into the behavioral psychology of making bad financial decisions, and how we can correct the thinking that leads us astray. 

Clint Walkner

Clint Walkner

Financial Advisor

Investment Trend | The Rise of Direct Indexing

A hundred years ago, people primarily invested in individual stocks through stockbrokers. Mutual funds changed the game, followed by the further advances – and a decrease in investing costs – brought on by exchange-traded funds in the early 2000s. As Clint Walkner, explains in this piece, direct indexing, one of the newest investment options targeted toward high-net-worth individuals, is a move back to the future, of sorts. 

Stan Farmer, CFP®, J.D.

Stan Farmer, CFP®, J.D.

US Expat Financial Advisor

Currency | The End of the Dollar Bull Run?

Along with the outperformance of U.S. stocks compared to international stocks over the past decade, the dollar has also been in a period of outperformance compared to other currencies. In this piece, Stan Farmer assesses the factors at play that could contribute to a potential end to that run for the dollar, and how investors, particularly Americans living abroad, can adjust accordingly in 2023.

Keith Poniewaz, Ph.D.

Keith Poniewaz, Ph.D.

US Expat Financial Advisor

International | A Tale of Two Markets

Drawing an analogy with Charles Dickens’s “Tale of Two Cities,” Keith Poniewaz analyzes the international markets in 2022 (not quite the best of times, but not as bad as U.S. equity markets) and foreign currencies being hit hard by the dollar (the worst of times). The conclusion? There may be opportunities in international markets in 2023.

Financial Market Recap for Q3: Gimme Some Truth Podcast

Financial Market Recap for Q3: Gimme Some Truth Podcast

How did the markets fare in the third quarter? What trends are unfolding this year? And what’s on the horizon for the rest of the year?

Nate Condon and Clint Walkner unearth the answers to those questions (and more) in this bonus episode of Gimme Some Truth, our Q3 market recap. Armed with data from JPMorgan’s Guide to the Markets, Clint & Nate explore the drivers of inflation, U.S. market outperformance, bonds, and more.

Questions related to this podcast or topics you’d like us to cover in future episodes of Gimme Some Truth? Send an email to [email protected].

As Fall Falls: A Market Perspective

As Fall Falls: A Market Perspective

As fall falls and the temperatures signal a new season, we are reminded why we love this time of year in Wisconsin. We are replacing our shorts and swim trunks with flannel shirts and hooded sweatshirts. Even though most of us have been through the Midwest seasonal pattern for decades, every season feels new and different from last year or the year before. We know that it isn’t different. Leaf colors will change and eventually drop. Snow will fall and temperatures will once again have a minus in front of them. 

The investment markets tend to run in similar cyclical patterns. Albeit not as predictable as the seasons, stock and bond markets have a familiar rhythm. Investment markets peak, then fall, eventually bottoming out before rising again. While we all know this and have likely been through the cycle, it is very easy to get lost in the noise, feeling as though this time it is different

Proper perspective is one of the most essential traits of successful long-term investors. While it is sometimes difficult to deal with freezing temperatures day after day in January and February, we know that by April and May things will improve. It is harder to have a solid perspective when the investment markets fall and show no indication of recovery. The majority of stock and bond markets started 2022 sliding downhill and have continued that negative momentum through the third quarter. If the first nine months of 2022 were an “investment market winter,” we don’t have the luxury of looking at a calendar to tell us when spring will arrive. 

Market Perspective: The Last 30 Years in the S&P 500

When I begin to lose sight of the big picture, I tend to look at history as a way to get my bearings. Here is a chart of the S&P 500 annual returns for the last 30 years. 

There are two significant takeaways from this chart. First, in the last 30 years, the S&P 500 has only had five years of negative returns of more than 2%. Second, only one of these years occurred in the last 13 years. The first takeaway helps to provide context. Most investors define themselves as long-term, with a time horizon of more than 10 years. Therefore, seeing the last 30 years of returns can give us a useful long view. The second takeaway helps us to better understand the unique nature of the most recent bull market. From 2009 – 2021, there was one meaningful down year over these 13 years. Most bull markets last just under three years. While a market downturn was inevitable, predicting when it would start and the depth of the downturn is impossible. Coming off the down year in 2018, many respected economists and market professionals were predicting a difficult year for the US stock markets in 2019. As we can see from the chart, the S&P 500 index posted a total return of over 28% for 2019 and started a three-year run of double-digit positive returns. This isn’t throwing stones at the economists and market professionals who got it wrong in 2019, simply pointing out that predicting market returns or when markets will fall in any given year is incredibly difficult. 

Raising of the Fed Funds Rate and Bond Markets

Now that we have a better understanding of the recent history of the U.S. equity markets, let’s turn our attention to the fixed income or bond markets. As jarring as 2022 has been for the equity markets, it pales compared to what has transpired in the bond market, particularly due to the Fed raising interest rates. The Federal Funds Rate, which is the rate most often adjusted by the Federal Reserve, began the year at .25%. As of Oct. 3, the current Fed Funds Rate sits at 3.25% as a result of three straight .75% increases. 

The Fed is raising interest rates to combat soaring inflation. While this is necessary to help contain the current inflationary environment, it is leading to an incredibly challenging bond market. This coalescence of events has led to the worst start to a bond year since 1842. Here are three popular bond indexes to illustrate the negative 2022 performance.

The positive byproduct of the Fed aggressively raising interest rates is that we are finally in a higher-yielding bond environment. Newly issued bonds from the U.S. government and corporations are paying much more attractive interest rates than in the past 15 years. 

Perspective is easily lost in light of the turbulent market conditions. Much like the despair you feel when we receive that early March snowfall, it is helpful to keep in mind that the current stage of this cycle will run its course and the markets will grow again. This is the time to review your portfolios and investment strategy to ensure that you are well positioned for your long-term goals.

ABOUT THE AUTHOR

Nate Condon

FINANCIAL ADVISOR

Nate Condon is one of the co-founders and managing partners of Walkner Condon Financial Advisors. He is a fee-only, fiduciary financial advisor who works with clients locally in Madison and around the country.

How Long Will Inflation Stick with Us?

How Long Will Inflation Stick with Us?

There is no lack of inflation data that we see on a near daily basis; however, the question remains – how long will this elevated inflation level last?

With all the talk of inflation, several terms are thrown around: CPI, Core, PCE, and more – ad nauseam. Core CPI is an attempt to strip out the most variable drivers of inflation (namely food and energy) from the base (or “headline”) CPI number, but the costs of food and energy can infiltrate into core CPI items such as apparel and household goods.

One index that is less discussed is the notion of Sticky Inflation, which examines how price changes can vary at shockingly different rates. This concept is examined by the Federal Reserve Bank of Cleveland in their post, “Are Some Prices in the CPI More Forward-Looking Than Others? We Think So”:

“The most comprehensive investigation into how quickly prices adjust that we know of was published a few years ago by economists Mark Bils and Peter Klenow. Bils and Klenow dug through the raw data for the 350 detailed spending categories that are used to construct the CPI. They found that half of these categories changed their prices at least every 4.3 months. Some categories changed their prices much more frequently; price changes for tomatoes, for example, occurred every three weeks. And some goods, like coin-operated laundries, changed prices on average only every 6½ years or so.”

Bils and Klenow then developed a methodology that separated these “sticky” priced items– items that changed prices less than every 4.3 months– from the “flexible” items– items that changed more frequently than 4.3 months on average. Intuitively this should make sense since it is far easier to raise the prices on tomatoes than it would be to increase rents in a residential building where the tenants have long-term leases.

Recent History of Sticky Inflation

Viewing the last 10 years, let’s take a look at the Sticky CPI versus Flexible CPI and see what we can take away from this chart.

In my opinion, it is important to note that Sticky CPI over the last 10 years was really sticky, and low overall. Looking into the Flexible CPI, particularly in 2015, the main driver of deflationary pressures was energy. We had a low overall print on CPI that year but it appeared to have almost no impact on Sticky CPI. Here’s where I begin to worry a bit about the longer-term sustainability of heightened inflation; despite gas prices being on a record 99-day decline (that just ended), there is no guarantee that any of that will affect Sticky CPI. The chart may be a little misleading since the upslope looks fairly gentle – in January 2021 the 12-month Sticky CPI was 1.7%, and in August it was 6.1% on a quickly rising curve. Given how stable the sticky CPI has been over the last 10 years, this increase in Sticky CPI in two years is significant and could prove meaningful to how we interpret future inflation. 

How Much Does Sticky CPI Influence Headline CPI?

According to the Cleveland Fed, In terms of the overall, or ‘headline’ CPI, we judge that about 70% of it is composed of sticky-price goods and 30% of flexible-price goods.” If this is the case, inflation may be around longer than we’d hope, and certainly well above the Fed mandate of 2%. The rate traders are not necessarily agreeing that this is the case, however. The forecast there is that rates will peak in the first half of 2023, with interest rate cuts later in that year. 

This is what the inverted bond curve we’re currently seeing (see link below) is predicting: The Fed overshoots the rate increases, causes a significant economic slowdown (recession), inflation falls quickly, and they immediately have to reverse course to bail out the ailing economy. To think that we will reverse course so quickly in having to cut interest rates is a bit hard to imagine, though noted bond trader Jeffrey Gundlach and celebrity ETF manager Cathie Wood are already talking deflation. Call me skeptical. A better bet may be that we see a less aggressive Fed in 2023 than this year, with a waiting period at some point to see if the inflation data is trending in the right direction. 

In a very uncertain economic picture, one thing is clear – significantly more recessionary headwinds are present than 12 months ago, and the Fed has the unenviable position of trying to navigate a soft landing. Let’s all hope that the inflation we are experiencing won’t be so sticky after all. 

ABOUT THE AUTHOR

Clint Walkner

FINANCIAL ADVISOR

Clint Walkner is one of the co-founders and managing partners of Walkner Condon Financial Advisors. He is a fee-only, fiduciary financial advisor who works with clients locally in Madison and around the country.

Recency Bias and the Fed’s Interest Rate Hikes

Recency Bias and the Fed’s Interest Rate Hikes

On every vacation we go on, my kids say something to the effect of, “This is the best vacation ever!” I typically follow up that statement with the question “What about that other vacation you said was the best?” And they respond, “Oh yeah! That was my favorite too!”

Is each vacation we take truly the “best” we’ve ever been on? Are we just upping the ante and topping each trip we take with a more exciting one? Nope. So then why do they think that each vacation we take is the best ever? Recency bias.

Recency bias is a cognitive predisposition that causes people to more prominently recall and emphasize recent events compared to those that occurred further in the past. My kids claim our current vacation is the best because it’s fresh in their minds, and they remember it most clearly.

When it comes to investing, recency bias shows up in many different ways: picking a stock or fund based on a recent surge in performance, overweighting a particular asset class due to recent outperformance compared to other sectors, assuming the current bear or bull market will continue, and generally losing sight of longer-term trends in things like gas prices, interest rates, and inflation.

Look no further than the current discussion of the federal funds rate. For reference, the current federal funds rate is 3.25%. A year ago it was .25%. 

So, if you look only at the recent history of interest rates, this may seem like a large jump. However, when you take a longer view and look at historical interest rate trends, we are still far below historical averages. Even news outlets use adjectives like “aggressive” and compare the current rate to the “most recent high in summer 2019.”

When you zoom out, looking beyond this recent time of uncharacteristically low interest rates, you’ll see that even with these increases, interest rates are still at historic lows. Over the past 60 years, the average federal funds rate has been just above 4.6%. From 1977-1991 the rate didn’t drop below that average and soared as high as 20.6% in 1981. We have had below-average interest rates since 2008. And even with the most recent increase, we’re still below historical averages.

Despite the historical data, the market reacted negatively over the last week to the news that the Fed is continuing to be more hawkish on inflation, with expectations of multiple interest rate increases in the next 12 months. 

Why this is somewhat of a surprise is confounding, as an important chart should be referenced:

Is the Fed “tight”? Hardly. Historically the Fed funds rate has been over inflation, and in some cases, for years. Unless supply chains heal quickly or we see a significant recession, in my opinion, we are a long way away from pausing rate hikes if we actually want to be serious about slowing inflation.

Low interest rates are fresh in people’s minds. It’s easy to focus just on that most recent data, especially when low rates have persisted for so long. When I remind my kids of a larger vacation we took a year ago (like Florida), suddenly the weekend we just spent up north is no longer “the best vacation ever.” It just takes a little reminder to put recent events into perspective. Hopefully, being reminded of longer-term trends, and adding more data points to the interest rate conversation, will widen people’s views and help eliminate some of that recency bias.

Note: The opinions expressed are the author’s views but may not reflect those held by other advisors at Walkner Condon Financial Advisors. 

AUTHOR

Alicia Vande Ven, M.S.

Alicia Vande Ven, M.S.

Financial Advisor

Alicia Vande Ven is a Candidate for CFP® Certification at Walkner Condon Financial Advisors, a fee-only, fiduciary financial advisor firm based in Madison, WI, that works with clients locally and around the country.