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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.

The 2022 Sell-Off: Making Sense of the Markets

The 2022 Sell-Off: Making Sense of the Markets

The market weakness in 2022 has continued to accelerate, driving equity prices lower. While it may feel like a pretty extreme selloff, the S&P 500 selling off 15% is fairly normal, occurring every 2.5 years. Even if we reach a “bear market”, defined as a 20% or more decline, this will occur on average every 4 years, so we are experiencing a phenomenon that is relatively frequent.

This, of course, doesn’t make anyone feel particularly better. As our revenue is tied to our clients’ assets under management and every advisor in our firm invests in the stock market in some form, we all feel the pain. There are many reasons for this. Inflation has run significantly above target levels. The Fed is moving away from ultra-low interest rate policies. And the war in Ukraine continues. These have all contributed to the uncertainty surrounding companies and their future outlook.

We have continued to watch earnings as they have been reported. Presently, they still are strong but earnings surprises have trended lower and future earnings are looking a bit more tenuous pending all the above uncertainty. This is not to say that we haven’t already hit the bottom of this pullback, nor is it saying that things can’t get worse. It is worth mentioning that today’s stock prices reflect the expectations of future earnings by companies. It is predictive in nature, and that’s why we have seen the results in 2022 when we look in a rearview mirror. An end to the Ukraine war, easing of inflation numbers, reduced COVID cases & lockdowns, and better news on supply chains could all be factors that will likely drive equity markets higher. A dive into a bear market could be caused by a worsening of any of the above as well, and that is precisely why we tend to advise caution in making any short-term decisions that can have long-term impacts.

Did you also know that the bond market is having its worst year since 1842(!!!)? Normally we see an inverse relationship between stocks and bonds, with bonds increasing in value while we see a negative stock market.

So, What to Do?

Assessing timeframes is obviously extremely important. Keep in mind that despite the pretty awful market we’ve seen so far this year, the longer-term returns look strong. Here’s a chart of the S&P 500 over the last five years:

Just from eyeballing the chart, you can also see that we’ve had some pretty feracious pullbacks before we hit higher highs. The difference between now and then? Inflation is running hot, and recent reports are showing that it is not coming down quickly.

What Can We Expect in the Future?

According to research by First Trust, out of the last 185 quarters, only 16 had stocks and bonds falling together. When we look back at historical data, returns tend to be positive in the stock and bond markets, especially in the 1- and 3-year periods. See this chart that lays out prior stock and bond market returns. While we know that the future is uncertain, we also know that it’s almost never about timing the market, it’s about time in the market.

Clint Walkner

Market Correction: What It Is and Why Market Corrections Matter

Market Correction: What It Is and Why Market Corrections Matter

The domestic and international stock markets have started 2022 with a level of volatility unseen for the past few years. The rather benign market conditions, over the last 10 years, have lulled investors into a false sense of security and normalcy that is anything but normal. 

This is completely understandable when we look at the recent history of the S&P 500, a benchmark for US stocks. The S&P 500 has only posted one year of negative returns greater than 1% since 2009. The index’s loss of 6.24% in 2018 was paltry compared to its 38% loss in 2008 and three consecutive double-digit down years of 2000-2002. This is all to say that the beginning of 2022 is a reminder that volatility and market corrections are part of the normal market cycle, not a deviation from it. 

What is a Market Correction?

The term “market correction” is generally defined as a drop in a given market index of at least 10%, but not more than 20%. A drop of more than 20% is referred to as a bear market.

To give some perspective on the recent history of market corrections, the S&P 500 experienced a market correction in 11 of the past 20 years. Further, the S&P has experienced a correction, on average, every 19 months since 1928. This helps to illustrate the fact that market corrections are common over most periods of time and should be viewed as the market resetting stock valuations back to a more fundamental level.

Most economists believe that periodic corrections are healthy for investment markets, particularly stock markets, as equities tend to have large price swings. As stock prices appreciate over periods of time, there can start to become a disconnect between the valuation for a company and the price of its common stock. While the relationship of company valuations and respective stock prices can be a moving target, market corrections help to bring this relationship back in line, and, in some cases, corrections can provide a buying opportunity as the stock price may fall too far relative to the valuation. The circumstances and variables that cause the to market slide are different each time, which makes predicting when a correction will happen and for how long nearly impossible. Furthermore, many corrections have been caused by non-financial related events such as geopolitical issues or military skirmishes.

Investing During a Market Correction

Now that we have a better understanding of corrections and their history, we need to turn our attention to how we should react during a correction. Corrections can be a scary, unnerving period of time in a market cycle, however, history shows us that corrections last, on average, four months before the market makes up the loss. This is the reason why most economists recommend riding out market downturns. Often people ask the question, “why not just sell stock positions when the market begins to fall and buy back in when the market bottoms”. This is almost always a recipe for disaster as it requires correct market timing, not one, but two major moves in a portfolio. It also requires that we are actually at the start of a correction. We know that we are in a correction once the market has already fallen 10% and, by that point, it is too late to avoid the loss by selling shares. The best advice for weathering volatility in the markets is to fully understand your personal risk tolerance and accurately match your investment allocation to that risk profile. This way, we can have confidence that our portfolio is built to withstand the appropriate amount of market loss for your specific situation.

Nate Condon