New Year Market Perspective: Best October Since 1976, Value vs. Growth, Inflation and the Dollar

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Well, 2022 was quite a test. Even historically great fourth quarter stock market performance could not remediate earlier losses. It was a tough year for investors to maintain the discipline necessary for long-term investment goals, but our strategy yielded many silver linings with the late momentum teeing up a promising start to 2023. Perhaps not surprisingly, our economic themes for the New Year include inflation, Federal Reserve activity, international financial markets, and the perils of assuming “this time, it’s different.”

Before we dive in, let’s review an important topic: the link between the economy and the stock market. These two concepts are not the same, although talking heads consistently discuss them synonymously. The economy represents total output, including production and consumption, for a specific region or country, over a specific period in time. It is a steamship of aggregate decisions by consumers, businesses, and governments to allocate scarce resources. It’s reported in arrears, indicating what has already happened. Past tense. The stock market represents ownership of companies’ future earnings. Key word: future. Every day, billions of trades are placed to determine the price for those future earnings. For every buyer, there is a seller, each armed with their own transaction rationale. The stock market is a leading indicator of the economy, signaling an increase or decrease before the economy registers its impact. Too often people look to the economy to predict the stock market, or believe they are the same. Considering these two separately throughout 2023’s news cycle will ensure the data is viewed with the appropriate lens. Now, let’s cut through the noise and review the relevant points.

Q4 2022 provided a historic rebound, though 2022 final results were the worst since 2008.

• International Stocks (MSCI ex US Index): +16.04% Q4, -15.26% 2022
• Emerging Market Stocks (MSCI Emerging Index): +9.50% Q4, -19.83% 2022
• U.S. Stocks (Russell 3000): +7.18% Q4, -19.21% 2022
• U.S. Small Cap (Russell 2000): +6.23% Q4, -20.44% 2022
• U.S. Bonds (Bloomberg Barclays Aggregate Index): +1.87% Q4, -13.01% 2022

Key market observations from 2022:

• The Nasdaq Composite Index led the decline, ending the year at -33%. The Nasdaq is mostly comprised of growth-oriented technology stocks, whose stock prices were bolstered by low interest debt since 2008.

• In the U.S., value beat growth by a whopping 21.60%. Value also beat growth in International and Emerging stock markets.

• October 2022 was the best month in the Dow Jones Industrial Average since 1976. Imagine those investors who said “this time, it’s different” at the end of September?

2022 was a reminder that using a crystal ball is a good way to end up walking on glass shards. The U.S. stock market had the worst year since 2008 while unemployment is historically low and GDP was positive. The Fed took rates from near 0 to 4% in 12 months. International stocks beat the U.S. in a year when Russia invaded Ukraine. Remember - markets are smarter, in aggregate, than any of us. Discipline and diversification are imperative to executing your plan and capturing months like October. If it was possible to consistently predict the future, we’d all own an island by now.

The dollar is historically strong, but less so than in September. The strength of the U.S. dollar is often politicized, twisted into a statement about the strength of the country itself. “Strong” must be good! “Weak” must be bad! This simplification is simply not accurate. International finance is relative to currencies and price of goods across borders, and there are pros and cons to all angles. If the dollar weakens in 2023, it may be a good thing. Part of the GDP equation is net exports (exports minus imports). If the dollar is weaker relative to other currencies, U.S. travelers pay more for goods and services abroad. BUT, those currencies can buy more from the U.S., driving more exports and adding to GDP – a net positive for the economy.

The Fed will likely raise rates incrementally in 2023, though inflation looks to have peaked in the fall. Inflation is still higher than ideal, but it has tempered significantly, and December CPI actually decreased from November. Consumer behavior has normalized, and commodity prices calmed. Labor supply and service prices remain an issue, so those areas will be scrutinized for improvement before rate increases cease. Regardless, remember that the Fed only controls the Fed Funds Rate, which is the overnight lending rate between banks. That’s it. Every other interest rate is market driven, including treasuries, mortgages, car loans, municipals, etc. So, news emanating from the Fed is only one part of the full interest rate picture.

As one well-known investor once said, ‘you make most of your money in a bear market, you just don’t realize it at the time.’ 2022 tested our resolve, and those who stick to the plan will have the best chance to succeed. We look forward to a great 2023, and please let us know of changes to your family’s personal headlines!

Sources: 2022 Index Returns dimensional.com, Zack’s Investment Management Q3 Earnings Exceed Expectations 11-21-2022, wsj.com An Epic Dollar Rally Goes Into Reverse—and Investors Expect Further Declines 12-29-2022, wsj.com The Dow Just Notched Its Best Month Since 1976 11-1-2021, First Trust How Stocks Fared This Millenium 1-5-2023, Federal Reserve Board of Atlanta GDPNOW 1-10-2023, BLS.gov, wsj.com Inflation Eased in December 1-12-2023

This material represents an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Past performance does not guarantee future results. Diversification does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk.

Index Disclosures:

Indices are unmanaged and investors cannot invest directly in an index. Unless otherwise noted, performance of indices do not account for any fees, commissions or other expenses that would be incurred. Returns do not include reinvested dividends.

Index Definitions:

The Consumer Price Index (CPI) is a measure of inflation compiled by the US Bureau of Labor Studies.

Barclays U.S. Aggregate Bond Index: The Bloomberg Barclays U.S. Aggregate Bond Index is an unmanaged index of fixed rate debt securities rated investment grade or higher by Moody’s, Standard & Poor’s, or Fitch rating services. All issues in the index have at least one year to maturity and an outstanding par value of at least $25 million to $1 billion based on the type of security. Indices are not available for direct investment and do not reflect any fees that may be charged.

S&P 500®: The S&P 500® index is an unmanaged index of 500 companies used as a representative sample of the United States economy. The S&P 500® index consists of only stock holdings. Indices are not available for direct investment and do not reflect any fees that may be charged.

MSCI Ex-US: The MSCI Ex-US index is an unmanaged index used as a representative sample of the global developed economy outside of the United States. The MSCI Ex-US index consists of only stock holdings. Indices are not available for direct investment and do not reflect any fees that may be charged.

MSCI Emerging Markets: The MSCI Emerging Market index is an unmanaged index used as a representative sample of the global emerging market economy outside of the United States. The MSCI Emerging Market index consists of only stock holdings. Indices are not available for direct investment and do not reflect any fees that may be charged.

The Russell 2000 index is an unmanaged index of the 2000 smallest companies in the Russell 3000 index. The Russell 2000 Index is used as a representative sample of the small companies in the United States economy. The Russell 2000 index consists of only stock holdings. Indices are not available for direct investment and do not reflect any fees that may be charged.

The Russell 3000 index is an unmanaged index of 3000 companies in the United States used as a representative sample of the United States economy. The Russell 3000 index consists of only stock holdings. Indices are not available for direct investment and do not reflect any fees that may be charged.

DJIA: The Dow Jones Industrial Average is an unmanaged index of 30 companies used as a representative sample of the United States economy. The DJIA index consists of only stock holdings. Indices are not available for direct investment and do not reflect any fees that may be charged.

Nasdaq Composite Index: The Nasdaq Composite Index is a market capitalization-weighted index of more than 3,700 stocks listed on the Nasdaq stock exchange. The Nasdaq Index is heavily weighted toward the technology sector and consists of only stock holdings. Indices are not available for direct investment and do not reflect any fees that may be charged.

[1] Investing internationally carries additional risks such as differences in financial reporting, currency exchange risk, as well as economic and political risk unique to the specific country. This may result in greater share price volatility. Shares, when sold, may be worth more or less than their original cost.

[2] Investments in emerging markets may be more volatile and less liquid than investing in developed markets and may involve exposure to economic structures that are generally less diverse and mature and to political systems which have less stability than those of more developed countries.