February 2, 2023
Dear Clients & Friends,
Whether you’re looking to set ambitious new goals for the upcoming year or simply getting a fresh start on some old habits, there’s almost always some value in reflecting on the past year before looking ahead. The same is true for the markets. When we look back on 2022, it’s easy to identify the challenges—but if we look closer, we can also uncover some opportunities and reasons for optimism in the year ahead.
First, we need to remember what we learned in 2022. The Federal Reserve (Fed) showed us they can and will take swift action to bring down inflation, as demonstrated by the sharp interest rate increases that we saw last year. We also saw that severe inflation coupled with the Fed’s interest rate hikes had a larger-than-expected impact on the stock market. We also can’t forget the impact on bonds, with increased Treasury yields and ultimately, the worst year on record for corporate and government bonds (as measured by the Bloomberg Aggregate Bond Index).
So, what does all of this mean for 2023—and where are these opportunities? In the bond market, it looks like we’ve uncovered some value, especially for those income-oriented investors. This is a welcome change after nearly 20 years of difficulty in finding stable income-producing investments as market interest rates continued to fall. With higher yields now available in some durable areas of the bond market, we believe investors may be able to increase income in their portfolios, while potentially taking on less risk than in years past. That said, we still strongly prefer stocks over bonds because of their superior ability to compound real wealth over time, but it’s nice to see bonds acting like bonds again.
Turning to stocks, which after the first full month of 2023 are looking more promising with the S&P 500 Index finishing the month up +6.28%. Inflation is still high, but falling, the Fed is expected to end rate hikes by the spring, and there are renewed hopes for a softer landing for the U.S. economy; the expectation from LPL Research is that the economy will either narrowly avoid a recession or enter a mild, short-lived recession in early-to-mid 2023. These factors have allowed investors to begin charting a more positive path forward, which will hopefully continue despite some potential choppiness in the market. At Mercer Partners, we don’t make predictions about the short-term direction of the market; instead, we build financial plans and investment strategies based on your most pressing short-term and long-term financial goals. We continue to counsel our clients to stay invested, despite the near-term pressure we may see on corporate profit margins this year.
Overall, we see reason for renewed optimism when it comes to the markets in 2023. Should the Fed pause rate hikes in the near term as expected, we may see a nice stock market rebound supported by falling inflation, reasonable valuations, and stable interest rates. However, further equity market volatility remains likely, but we are hopeful that we’ll see more positive outcomes from the stock and bond markets this year. Remember the proverb, "no matter how long the winter, spring is sure to follow."
As always, thank you for being our clients. Please contact me if you have any questions—that’s what I’m here for.
-Nick
Important Information
Nick Enzweiler, CFP® is a registered representative with, and securities offered through LPL Financial, member FINRA/SIPC. Investment advice offered through Strategic Wealth Advisors Group, a registered investment advisor. Strategic Wealth Advisors Group and Mercer Partners Wealth Management are separate entities from LPL Financial.
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
All data is provided as of January 31, 2023.
Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities.
All index data from FactSet.
The Standard & Poor’s 500 Index (S&P500) is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
This Research material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Past performance does not guarantee future results.
Asset allocation does not ensure a profit or protect against a loss.
For a list of descriptions of the indexes and economic terms referenced, please visit our website at lplresearch.com/definitions.