March 2, 2023
Dear Clients & Friends,
This year the financial markets have experienced significant changes in just two short months. We started the year hopeful that stocks would benefit from a better economic and monetary policy environment by springtime, but recent developments suggest our optimism may take longer to play out than we originally anticipated. We remain confident that a new bull market will come—but it just may require a bit more of our patience before we get there.
When 2023 began, we had hoped for a new bull market to bloom in the spring, prompted by the end of the Federal Reserve’s (Fed) interest rate hiking campaign. Following recent data pointing to stronger growth and higher inflation, rate hikes may extend into the summer and potentially delay the start of a new bull market. Against this backdrop, even though stocks pulled back in February, this year’s modest two-month gain for the S&P 500 Index feels like a victory.
Recent evidence of consumers’ resilience has been encouraging. Over 500,000 jobs were created in January, according to the U.S. Bureau of Labor Statistics, nearly triple economists’ expectations (the February report is scheduled for March 10). The unemployment rate is at its lowest level since the 1960s. Retail sales rose a better than expected 3% in January month over month, as consumers benefited from the healthy job market, excess savings, and perhaps motivated by the diminished COVID-19 threat. However, that consumer strength was accompanied by a series of hotter than expected inflation reports for January, fueling more concerns about higher interest rates and, in turn, weighing on the stock market.
Rewards for investors will come—they always do—but they will require more patience than we initially hoped. In an environment where inflation has been frustratingly slow to come down, with a Fed still very much focused on fighting it, our patience is being tested. The risk that the Fed tightens too much and drives the U.S. economy into recession has certainly risen. Higher interest rates also put stress on stock market valuations, so the longer we worry about the Fed, the less likely we are to see that bull market arrive this spring. Corporate America is not in a position to help much, given earnings declines are likely during the next few quarters.
Still, we remain steadfast in our belief that investors’ patience will be rewarded. As Warren Buffett wrote in his latest annual letter to shareholders, “There has yet to be a time when it made sense to make a long-term bet against America.” Stocks in the United States have generated annualized returns of just over 10% since 1926 (according to Ibbotson Associates)—and that includes the Great Depression, World War II, the dotcom crash, terrorist attacks on 9/11, the Great Financial Crisis in 2008/09, the Global Pandemic in 2020, and numerous other economic and geopolitical shocks. Stocks will likely continue to be volatile until the direction and ultimate destination of interest rates becomes clearer, but new highs will come—eventually.
We don’t see much value in making predictions about the short-term direction of the market. However, it seems unlikely that the next bull market will arrive in time for spring, but stocks will hopefully ramp up this summer as inflation eases and the Fed finally hits pause on rate hikes. But regardless of how it all plays out, we are absolutely convinced that investors who exercise the virtues of faith, patience, and discipline will be rewarded with size-able returns over the long run.
Thank you for your continued trust. Please contact us if you have any questions— that’s exactly what we’re here for.
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.
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All index data from FactSet.
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