The difference between December 31 and January 1 is only a day. But in that one day, most of us find renewed hope. Hope that the coming year will bless us with good health, good fortune, or success. It might be an arbitrary line we draw in the sand, but the dawn of a new year carries with it a certain optimism. Many of us need that after last year.
Two-thousand twenty-two was a tough year for the markets. Every major market was down for the year, including US and foreign stocks and bonds. And mostly, they were all down between 15-20%.
The catalyst for the markets losing value last year was the Fed pushing interest rates higher; a reaction to inflation levels not seen in forty years. Today, borrowing rates look more like they did fifteen years ago. Even so, while many Americans might be second guessing whether they really want to spend money on homes, cars, and vacations, borrowing rates are still low by historical standards.
For reference, the Fed’s actions were necessary and expected. In 2020, our government’s response to Covid was to shut down the economy. At the same time, they funneled billions of dollars into the economy, supporting individuals unable to work, and bailing out businesses on the threshold of bankruptcy. It was a year of non-production, yet Americans were still flush with cash. And what happens when we have too much money chasing too few goods, or services, or assets? Prices go up. We witnessed this in late 2020 and for most of 2021 as the prices of assets like real estate and stocks ballooned.
But the government cannot shut down the economy and flood the market with money and expect for there to be no consequences. Inflation, as we know, became a major problem. And to correct that problem, our leaders had to undo what they did. They had to reverse the flow of money, pulling dollars out of the economy. The challenges we should have experienced in 2020 were simply delayed. We experienced them in 2022 as the money supply shrank.
William Shakespeare said, “expectation is the root of all heartache.” Keeping that wisdom in mind, knowing full well our prognostications for 2023 are unlikely to be accurate, we still have a few expectations for the year.
First, we expect the Fed will continue to be hawkish on interest rates. While their efforts to curb inflation have had early signs of success, the Fed may have to raise rates a bit more. By design, this should slow the US economy.
Second, we don’t expect Congress to offer the same bailouts they did in the past. This means that many of the weakest businesses in the US will struggle and may need to seek partnerships that will allow them to continue to operate as they had.
Third, we expect strong businesses will continue to lead the way in every industry. Many of the best businesses have already made changes to help improve profitability and growth; changes that will serve them well if economic growth slows. Sticking with dominant and profitable businesses has always been our approach, and we will continue to act using our tried-and-true approach.
Investors of late are reacting as they should, with a sense of optimism that this year may be better than last. They are reacting appropriately to good news and bad news about corporate business and earnings prospects for the coming year. We can’t expect the coming year to be great just because of that, but it’s a nice start to 2023.
~ Travis Raish, CFA