FOURTH QUARTER MARKET UPDATE

LOOKING BACK...AND LOOKING FORWARD!

By Mark Knackendoffel, President & CEO & Michael Carlisle, Vice President & Investment Committee Chair

 

 

 

 

 

 

 

 

2022 Performance – U.S. & Foreign Stocks 

Despite a modest rally in the 4th Quarter, stock prices suffered steep declines in 2022. (S&P 500: -19%; NASDAQ: -33%; Russell 2000:  -23%) Foreign stocks also got hit hard, dropping -15% for Developed Foreign Markets and -20% for Emerging Markets. But also remember stock markets were coming off record highs in 2021, so these declines were not extraordinary from a historical perspective.  

2022 Performance - Fixed Income Markets

The shocker for most investors, as well as investment managers, was the precipitous declines in the bond markets. But frankly, these declines were no great surprise. We had written in 2021 that the probability of risk in the bond markets was greater than the probability of risk in the stock markets. In response to these potential market movements, we started shortening maturities on our bond mutual funds and individual bond holdings. It was the right move, but unfortunately, we didn’t do enough of it, both in terms of overall allocations and that we didn’t go “short enough.”  

The Trust Company’s Money Market Rates
January, 2022	.13%
April, 2022	.25%
July, 2022	1.21%
October, 2022	2.70%
January, 2023	4.29%

That’s clearly illustrated by the rates on our Money Market Fund (A private, FDIC-insured sweep account with a community bank with a negotiated-indexed rate based on U.S. Treasury rates).  From January 2022 to January 2023 our rate shot up from 0.13% to 4.29%. That’s an increase of 33X. Compare that to the late 1970’s and early 1980’s when rates “shot up” from 6% to 14½%. That was an increase of only 2½X. No wonder bond prices got beat up in 2023. But it’s also created a better environment for investors seeking income. Bonds now provide attractive income yields of 3%-5%.

Also, keep in mind that 2022 was the only time in the past 45 years that stock prices and bond prices both declined in the same year. That’s even longer than both of our careers . . . and we’re old!

Looking Ahead to 2023 - The Trust Company’s Perspective

We have positioned client portfolios by gradually allowing MMF balances to increase, but just recently we’ve also started extending maturities for our bond funds. This will take advantage of higher yields and provide a defensive position in the event of a recession. 

With respect to equity markets, we swapped some of our foreign funds for more attractive options, which have performed well in the short run. But we have retained our portfolio of domestic equity funds, which have capably performed due to our “value” tilt and the addition in mid-year 2022 of several “factor” index funds. These include some dividend-oriented funds.

Recession Forecast.  Although, we have used the term “forecast,” we are not actually in the “forecast business.” But we do have some opinions about possible outcomes in 2023.   We believe the continual, but slower, increases of the Fed Funds rate will eventually trigger a recession in 2023, although of relatively mild impact. This is reflected in the strong equity performance so far in January. But we will continue to be cautious and most likely rebalance portfolios to harvest some of the equity growth we’ve seen. Stay Tuned!!

Q4 - 2022 MARKET INDEXES