December wrapped up 2022 without a “Santa Claus” rally, posting negative returns for the month and year. In short, 2022 was a hostile investment year. Projected results for 2023 are still being debated. The Federal Reserve continues to fight inflation but appears to be moving to a more tolerant rate phase.
S&P500: Dec -5.90% 2022 -19.44%
DOW: Dec -4.17% 2022 -8.78%
NASDAQ: Dec -8.73% 2022 -33.10%
Russell 2000: Dec -6.64% 2022 -21.56%
$10 Trillion came out of the stock market in 2022. Home values have been reduced in price by 25% since June. Technology companies, heralded as leaders, faltered, posting an almost -30% loss for the sector. Amazon lost nearly -50% of its market value for the year. What was remarkable about the price action was that close to 100% of Wall Street analysts rated the stock a “Buy” during the past two years.
A downdraft took place in Tesla, Elon Musk’s evolutionary EV car company. The stock tumbled just over -65% in 2022 and almost -70% from the November 2021 all-time high. An interesting note, we never owned Tesla with its exorbitant price/earnings valuation and on the criticism that the company, at its November 2021 high, exceeded in value the 10 largest global automakers. We judge the competitive comparison to be staggering.
2022 Sector Performance:
Communication Services -40.4% Consumer Discretionary -37.6%
Consumer Staples -3.2% Energy +59.0%
Financials -12.4% Healthcare -3.6%
Industrials -7.1% Materials -14.1%
Real Estate -28.4% Technology -28.9%
Utilities -1.4%
Fixed Income:
The picture in the bond market has changed. Yields are now competitive. Two-Year Treasuries now yield 4.45%, up from 0.78% at the start of 2022. This clearly presents an alternative with less risk than stocks, and a place to park cash while waiting for a shift in equity fundamentals.
Our sense is that short maturities, with yields at these levels, protect portfolio assets while waiting for the Federal Reserve to come to grips with inflation disruption. We expect, roughly, six more months of Fed activity before settling down on interest rate hikes. It is important to note that there is an impact lag of one to two years in the economy for measures to take hold. The stock market will adjust ahead of the economic reaction.
Plan for 2023:
GN&Co will adjust portfolios in 2023, concentrating on sectors with the best opportunities for success. Currently, Energy, Healthcare, the Defense industry (world issues) in the Industrial sector, Short-Term Treasuries, and maintaining high cash reserves signal the best value. Slow to buy is still the prevailing mantra.
Our view is that as the year develops the Fed Reserve will lighten pressure on rates, allowing for upside in stocks. The first half of 2023 will have some volatility, but we are optimistic that the second half of the year will develop positively.
The important measure for Fed activity will be earnings results for the next two quarters. The results will weigh on S&P500 expectations. A price target of 4,100 in the S&P500 for 2023 is likely with a mid-year start of Fed policy adjustment.
Happy New Year!
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