2023 First Quarter Insights
The 4 Disciplines of Investing
1. “Investing is a marathon and not a sprint.”
2. “Do no harm.”
3. “Knowledge creates success; stay calm, objective and long-term oriented.”
4. “Choose carefully what you read and to whom you listen.”
“We have always lived in an uncertain world. What is certain is that the United States will go forward over time.”
– Warren Buffett
Welcome to 2023 and good-bye 2022. To say 2022 was a challenging year for investors would be an understatement. The NASDAQ lost 33%, the S&P 500 lost 20% and it was only the third time since 1929 that bonds did not go up when equities went down. It has been a year in which the most seasoned investors were humbled. I often say that periods of instability create periods of stability and I believe that once inflation is under control and monetary policy (which drives risk assets) becomes less aggressive or restrictive, the economy and markets will resume their growth and reward investors for their patience.
S&P 500 – Are We at the Bottom? It’s Too Early to Call
I recently used this chart in our most recent webinar and thought I would follow up on it. The S&P 500 has been attempting to stabilize after the cumulative raise of 425 basis points (4.25%) to the Federal Funds Rate in 2022. The Federal Reserve commenced its fight against inflation in March when they initiated their first rate hike and began one of the most aggressive rate tightening rate campaigns in history. As seen below, the index has been under pressure and is currently in a downward trend.
Source: FactSet
Inflation and the Consumer Price Index (CPI)
The November CPI report showed that inflation fell 7.10% year-over-year to the lowest level since December 2021 and Core CPI (ex-food and energy) fell to 6.00% year-over-year. Energy prices, durable goods and used cars were some of the components that cooled in the report. Overall, it appears that CPI is rolling over as we are just starting to feel the effects of tighter monetary policy.
Source: U.S. Bureau of Labor and Statistics
Home Sales – Continued Weakness
Pending home sales fell for the sixth consecutive month in November and existing home sales continued their weakness falling for the tenth consecutive month in November. Higher mortgage rates, inflation and a slowing US economy are starting to cool down this once hot market, representing another set of positive indicators demonstrating a potential trend towards lower inflation.
Economic Indicators – Recession?
The Conference Board Leading Economic Indicator Index (LEI) decreased in November and is now down over 3.70% over the past six months. This steep contraction is indicating that despite tight labor conditions, the US economy is slowing down and heading in a trajectory that might imply an approaching recession.
To further demonstrate, most components are contributed negatively to the LEI Index in November as well as the prior six months. This reinforces that the Federal Reserve is slowing down the economy and cements Powell’s willingness to move monetary policy to more restrictive levels to stomp out inflation. His weapon of choice is the use of higher interest rates through the Federal Funds Rate.
Labor Markets – Out of Balance
While inflation indicators appear to be rolling over and waning, the Federal Reserve would like to see unemployment grow higher. Yes, I said the Federal Reserve wants more people unemployed. Higher unemployment will restore the balance of power back to the employer and help achieve a lowering of wage inflation. The Federal Reserve is attempting to create slack in the labor force so that it can slow wage growth and tame the inflation that is associated with higher wages. A slowing economy through more restrictive monetary policy is how they feel the task can be accomplished. In the case of unemployment, bad news (more unemployed) is good news for the markets and economy.
Written by: Nicholas W. Sergio, AIF®
Founder & Chief Investment Officer • Banyan Wealth
Registered Principal & Financial Advisor • RJFS
2021 RJFS Leaders Council Member*
The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The NASDAQ composite is an unmanaged index of securities traded on the NASDAQ system. Dow Jones Industrial Average (DJIA) commonly known as “The Dow” is an index representing 30 stocks of companies maintained and reviewed by the editors of the Wall Street Journal. The Russell 2000 Index measures the performance of the 2000 smallest companies in the Russel 3000 Index, which represents approximately 8% of the total market capitalization of the Russel 3000 Index. BPS stands for Basis Points and refers to a common unity of measure for interest rates, one basis point is equal to 1/100th of 1% or 0.01% it is used to denote the percentage change in a financial instrument. Inclusion of these indexes is for illustrative purposes only. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of capital might occur. All investing involves risk and you may incur a profit or loss of capital. There is no assurance any investment strategy will be successful. All information, data and analysis provided in this report is for informational purposes only and is not a recommendation to buy or sell any security. This report does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete; it is not a statement of all available data necessary for making an investment decision and it does not constitute a recommendation. Any opinions are those of Nicholas Sergio and not necessarily those of Raymond James and are subject to change without notice. Raymond James does not offer tax advice and services. You should discuss any tax matters with the appropriate professional. Holding investments for the long term does not insure a profitable outcome. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. High-yield bonds are not suitable for all investors. The risk of default may increase due to changes in the issuer’s credit quality. Price changes may occur due to changes in interest rates and the liquidity of the bond. When appropriate, these bonds should only comprise a modest portion of a portfolio. Investment advisory services offered through Raymond James Financial Services Advisors, Inc.
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https://www.bls.gov/news.release/cpi.nr0.htm
https://www.nar.realtor/research-and-statistics/housing-statistics/pending-home-sales
https://www.nar.realtor/research-and-statistics/housing-statistics/existing-home-sales
https://www.conference-board.org/topics/us-leading-indicators/press/us-lei-dec-2022