After two positive months in the market, we saw a pullback in the month of December. With all of 2022 being challenging for the markets and investors, we unfortunately didn’t get a Santa Clause Rally to end out the year. However, as we look forward into 2023, there are some bright spots to be cautiously optimistic.
December 2022 Performance:
2022 was Wall Street’s worst year since 2008. The S&P500 ended down -19.4%, the DOW ended down -8.8%, the TSX ended down -8.4%, and the tech-heavy NASDAQ ended down -33.1%. Throughout the year, the markets have battled against the affects from the war in Ukraine, continued supply shortages, high inflation, and rapidly rising interest rates to combat inflation. The Federal Reserve in the States raised interest rates by 4.25% over the course of 2022, ending at 4.50%, which is the most restrictive level since 2007.
Looking specifically at December 2022, the markets pulled back after the Fed raised rates by 0.50% to a rate of 4.50%. The hike of 0.50% was expected, however what spooked the markets were the comments from Fed Chair Jerome Powell after the hike was announced. Throughout his speech it was indicated that although inflation numbers have come down, more evidence is needed to have confidence that inflation is on a consistent downward trajectory. No reductions in interest rates are currently planned for 2023. It was also indicated that interest rates are set to rise to a target rate of 5% - 5.25% and then pause. The target rate and the rising or lowering of rates can potentially change month-to-month, but overall, the market reacted negatively in December since it looks like the restrictive interest rate policy in the US isn’t going away any time soon.
As we look ahead into 2023, one of the main reasons to be cautiously optimistic is the same thing that caused investors anguish in 2022. Interest rates.
Although they are set to increase in the US, as of this writing, they are projected to increase by 0.75%; this is a much easier rise to stomach when compared to the 4.25% in hikes we went through over the last 12 months. The fewer the rate hikes equate to less volatility in the bond markets and your subsequent fixed income holdings. The other positive as we look forward is the fact that bond portfolio holdings are now yielding more attractive numbers. In the short term, as rates rose, bond returns were negatively affected, but as we look outwards, with rates at the current higher levels, bond holders are set to receive higher yields for holding their lower-risk securities.
