While the Happy New Year may have brought good memories of the year that just passed, the investment markets did not contribute. The S&P 500 suffered a tough loss of -18.1%. The Strategas Research chart below shows the index’s progression over the year.
Bonds are usually an offset in years like this, but 2022 was a rare year in which both stocks and bonds declined sharply. The Bloomberg Aggregate Bond Index was down -13% for the year. Fortunately, our bond portfolios were positioned well for this market and held their value better than the index.
Investing over the last few years has been driven by the old adage, “Don’t fight the Fed”. If the Federal Reserve is raising interest rates, stocks face headwinds and finding ‘winners’ is challenging. On the other hand, when the Federal Reserve is easing by lowering rates, most stocks tend to outperform even their own earnings growth, as investors are willing to accept higher valuations.
In the year ahead, the Federal Reserve will slow their pace of rate increases and eventually pause. Rates will stay high relative to recent history, but we anticipate more opportunities to find companies that can outperform in this environment.
There are three major themes we are keeping front-of-mind in stock selection this year:
- Higher interest cost on debt will impact federal government spending. Government spending has been a big support to the economy the past few years, but as they are forced to pay higher interest on their enormous debt, broader spending will have to moderate.
- China COVID impact will have a domino effect. “When China sneezes, the world catches a cold.” The spread of COVID in China is impacting production facilities (supply) and putting a damper on global demand. We have a cautious eye on companies with high exposure to China for production and/or sales in the near-term, but also anticipate the potential positive impact of recovery later in the year.
- Corporate profit margins will face significant pressures. Companies are facing new taxes in 2023 (tax on share buybacks, EU global minimum tax and less favorable R&D tax credit). They will also pay higher interest costs on debt and continue to deal with tight labor markets and inflation. Firms with lower debt levels and higher revenue-per-employee will be at an advantage in this environment.
In addition to watching the market impacts, we are studying the new SECURE Act 2.0 legislation. This law just passed at the end of 2022 and will have repercussions (mostly benefits) for retirement planning. We are happy to discuss how any of these changes will impact your retirement plans going forward. Cheers to a Happy New Year!