January 2023 Market Update

January 2023 Market Update

A Glance Back & Focus Forward

How many of you made New Year “resolutions”? How many of you set some goals?

The reputable folks at Sandler Training put together a study that shows: 

“Nearly 100% of us have dreams, 60% of us have goals, three percent of us write them down, one percent have a written plan, and less than that execute on the plan consistently.”  

If you want to be a “one percenter,” doing all three things is a great place to start.    

This month, we will take a glance back at 2022 and look forward to 2023

Much like driving a car, it is good to glance in the rearview mirror but concentrate on looking forward.  

Glancing back at 2022, we see the wreckage caused by two events, the Russian invasion and the Federal Open Market Committee (FOMC), raising rates at a speed and amount never seen when measured by percentage increase. Both have left much collateral damage to innocent bystanders.  

The human tragedy caused by the ongoing war in Ukraine that started with the Russian invasion this past year is immense. It is impossible to adequately express our sadness regarding the damage to lives and families.    

The purpose of this note is not to discuss or report on these tragedies but to provide information and opinions on how they impacted economies, markets, and your personal financial well-being now and in the future.  

January 3rd marked the peak of the market for 2022, and the roller coaster ride for the remainder of the year was primarily driven by the FOMC’s decisions to declare their previous call that inflation was “transitory” an error and begin what has been the fastest and most significant percentage move higher in rates of all time. There were few places, although there were some, to hide as bonds experienced their worst performance since 1981, when 10-year treasury bonds produced a total return of negative 20.7%, while equities had their worst year since 2008 when the S&P500 produced a total return of negative 37%. There has not been a time since 1937 when both the S&P500 and the ten-year treasury total returns were both negative until 2022.  

February 24th marked the end of decades of globalization which nearly everyone, including myself, had once applauded. Make products and components where they can be most economically utilized, which lifts the world. What this does not consider is a worldwide pandemic or what could potentially become the next world war. While globalization is not dead, it has been forever changed.  

What does this mean for us as we focus forward? 

There is nothing magical about January 1st. Nothing that drove the markets in 2022 suddenly stops because the new year has started. Where are we in the cycle, and how do we position ourselves as best we can to profit?

There is a reason the markets, fixed income and equity, dislike increasing interest rates, particularly when it is widely believed rates will continue to move even higher. The higher interest rate hurts every company, whether or not they have debt on the books. Higher rates indeed hurt businesses with higher debt levels more than those with stronger balance sheets. However, higher interest rates hurt companies in both situations because future cash flows are mathematically worth less under a higher interest rate scenario than in a lower interest rate scenario. This concept is often a critically misunderstood point when analyzing the markets.

Combine the FOMC’s massive (on a percentage increase basis) increases over a short period with the supply chain disruptions caused by the Pandemic and the Russian war, and you have the proverbial perfect storm for the markets.   

Different people have different reactions when things like this happen, as do markets in general. History tells us we will see overreactions on nearly all fronts.   

While oil companies experienced substantial gains in 2022, oil prices surprisingly stayed stubbornly low due mainly to government intervention. While much of the trade to the upside in oil and alternative energy has already occurred, there is still more room for select companies to increase in price while paying some income. Energy is one sector in which you may be able to position yourself to profit however this is not investment advice.  

Other commodity prices have gotten ahead of themselves, and we may see an oversupply that could surprise some in 2023, particularly in the copper market.  

Oil and natural gas are used as inputs in many things, including fertilizer production, plastics, and tires, to name a few. For this reason, oil prices have implications reaching far beyond our price at the pumps and into our grocery stores in the form of high input costs to produce and transport our food. This is why the FOMC is having such a difficult time taming the inflation monster and likely will continue to struggle to move into 2023.  

While inflation may seem to come down a bit, the numbers have a difficult time telling other parts of the story, like “shrinkflation” as package sizes decrease and prices stay the same or go higher, portion sizes and substitutions take place at your favorite restaurant to keep costs down. These are just two examples of what businesses are doing to protect margins. 

Innovative companies developing and utilizing Artificial Intelligence to do things like increase energy efficiency and decrease input costs in the form of labor or any form of efficiency, particularly in the areas of farming and transportation of goods, are likely to benefit during 2023 while businesses in non-essential areas of the economy or businesses that are unable to find ways to reduce their costs in other ways are likely to fare poorly.

Much like in 2022 and later in 2021, the investor who utilized standard broad market indices will continue to suffer more than strategic asset allocators and those carefully using individual company and economic analysis.

Investors should know what they own and why they own it. An analysis should be done as to what things may have or are currently changing that could impact businesses you have held with great success for long periods.  

The equity market will likely continue to decline through the first half of 2023, if not for the entire year, with much volatility in between. The fixed-income market could snap back at some point with minimal warning.

We could be wrong if Russia and the rest of the world come to an amicable agreement that would be positive for the markets. If the FOMC changes course, that will make us wrong. A breakthrough on the energy front or even a significant political change could change everything. We anticipate that various headlines will cause rallies this year that will make us question our forecast, just as has happened in 2022. This is why we do not advocate market timing. Instead, a carefully executed long-term strategy is designed to help you build your best life using the tool you call money.

Define your outcome and allow a skillful artisan to help you create it for you.

Please remember that this note is our opinion from a broad perspective and is not personal investment advice.

Contact us to book John to speak at your next event.

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We continue to have one goal; to help you build a life you love supported by a portfolio that fits your specific needs.

Talk soon,

John

Phone: (312) 372-5000

Email: info@advocacyinvesting.com

John Browning, MBA and CSA®

* Investment advisory services are offered through Guardian Rock Wealth™ Investment Management Inc. (GRWIM). GRWIM is a wholly-owned subsidiary of Guardian Rock™ LLC. Neither of these entities provides tax or legal advice.

Nothing in this communication should be construed as personal investment advice, and past performance is no guarantee of future results. Investing is not appropriate for everyone. There is a risk of loss associated with investing in the markets. No representation or implication is being made that using any methodology or system will generate profits or ensure freedom from losses. Please remember that investing carries risk. Guardian Rock Wealth™ LLC and its affiliates are fiduciary investment advisors. Please consult with another experienced, qualified investment advisor or us before making any investment decisions and/or trying to implement any of the strategies and tactics we may discuss in any of our publications.