{"id":6380,"date":"2023-01-03T14:31:38","date_gmt":"2023-01-03T20:31:38","guid":{"rendered":"https:\/\/www.keystonefinancial.com\/?post_type=oi_article&p=6380"},"modified":"2023-01-03T14:31:39","modified_gmt":"2023-01-03T20:31:39","slug":"market-commentary-january-3-2023","status":"publish","type":"oi_article","link":"https:\/\/www.keystonefinancial.com\/articles\/market-commentary-january-3-2023","title":{"rendered":"Market Commentary | January 3, 2023"},"content":{"rendered":"\n
It\u2019s finally over.<\/p>\n\n\n\n
2022 was a dismal year for financial markets. Major United States stock indices moved lower, trimming or eliminating the previous year\u2019s gains.<\/p>\n\n\n\n
The Standard & Poor\u2019s 500 Index, which had gained about 27 percent in 2021, dropped almost 20 percent in 2022.<\/p>\n\n\n\n
The Nasdaq Composite Index, which had gained more than 21 percent in 2021, lost about 33 percent in 2022.<\/p>\n\n\n\n
The Dow Jones Industrial Average, which had gained about 19 percent in 2021, fell almost 9 percent in 2022. It\u2019s performance reflected the improved performance of value stocks.<\/p>\n\n\n\n
Bond markets didn\u2019t fare much better. As rates moved higher, the value of previously issued bonds moved lower. The Bloomberg U.S. Aggregate Bond Index dropped about 13 percent during 2022. The silver lining is that bonds now offer more attractive yields, opening new opportunities for income investors.<\/p>\n\n\n\n
2022 may be remembered for inflation, rising interest rates, and geopolitical turmoil<\/p>\n\n\n\n
Inflation was a dominant concern throughout the year. In January, the Consumer Price Index showed that prices were up 7.5 percent year-over-year. Inflation issues were exacerbated when Russia invaded Ukraine at the end of February.<\/p>\n\n\n\n
\u201cDespite weeks of buildup, Russia\u2019s invasion of Ukraine on Feb. 24 was unexpected and sent shock waves through commodities markets still struggling with the after-effects of the pandemic\u2026the price of Brent crude oil [rose] to $123 on March 8, up from $92 a barrel on Feb. 23\u2026The war also upended grain markets. Ukraine and Russia both export masses of wheat plus other food, and prices leapt as the Black Sea, through which much grain gets dispatched, descended into a battle zone\u2026However, the laws of economics worked, and higher prices did become the cure for high prices,\u201d reported Simon Constable of Barron\u2019s.<\/p>\n\n\n\n
From March through December, the Federal Reserve aggressively tightened monetary policy in an effort to slow the economy and inflation. The Fed raised the federal funds rate seven times and lifted the effective federal funds rate from near zero to 4.33 percent. Despite the Fed\u2019s efforts, inflation persisted as consumer spending, which is the primary driver of U.S. economic growth, proved resilient for much of the year. In November, consumer spending slowed significantly.<\/p>\n\n\n\n
Will 2023 bring a recession or a soft landing?<\/p>\n\n\n\n
The question that has been on everyone\u2019s mind is whether the slowdown will become a recession. Opinions differ widely. In late December, economists participating in a Bloomberg poll said there was a 70 percent chance of recession in 2023. In contrast, economists at a major investment bank say the U.S. will experience a soft landing in 2023. A soft landing occurs when the economy slows, and inflation falls, without a recession.<\/p>\n\n\n\n
The inverted U.S. Treasury yield curve tells its own story. The New York Federal Reserve wrote, \u201cThe yield curve \u2013 specifically, the [difference] between the interest rates on the ten-year Treasury note and the three-month Treasury bill \u2013 is a valuable forecasting tool. It is simple to use and significantly outperforms other financial and macroeconomic indicators in predicting recessions two to six quarters ahead.\u201d<\/p>\n\n\n\n
At the end of 2022, the three-month Treasury yielded 4.42 percent and the 10-year Treasury yielded 3.88 percent. The difference is -0.54, which puts the chance of recession between 40 percent and 50 percent, according to the New York Fed\u2019s model.<\/p>\n\n\n\n
\u201c2022 will likely be remembered as a year when conventional wisdom about a new market and new economy was destroyed, and investors once again learned that \u2018it\u2019s not different this time\u2019\u2026Investors were once again brought back to economic and financial reality, a reality where profits matter, interest rates can go up, inflation can rise, and geopolitical risks are real,\u201d stated a source cited by Jack Denton of Barron\u2019s.<\/p>\n\n\n\n