Financial Insights

Happy New Year! Is it Over Yet?

As if COVID fatigue weren’t enough, we’re starting off 2023 with market fatigue following a rough 2022 in both the stock and bond markets.

It’s frustrating and exhausting to see the market still far from the highs we reached back in late 2021, when all systems were go following unprecedented stimulus put in place to create a quick rebound from the brief recession we experienced in the spring of 2020.

The behavioral term we use in the financial planning community for this is “anchoring bias”, meaning that we view the progress of our investments relative to the most recent high.  Anything less than the last “top” is unsatisfying.

The rounds of pandemic stimulus left consumers flush with cash to spend while the labor market participation rate remains below its pre-pandemic level due to folks not coming back to the labor force.  And there have been supply disruptions to a variety of products as well.

All of this has led to the Fed aggressively raising interest rates over the past 12 months in order to slow economic growth and consumer spending in order to get inflation under control.

The market initially bottomed this past June and then rallied in July on the “hope” that inflation data would improve over the summer and that the Fed may be able to pause further rate increases.  But the inflation data did not improve and the market had an awful September knowing that the Fed had more to do.  The market rallied in October on more bad inflation data, which is counterintuitive, but this was the market’s way of abandoning hope and finally validating the Fed’s efforts.

The Fed has to slow economic growth and consumer spending in order to get inflation under control. How long this will take and how much damage needs to be done to the economy in order for the Fed to feel that it has inflation under control are the $64,000 questions.

Given that the stock market looks ahead, it typically will decline prior to economic growth bottoming.  On average, a 20%-25% decline in the stock market is seen as normal in a Fed induced recession environment.  The S&P® 500 hit that mark back in September.

For those with a relatively good memory, you may recall when the S&P 500® dropped -20% at the end of 2018 when the Fed indicated that it was going to increase interest rates on the heels of the Trump tax decreases, only to back off.  The market recovered all of that, quickly in January 2019, and much more over the rest of the year.

In the current situation where inflation is far from the Fed’s 2.0% target, a market rebound is not likely to happen as quickly, but historically the market will start to rally before an expansion of economic growth resumes.  When or whether this will happen in 2023 is really a guess at this point, despite the multitude of experts attempting to forecast the future.

The “light at the end of the tunnel” is when the Fed can finally put an end to raising interest rates.  Given the amount of increase (from essentially 0% to 4.4% in 12 months) already, it seems reasonable to assume that the bulk of rate increases have been completed.  The Fed did lower the amount of the last increase and inflation data has recently been trending in the right direction.

A frustrating reality in this is that the impact of rate increases on the economy also takes time.  But rather than fret when you see some worsening economic data and layoffs leading to more unemployment in the headlines, keep in mind that this means that we’re getting closer to the light at the end of the tunnel.  The process needs to play itself out, so bad news is good news, even when the market that day is down on the news.

Will the stock market return to its all-time high?  If history is any guide, then the answer is yes and we should expect higher highs beyond that in the future. It’s really more of a question of when.  And it can never come soon enough.

As we head into 2023, frustrated and fatigued about our investments and facing continued uncertainty about the short-term future, it’s as important as ever to keep some perspective and remain focused on your long-term investment goals and what you can control.

It’s important to remember we can’t control the markets and volatility in the markets is normal.  The amount of volatility we’ve experienced over the past year would appear to be normal under the circumstances.

The foregoing content reflects the opinions of Advisors Capital Management, LLC and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful.


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