Inflation, monetary policy, and interest rates ... key factors effecting Q4 2022
Inflation, monetary policy, and interest rates were all key factors effecting the markets in the 4th quarter of 2022.
Believe it or not U.S., International and bond markets recorded strong performance in the 4th quarter. Inflation indicators in October pointed to inflationary pressures easing. The markets rebounded off annual lows mid-October through the end of November. The rally ended with a December selloff, no Santa Claus rally in 2022. Hopes that the Federal Reserve would pull back on raising interest rates were dashed when they moved rates higher in November and December. This paints the picture that inflation is not at bay and Central Banks are committed to aggressively moving rates higher. Weakening in global economies continued with manufacturing and retail data showing signs of slowing down because of this policy. Although the Fed has not called a recession, we look at the traditional definition of a recession (i.e., two consecutive quarters of negative GDP), we are already sitting in recession territory. We believe that the Fed is looking for the job market to weaken before calling this recession. In all, the Fed raised interest rates seven times in 2022. The current Fed Funds Rate is 4.5%, up from .25% a year ago. This move started in March of this year and is one of the most aggressive moves in recent history.
International markets outperformed U.S. markets this year, with the 4th quarter showing signs of a rebound. Stock gains advanced with hopes that inflation may be peaking in Europe. However, the European Central Bank has indicated that it is not finished with raising interest rates. The Asian and Emerging markets had strong gains in the 4th quarter prompted by China announcing a loosening of its Covid restrictions and a weakening dollar. By December, prospects of higher interest rates in the U.S. cooled international market momentum.
This year we experienced the largest market declines since the global financial crisis of 2008. The bright spots in the economy were the Energy and Utility sectors, the only 2 of 11 market sectors that reported positive returns in 2022. The cost to the consumer for these sectors performing well was high prices at the gasoline pump, and higher bills to cool and heat our homes. This was not a good trade off. Typically a haven for investors, bonds had their worst performance recorded. Prices declined as interest rates spiked. The benefit for investors was that yields moved higher, increasing the income derived from bonds and other fixed income investments.
All these market asset classes rebounded in the 4th quarter. The hope of investors is that inflation will be tamed to deter the Federal Reserve and Central Banks from their continued interest rate hike policies. The market reacted favorably to the prospect of this being a reality. The question is whether rates will go higher and stall economic growth causing a deep recession, or will inflation be contained before this happens? This waits to be seen.
We believe in the long-term growth of the markets. Ultimately the markets are efficient. Volatile market performance this year was a consequence of low interest rates, and an easy money fiscal policy that got the markets out of the Covid crisis that shut down the global economy. The balancing act to maneuver through this territory has caused a course correction for the markets that have global consequences to the investors bottom line.
With the prospect of continued volatility in the markets we seek to invest in areas that complement an investors risk tolerance. We are committed to working to ensure that the investment strategies we design are in line with the goals and desires of the investor. If you would like to discuss our market and economic perspectives in more detail, or your circumstances have changed, please do not hesitate to contact us. Thank you for the opportunity to serve you.
Abundance to you,
Scott Miller
Partner
