Market Commentary: 2022 Recap and 2023 Forward
By Bob Barber and Shawn Peters
As we begin 2023, we look back on 2022 and look forward to this new year. Last year was volatile for the stock markets as they entered into a Bear Market (a 20% decline from previous highs) in June. Today as I write this, we are squarely right in the middle of a Bear market that could last another 6-7 months based on average Bear markets lasting 13 months.
What caused this present Bear market?
This present Bear market decline is mostly from speculation that higher interest rates brought on by the Federal Reserve could cause a severe recession which so far has not happened. December increased this speculation fear, with the federal reserve raising interest rates another 50 basis points or ½%. The Fed is doing this to lower inflation and to normalize interest rates after the artificial lows during the COVID shutdown to stimulate the economy. We’re all paying the price with massive inflation caused by the Fed’s artificial stimulus and government stimulus checks.
One year ago, the Fed funds rate was at zero percent. Today, the rate is 4.5% higher than a year ago. The market consensus is that the Fed will only raise interest rates another ½ to ¾ percent more, topping the Fed rate at 5 to 5.25% in mid-2023, then either stopping rate hikes or even pivoting by lowering rates.
Mathematically the first 4.5% of interest rate increases dropped the overall stock markets by approximately 20-25% or an average of 2.2% for every ½ percent the Fed raised rates. With just ½ to ¾ percent left to go, the markets should drop at most another 2-5%, based on mathematics. If it does drop more than this, it’s an overreaction and creates buying opportunities. Think of the Fed’s interest rate increases in miles. If you had a 500-525 mile trip to drive and were at 450 miles already, you are very close to your destination. This is the case for the Fed.
The area that interest rates have affected the most and will continue to affect the most is real estate. A year ago, a $3,000 monthly mortgage payment could finance a $750,000 home. That same payment will now only finance a $450,000 home at today’s rates. A $2,000 payment a year ago could finance a $450,000 home; today, it’s $300,000. From a mathematical perspective, if interest rates stay where they are, then today’s home prices need to fall enough to equalize the payment. Yes, you’re reading this correctly. That $750,000 home a year ago needs to drop to $450,000 to equalize the same payment as a year ago. A $450,000 home a year ago needs to drop to $300,000. It’s just math, and like my dad used to say, figures don’t lie. If you’re looking to buy a home today, please wait! wait! wait! I have repeatedly said that home prices were artificially high since late 2021, and now it’s proving right. It’s just math! Please review the chart I have included below.
Recovery and History
Taking all the above in consideration, we will most likely see another six months of pain in the stock market, but nothing like the first six months of 2022 when over 90% of the drop occurred. As I said above, with just 50 to 75 basis points or ½ to ¾ percent of interest rate increases left, the markets should drop no more than another 2-5% based on mathematics. Then I believe we are in for an L-shaped, possibly U-shaped recovery in the second half of 2023. All our portfolios are positioned well for the current market conditions.
We made some good buys in 2022 with the cash we took out of stocks in October of 2021 when the markets were at all-time highs and still have considerable cash left to buy more which we are doing in small increments when the markets overreact.
2022 was the worst year for the stock markets since 2008, but it was not worse than 2008. Markets rally after bear markets. For example, in the two years following the 2008 downturn, the S&P 500 rallied 39.23%, and the Nasdaq (QQQ) rallied 83.12%. Will history repeat itself? Maybe, maybe not, but it’s worth considering.
With very little left for the markets to drop now, in my opinion, I feel it is a good time to invest any cash on the sidelines by dollar cost averaging cash into the markets over the next several months before the markets possibly start to recover. When the markets get any indication that the Fed is done raising rates (or is considering pivoting to lower rates), the recovery could be so quick that any cash not invested will miss out on “the sale” that stocks are having now. The time to buy stocks is when they are “on sale,” but for some reason, stocks are the one thing people like to buy high and sell low. You should do just the opposite: buy low and sell high.
Inflation should stabilize in 2023 as things continue to return to normal. In 2020, 2021, and 2022 we dealt with Covid, the Ukrainian war (which still continues), the cascading effect of supply chain disruptions, a new car shortage for lack of computer chips, etc., like we had not seen in 40-50 years. All of this is returning to normal, which is a very good thing.
In the Bible, Ecclesiastes 3:1-8 tells us there is a time for everything; war, peace, prosperity, famine, etc. This scripture assures me that the bad and good times are always temporary, so enjoy the good when they are here and rest assured that in the bad times, the good times will return.
God is in control, and we must trust Him regardless of circumstances.
If you have any questions or comments, we would love to hear from you. As always, we can be reached by phone or text at 830-609-6986 during regular business hours. You can also email us (click here) or set up an appointment (click here).
Happy New Year from Christian Financial Advisors®.
Bob Barber – CEO and President
Shawn Peters- CCO and Vice President