Dave Alison (00:07):
Hello and welcome to The Complete Wealth Management Podcast. I'm your host, Dave Alison. And in today's episode, we're going to change it up a little bit. As you know, I normally invite an industry professional on to share wisdom and insight into things that I believe can help your financial situation. But today I'm going to go solo. I'm going to spend a little bit of time giving what I call our Market Intel Report. As many of you know, I have the fortunate opportunity to serve as the president and founding partner of a national registered investment advisory firm, Prosperity Capital Advisors, as well as the president of Valor Capital Management, in institutional asset management firm. At those two firms, we oversee about $1.75 billion of client assets, and I serve as the co-chair of the investment platform committee.
(01:05):
As part of my duties there, one of the things that we bring to our clients every single quarter is a market intel report. We look back over the previous quarter, we look at some of the good and some of the bad of what's happened to glean insight into where we think the markets, the economy, the world in general is heading into the next quarter, the next year, the next three, five, seven, 10 years. And we also give an outlook. And in today's episode, I really want to spend some time talking about what we feel are the three core things on the minds of investors today. Because there's no doubt if you turn on the news or the media, it's pretty doom and gloom. I don't think I've turned on a financial or a news show in the last three or four months where the big 'R' word hasn't been mentioned. And when I say the big 'R' word, I mean recession.
(02:03):
But what I want to do is unpack some of the data. I want to look at inflation and how that's impacting the global economy. I want to talk about if we might head into a recession, what that could mean for the stock market. And last but not least, in this episode, I'm going to talk about what a potential pause in the Federal Reserve hiking interest rates could mean both for the stock market and the economy. So with that being said, I hope you enjoy the episode and we'll go ahead and we'll dive right into our 2023 Market Intel Report.
(02:48):
Hello, this is Dave Alison and I'm thrilled to deliver our Q4 and end of year market intel report. Obviously, a lot has gone on in the global economy, in the world and certainly in the stock market. I want to take a couple minutes and reflect on where we've been, but more importantly talk to you about what's on the minds of investors today as we look at what 2023 can bring. And so certainly there's been no shortage of headlines and volatility in the stock market. We still in 2022, we're coming out of COVID and the impact that COVID has had on the global economy. We've had tremendous geopolitical events with this devastating war in Ukraine. We've then had record surging inflation, inflation that we haven't seen in over 40 years and an unprecedented interest rate hike by the Fed.
(03:51):
And so here we are at the beginning of 2023, and what we'll see in some of the data is hopefully inflation is starting to come down, and now all eyes are really turning to what happens to companies, to the economy, to their ability to produce earnings and to jobs. In this session, what we're going to spend a little bit of time talking about is essentially the top three things that we feel are on the minds of investors today. And those three things are really, what will falling inflation mean for the Federal Reserve's policy and interest rates? We're going to talk about, if the economy is going to fall into a recession. And last but not least, could a fed pause actually bring some relief for stocks?
(04:44):
And so just to recap, we all know that 2022 was the worst year for stocks since 2008, since the great financial crisis. We saw the S&P down almost 19%. We saw the technology sector specifically the Nasdaq get hammered hardest down over 33% for the year, and then blue chip stocks more driven by the Dow index was down about 9% for the year. Now if we look back just at the fourth quarter of 2022, we started to see a little bit of a rally. I know in my last session I talked about at the end of Q3 going into Q4, and historically this kind of midterm stock market rally. Well, certainly Q4 did not disappoint. We saw a lot of the major indexes up 5, 6, 7, 8, 9%. And so hopefully some of that momentum will carry on into 2023 here. But let's go ahead and dive a little bit deeper into our first topic here today, which is inflation.
(05:55):
So if we look at inflation, a lot of people are saying inflation has now peaked, and expectations are that inflation and pricing pressure is going to continue to decline going into 2023. In fact if we look at some of the numbers, we saw that in the summer of 2022, we had some of the peak inflation rates of about 9.1. In November, inflation came in at a read of about 7.1, and the December read which is not shown on the chart here, came in at about six point a 5%. Now, market expectations are that in Q1 we're going to be able to reduce inflation to about 5.8%, by Q2 down to 4%, all the way down to about 3% through 2023. Now the Fed has a target of 2%, so it's not likely that we're going to get to that target 2% inflation rate in 2023, and we're going to have to keep an eye on what that means for companies ability to produce earnings and the overall economy.
(07:05):
Now if we look at increasing interest rates, which has been the Fed's number one tool or one of their top tools to help fight inflation as the Fed raises interest rates, typically people are more motivated to save and not spend money. We've seen some fixed interest vehicles like government Treasurys. For our clients right now we're getting 4 to 4.5% on 13 and 26 week Treasurys. So talk to your advisor if you have cash that's not earning a good interest rate right now. But we've seen that the Fed has come out and stated that their expectation is that they're going to raise interest rates about three more times in 2023 to the tune of about 25 basis points, which is one quarter of 1% each time.
(07:56):
Now we saw four straight 75 basis points or three quarters of 1% rate hikes. And then in December 2022, the Fed downshifted to a 50 basis point or half of 1% rate hike. And again, in 2023, expectations are that that's going to be reduced further to about 0.25%. Now, if you look at the left-hand side of this screen, the general expectation of the market is that we are going to see two more 25 basis point rate hikes and then a pause in raising interest rates.
(08:38):
Again, the Fed has shared that they're looking to keep a range of about five to five and a quarter as the terminal rate, and this will have a big influence on continued volatility in the stock market. If we continue to see that these interest rate hikes have worked, they're cooling inflation, the Fed hits pause, that could bring some relief to the overall stock market. What's interesting though is now kind of our head is turning from watching the Fed and what they're doing with interest rates over to the impact of those interest rates and how it's playing out in the general economy, and company's abilities to continue to produce earnings and consumer's ability to continue to go out and spend.
(09:27):
This chart here was put together by the Federal Reserve Bank of Philadelphia, and the red line represents a survey of the probability that forecasters believe we're going to be in a recession in the next 12 months. Now, what you can see with that red line is dating all the way back to 1970. It's at the highest it's ever been, which means there's a heck of a lot of people out there who are forecasting that we're going to be going into a recession sometime in the next 12 months. Now, the only time that this line was nearly as high and we didn't end up going into a recession was back in 1999. If you see that chart, you can see it's spiked but we didn't go into a recession. Actually, we didn't go into a recession until about a year, year and a half later. So it didn't follow that in the next 12-month guideline.
(10:28):
But the one interesting thing about this expectation is that if we do go into a recession in the next 12 months like so many people believe we will, this will go down as one of the most anticipated recessions on record. And this could help both consumers and businesses be more prepared relative to previous recessions. So many businesses right now, boards are meeting, executive teams are meeting, they're preparing to be able to weather the storm. And I know with our clients having the bucket plan in place, their now bucket and their soon bucket gives them that same ability to weather the storm of any potential recession, and any further ramification it could have on the stock market.
(11:19):
Now, what's also quite interesting is there's this teeter-totter between good things and bad things going on right now. So some indications of a potential recession, one of them is the 10-year minus two year Treasury curve. People say that when this Treasury curve is inverted, it's signaling we're going to go into a recession and the 2-10s is the most inverted that we've seen since the 1980s. So that's certainly a cautionary data point to look at that could signal we're going to go into a recession.
(11:57):
We've also seen a decline in personal savings. Savings rates have hit their lowest level in the last 17 years during the fourth quarter. Again, people have to spend more money because of inflation. And last but not least, a slowdown in manufacturing. US manufacturing activity contracted in November for the first time since May 2020. These are three pretty big cautionary data points, but there's also some constructive data.
(12:25):
Over on the left-hand side, you can see unemployment rate. We have an incredibly strong labor market right now. November's unemployment rate was 3.7%. US consumer spending, retail spending is 30.8% higher than pre pandemic levels. And last but not least, there's a lot of business resiliency right now. We have very strong corporate balance sheets that could help weather a slowdown.
(12:55):
And so again, the idea behind all of this is there's going to be some sort of slowdown. The terminology that we've been hearing a lot is, will it be a soft landing or a hard landing? A soft landing could be a slowdown but no recession. Hopefully we get some ease in inflation. The job market stays strong, so people continue to earn a paycheck. A hard landing is we go into a deep recession, inflation remains high and unemployment continues to rise.
(13:28):
Now, what's also interesting is there's a lot of speculation that we're towards the end or nearing the Fed's interest rate hike cycle. At some point, interest rates will top out, and then the Fed will pause in raising interest rates. So if we look at a historical context of when the Fed pauses raising interest rates, we've seen that it actually has meant good for the overall stock market. This chart here shows that the average 12-month return following a pause in the Federal Reserves rate hike increases has averaged almost 15.7% in the S&P 500. You can see there was only one time period back in 2000 when the Fed stopped raising interest rates and we actually saw a negative 12 months in the stock market. And so this is another data point to be optimistic about, that if we continue through 2023 and we get to the point where the Fed feels they can stop raising interest rates because they see inflation continue to come down in a meaningful way, it could be a lot of relief for the overall stock market.
(14:50):
Now let's talk about the economy, because again, you've probably heard me share in these videos, the stock market and the economy are not the same thing. Typically, the stock market will bottom out before a recession is actually declared. And so if we look at some key economic and market metrics, this chart shows in the red bar what the average levels are. So on the far left, you can see consumer sentiment. You can see right now we're below the average and it's continuing to go down. People are continually bearish or have a more pessimistic outlook on the overall economy, the markets, consumer sentiment in general. Now, economic growth you can see is at the top end of that range. Historically, inflation, as we all know, is at the top range, but coming down you can see that arrow pointing down. Volatility is at the top end. In fact last year in 2022, we saw 63 days in the market where the S&P lost over 1%. That makes the ride seem a lot bumpier than it really is. 63 days, that's one fourth of all trading days, the market lost over 1%.
(16:13):
Unemployment is still very low, and the US Treasury rate historically is very low. Now it's high in comparison to what we've seen over the last six to 12 months, and we'll talk about that a little bit as we go through our fixed income outlook.
(16:31):
But the first area that I want to talk about is equities because this chart shows the S&P 500's cumulative returns, and what you can see from the peak on January 3rd, 2022 to the end of the calendar year of 2022, the S&P was down about 20%. What I want to note in here is as you look at these cumulative returns, the one thing that I always like to look at is the magnitude and the duration of the bull in the bear markets. This long-term trend clearly shows that these bear markets, these downturns have a much shorter duration than the magnitude and longevity of these bull markets.
(17:18):
And so, one of the most important lessons in long-term investing is not to allow your emotions to drive your investment decision and pull out of the market. Because as we can see here, these downturns are temporary, but it allows us to stay fully invested and participate in the magnitude and duration of a bull market. Investment returns are driven not by your timing of the market, but rather by your time in the market. What I also think is interesting is if we look at consumer confidence and some historical trends on the S&P 500 or stock market returns, we can see that there's different levels of consumer confidence, and there's different levels of weakness in consumer sentiment.
(18:13):
The bottom part of this chart shows times where consumer sentiment is at its lowest point, and you can see when it's at its low point, the subsequent 12 months have delivered phenomenal returns. Think about going back to November 2008. You can see over towards the right side of this chart, November 2008, 12 months later, the S&P returned positive, 22%. So if you were bummed about what was going on in 2008 and you got out of the market, you missed that positive 22% rebound. Think about April 2020 when the pandemic hit. We were at an all-time low point quarantining in place. Businesses were closed. It seemed like the global economy was shutting down, but the subsequent 12 months produced a positive 43% return. December 2022, we're in a very similar place, very low consumer confidence.
(19:13):
But if we look historically, buying opportunities that exist. If you bought at a confidence peak, on average, you've returned about 4.1%. If you put money in at a trough at one of these periods where consumer sentiment was at a low, your average return was 24.9%. That's pretty astonishing, and it shows one of the best times to be entering into the market is a time like this when there's massive uncertainty.
(19:46):
This chart also shows equity performance around a US recession. What happened one year before the recession? What happened six months before the recession? What were the returns like during the recession, one year after, three year after, and five years after? And although recessions can be a tough time and bring a lot of uncertainty, history shows that a high percentage of equity declines occur in the months before they officially began. So we might very well see 2023, we do enter a recession, but a lot of the bad stock market returns already happened in 2022. Now there's no guarantee that's the case, but that's what's happened many times historically. Returns during recessions themselves have been relatively mixed, lending itself to an adage that the stock market is not the economy. There's sometimes where we've been in a recession, but the stock market has done really, really well.
(20:50):
Now, what's most important to focus on here is returns following recessions have been strong with cumulative one, three, and five year later gains of 16.1%, 30.2%, and 56.4%. It shows you that these drawbacks are temporary. And as long as you have the right time horizon, again, which we do with our now and soon bucket to weather the one, three, five year storm, you should be rewarded. So what this chart essentially shows is that historically the markets have begun to recover before a recession ends. So if you're sitting there saying, "Well, I'm just going to wait till this recession's over to get back into the market," you could miss out on the rebound already. If history's any guide, the market could rebound about six months before the economy does. And so again, it typically starts to show itself in negative returns before a recession is called, but the market typically rebounds about six months before a recession ends. You need to be able to embrace the opportunity for that next bull market. And again, this shows some of the different periods in time, what the total drawdowns were.
(22:12):
Again, I'll just go back to 2009. We saw that the market fell 27%. It was down for about two months. One year later it was up 47%. Three years later, 83%, five years later, 147%. Again, there's only been four times in history, at least dating back to 1946 that we've seen negative one-year returns one year after the market fell by 20% or more. And so again, another statistical data point to want to be able to have money in the market at this time to participate in the rebound.
(22:56):
Now, let's flip over to the fixed income markets because this has really added a lot of volatility to our 2022 portfolio returns. In a diversified portfolio, you generally have a component of equity stocks and bonds fixed income. Traditionally, if equities go down, the bonds should be able to preserve or hold their value. But in 2022, we saw the worst year for bonds in the history of the market. Because the Fed was raising interest rates so rapidly, we saw the price of bonds go down substantially, and that added a tremendous challenge for a diversified portfolio. Now, the silver lining in it is the reason prices go down is nobody wants to buy an old bond that's only paying 1% interest when you could buy a new bond that's paying 4 or 5% interest. And so this shows the yield curve, you can see a substantial difference. In December 2021, a one-year Treasury was paying about 0.38% interest, so not even half of 1%. Today, a one-year Treasury is paying about 4.73%. That makes a Treasury today a lot more attractive than a Treasury back in 2021.
(24:23):
That's why the price of the Treasurys in 2021 had to go down. You'd have to give somebody a good discount to incentivize them to buy it because you could buy a new Treasury today for about 4.73%, and there's a lot of opportunity here. It's why we're finally seeing the income get put back into the word fixed income. 4, 4.5, 5% are some of the fixed rates we're seeing. Money market rates, fixed insurance rates, annuity rates are all increasing in addition to bond rates, which is bringing a level of ease to creating a retirement portfolio. So there's a silver lining there. If you look at bond characteristics right now, the Bloomberg US Aggregate Bond Index is sitting at about 6.2 years of duration with a yield of about 4.68%. And so you can see historically that yield is now higher than it's been since before 2009. Now back in 1999, we saw yields of 7.2, back in '89, 8.62. Don't know if we'll get that high again, but again, it's putting the income back into fixed income.
(25:42):
And last but not least, just to close out this quarter, I want to share that your response to volatility matters. I closed out last quarter in Q3 with this same slide. And hopefully those of you who took advice from this slide were rewarded because Q4, we had really good returns in the stock market. But what this slide shows is for investors. An apprehensive investor in light blue, an uncertain investor in gray, a steady investor in dark blue, and an opportunistic investor.
(26:16):
If you look at the apprehensive investor, they moved to cash at the start of 2009, and they remained there, meaning their $10,000 through the great financial crisis of 08/09 lost about 40% in value. It fell from 10,000 to 6,000, and their cash really didn't earn them anything.
(26:36):
From there, we went to the uncertain investor. The uncertain investor moved to cash at the start of 2009, and then reinvested one year later. So they said, "Hey, we're going to wait till this whole recession thing is over and see how things shake out." You can see their 10,000 fell in value. They went to cash. One year later, they got reinvested back into the market, and they participated in some of the upside up to about 21,000.
(27:05):
But they didn't do as well as the steady investor who just stayed the course. They made no changes to their portfolio. They stayed in their diversified portfolio from 2008. It fell in 2008 and nine. It rebounded in 2010, 11, 12, 13, 14, 15, 16, 17, 18, 19, 20, 21. It's fallen again a bit in 2022, but again, they're remaining and staying the course, and they're at 26,000.
(27:34):
Now, the opportunistic investor's one who when the market went down, they saw everybody else was panicking. They put another $10,000 in, they doubled down at the start of 2009, and look at where they ended up, 68,655. And so again, if you have opportunity to deploy capital, these are the best times to do it. If you're retired and all of your capital is already deployed, you're still buying into the market because of dividends and interest that's getting reinvested. And so again, I urge everybody, there's no doubt 2023 is going to continue to be volatile. We still have inflation challenges. We're through some of the energy inflation and the supply chain inflation. We still need to see how wage inflation shakes out. We still need to see how these interest rate increases impact the economy and companies abilities to produce earnings.
(28:35):
But with that being said, when we zoom out, we have a great opportunity to continue to build wealth for ourselves, and for our families, and our loved ones.
(28:46):
So, if you need anything from us at all, please reach out. We're here to help, and I look forward to seeing you at the end of next quarter.
Speaker 1 (28:55):
Financial planning and advisory services are offered through Prosperity Capital Advisors, "PCA" and SEC registered investment advisor with its principal place of business in the State of Ohio. Alison Wealth Management and PCA are separate, non-affiliated entities. PCA does not provide tax or legal advice. Insurance and tax services offered through Alison Wealth Management are not affiliated with PCA. Information received from this video should not be viewed as individual investment advice. Content may have been created by a Third Party and was not written or created by a PCA affiliated advisor and does not represent the views and opinions of PCA or its subsidiaries.
(29:32):
For information pertaining to the registration status of PCA, please contact the firm or refer to the Investment Advisor Public Disclosure website. For additional information about PCA, including fees and services, send for our disclosure statement as set forth on Form ADV from PCA using the contact information herein. Please read the disclosure statement carefully before you invest or send money.
