The Legacy Perspective - January 2023
by Steve Wachs, CFP®
“December is a month full of market predictions for the year to come. Everyone, from economists to analysts to grocers, seems to have a strong feeling about how stocks will behave going forward. Here’s the thing: They’re almost always wrong. No major analysts predicted last December that this year (2022)would (likely) be the worst for US stocks since 2008, that oil prices would shoot from $70 to $130 and then careen back to $70, and that the Federal Reserve would announce four straight historic three-quarter point interest rate hikes”
The same “experts” who made these prognostications last year are providing their thoughts of what will happen in 2023. Many of them are predicting much more tepid investment returns. You do not want your financial independence to be dependent on our guesses. You want it based on a customized financial plan that is combined with an investment discipline that has worked over the long-term through both good and bad times. With that in mind, let’s look back to what we know was “Higher” and “Lower” last year and what it means for the upcoming year.
1. Higher Inflation.
First it was bacon, and now it is eggs. What’s the world coming to! Almost everything was more expensive to purchase last year. Inflation peaked in June 2022 at 9.1%. It declined to 6.5% by December. Supply chains continue to heal, rising interest rates potentially reduce consumer demand, and housing/rental rate increases appear to be moderating. We do expect inflation to be higher for a longer period of time. This may be beneficial for commodities related investments. The era of 2.0% inflation has ended for the near future.
2. Higher Interest Rates.
One of the mandates of the Federal Reserve is to keep inflation low. One of the tools they use to do that is to increase interest rates which moved from near 0% at the beginning of 2022 to 4.5% at the end. Increased interest rates result in higher costs for both consumers and businesses to borrow money which results in lower demand. That ultimately results in prices declining. Consider the following example - mortgage rates increase, there is less demand for home purchases, and home prices decline. The “trick” is to slow down demand without causing a severe recession – the proverbial “soft landing.” Recession will be the most discussed topic in 2023. Barring a negative global surprise like Russia/Ukraine that occurred last year, we believe a deep recession can be avoided.
3. Lower Stock and Bond Prices.
Not everything increased in price last year. We have to return to the “wonderful time” of the Great Depression to experience a double-digit decline in both stock and bond indices. We know stocks periodically decline by more than 10%, but bond values do not. 2022 was an anomaly and it is painful that our clients with more conservative portfolios were negatively impacted as there was no place to hide investment-wise last year. We don’t know what the stock market will do in 2023. However, we believe that owning companies that generate free cash flow (they are not dependent on debt) and are in sectors that may be less impacted by an economic slowdown are poised do well this year. The forecast we are extremely confident about is that bond returns will be positive. For the first time since the early 2000’s, bonds actually pay a decent rate of interest. Without taking much credit risk, our bond portfolios are currently set to yield over 5%. Even though our bond returns last year were significantly better than the comparative index (we did “less bad”), we anticipate a major positive impact from bond returns in 2023. Finally, despite the global conflict last year, international equity indices out-performed U.S. ones. We would not be surprised if that continues in 2023.
4. Lower Capital Gain Taxes
At the beginning of 2022, we advised many clients we had planned for higher capital gain taxes that would be owed given the portfolio gains we captured at the end of 2021. We stated capital gains are better than capital losses. We used the declines in investments in 2022 to generate taxable losses that will offset future gains. That is about the only benefit that comes about during times of investment declines.
We know when we go through a bad investment year, “more” words are needed to explain why. As one long-term client recently shared with me, “Steve, you never have lacked for words.” Please feel free to reach out. We will use the appropriate words to answer your questions and address your concerns as we keep you on track to accomplish your long-term financial goals.
Disclosures
Legacy Consulting Group is registered as an investment adviser with the SEC and only conducts business in states where it is properly registered or is excluded from registration requirements. Registration is not an endorsement of the firm by securities regulators and does not mean the adviser has achieved a specific level of skill or ability.
Information presented is believed to be current. It should not be viewed as personalized investment advice. All expressions of opinion reflect the judgment of the authors on the date of publication and may change in response to market conditions. You should consult with a professional advisor before implementing any strategies discussed.
All investments and strategies have the potential for profit or loss. Different types of investments involve higher and lower levels of risk. There is no guarantee that a specific investment or strategy will be suitable or profitable for an investor’s portfolio. There are no assurances that an investor’s portfolio will match or exceed any particular benchmark.