Winter 2023 Market Commentary

January 12, 2023

Market Recap

For the quarter, U.S. stocks rose, with the S&P 500 gaining 7.6%.  International stocks performed very well, with the MSCI EAFE climbing 17.3%.  Bonds were also positive, with the Bloomberg Barclays Aggregate Bond Index returning 1.9%.


The fourth quarter saw the market bounce back following negative returns in the first three quarters of the year.  At its worst in October, the S&P 500 had fallen more than -25% from its January peak.  For the year, the index lost -18.1%, which is its worst annual return since the 2008-09 Global Financial Crisis.  International stocks, as measured by the MSCI EAFE Index were down -14.5%, and bonds finished the year with their worst performance on record, with the Bloomberg Barclay’s Aggregate Bond Index falling -13.0%.

*This graph is not intended to recommend any investment or investment activity.

Though the fourth quarter was overall positive, it was a rocky ride to finish the year.  October saw early declines, bringing the indexes to their lows for the year before bouncing back sharply, with the S&P 500 returning 8.1% for the month.  In November, the gains continued with the large cap index rising 5.6%.  Early gains in December quickly reversed into a steep selloff in the latter part of the month.  The final sessions for the year capped off a decline of    –5.8% for the month of December and a return of –18.1% for 2022.

The most significant factor that influenced the markets in 2022 was the rise in inflation, and more importantly, the Federal Reserve’s monetary policy response of rapidly raising interest rates.  The Fed was caught somewhat flat-footed in 2021 when inflation began to increase substantially.  In early 2022, they decided to intervene in a major way.  In an attempt to cool the economy and inflation, the Fed implemented a succession of seven interest rate hikes that brought their benchmark lending rate from 0.125% to 4.375%.  They are expected to raise rates 2-3 more times in the coming year to bring the Fed Funds Rate above 5%. 

There is growing optimism that a pause and eventual reversal of the Fed’s policy may occur later this year.  The pace of the rate increases are slowing and inflation is showing significant signs of cooling.  In the graph below, you can see that the majority of the components of the Consumer Price Index (CPI) have come back down to more acceptable levels, with the exception of housing costs, which traditionally takes longer to change course.

Inflation Heat Map

*This graph is not intended to recommend any investment or investment activity. Source: JPMorgan, U.S. Bureau of Labor Statistics

The significant drawdown in the stock market coupled with the worst year on record for the bond market meant the benefit of owning both stocks and bonds was essentially nonexistent.  To illustrate, the classic 60/40 mix of stocks/bonds (S&P 500 / Bloomberg Barclays Aggregate) had its worst 12-month period since 1974, returning –16.1%.  This has left many investors wondering if the benefit of diversification will return.  In our opinion, it will.  2022 was an undeniably lousy year for almost all investors.  But the bright side is that prices for both stocks and bonds are much more attractive than they have been in some time, increasing the probability for much better returns for diversified portfolios in the years ahead.

Despite the seemingly high level of pessimism in the press and among investors, the economy is in reasonably good shape.  Unemployment remains near historic lows, and Real GDP is expected to have grown 1-2% in 2022.  Inflation appears to have peaked and has since been drifting lower.  Many strategists believe that a recession is not a certainty and that if there is a recession, it is likely to be mild.  So, we remain optimistic that markets will recover last year’s losses and move to new highs.  Hopefully much sooner than many are expecting.

Thank you very much for your continued confidence in our service and advice.  If you would like to discuss our opinions, outlook, or your portfolio in greater detail, we would be happy to schedule a meeting or a conference call at your convenience.  Lastly, don’t keep us a secret.  If you know someone who would like help planning for their financial future, we will be pleased to speak with them to see if we can assist.

Owen Murray, CFA

Owen Murray joined Horizon Advisors in 2005. As a core member of the wealth management team, Owen is principally involved in investment research and portfolio construction.