On Money & More – December 2022/January 2023

We’ve spent much of 2022 working off the fiscal and monetary excesses of the pandemic economy; excessive amounts of cash creation coupled with excessive lengths of time with suppressed interest rates. These mistakes led to excessive purchases of speculative asset classes such as cryptocurrencies (even dogecoin had its day in the sun), non-fungible tokens (remember people buying “bored ape NFTs”), high multiple stocks (the meme-stock craze of Gamestop stock) and, yes, even long-term bonds (much of the developed world recently had bonds with negative interest rates). Our economy is working its way back from this euphoria, and while the process has been painful, it is crucial for long-term stability. We remain believers that prosperity will follow this recession, similarly to every previous economic contraction in American history. The relevant question for investors isn’t about whether we are in a recession, but rather how bad the expected recession will be. Will the Fed lead us to a “soft landing” with their widely broadcasted pace of rate increases, or will we have a “hard landing” with a longer, deeper recession?

The data continues to show a mixed bag on where our economy actually stands. After two straight quarters of negative Gross Domestic Product (GDP) growth, Q3 GDP rebounded with an initial estimate of +2.6%. Some inflation measures have modestly ticked down, with Headline CPI declining from 9.1% for June to 8.3% for August. But Core inflation, which excludes more volatile items, has ticked up due to persistent rent increases. Meanwhile mortgage rates have spiked higher, and housing prices have dropped to reflect that cost increase. 30-year fixed mortgage rates have climbed from 3% in January to recently touching 7%.

The conflicting data has elevated debate about whether the Fed needs to maintain its aggressive stance toward rate increases. Much like Ross from Friends trying to get his couch up the stairs, many high-profile economists are screaming “Pivot!” to the Fed, warning of a rate increase overshoot. Any hints of a Fed pivot have rocketed stocks higher, however those have been quickly countered by members of the Federal Reserve Board of Governors who have been clear that their job is not finished. In a world where the stock market rallies on lower rate expectations, bad news has been good news for stocks and vice-versa. However, time and again the pivot has proven to be the current version of Ahab fruitlessly chasing the white whale, and any related market rallies have been quickly snuffed out.

So, what are investors to do from here? Are we in store for a Santa Claus rally this year? Looking forward, there will be no shortage of impactful events. With the election behind us, investors will maintain a focus on inflation and the possibility for the elusive Fed “pivot.” We will also see a renewed Federal debt ceiling debate, which historically has been a big Washington bluff (let’s hope that’s all it is again!). And the conflict in Ukraine will continue to impact inflation in commodity and oil markets. All these developments can be discouraging for investors, but while there are always numerous reasons to sell stocks, here are a few historical footnotes that are more bullish: First, stocks have a very strong record after midterm elections, having gained in each of these years since 1940 (source: Yardeni Research). Second, stocks have an excellent record of returns after periods of 20% losses, such as the sell-off we’ve recently witnessed. And finally, the drop in stock values has brought valuations much more in line with historical averages, with the S&P 500 forward Price/Earnings ratio coming down from almost 22 a year ago to 15 now (source: JPMorgan). Bonds are also yielding at levels not seen in years, with even short bonds currently providing nearly a 5% yield. These assets are all an important part of creating a retirement portfolio that you can rely on, and we at Cutler feel optimistic about the prospects for diversified portfolios going forward. If you have questions about your current market positioning, give us a call and we’ll be happy to share our views with you.

All of us at Cutler want to wish our Jacksonville Review readers a Merry Christmas and a Happy New Year! Let’s get 2022 behind us and look forward to better times ahead!

Past performance is not indicative of future results . All opinions and data included in this commentary are as of November 4, 2022 and are subject to change. The opinions and views expressed herein are of Cutler Investment Counsel, LLC and are not intended to be a forecast of future events, a guarantee of future results or investment advice. This article is provided for informational purposes only and should not be considered a recommendation or solicitation to purchase securities. This information should not be used as the sole basis to make any investment decision. The statistics have been obtained from sources believed to be reliable, but the accuracy and completeness of this information cannot be guaranteed. Neither Cutler Investment Counsel, LLC nor its information providers are responsible for any damages or losses arising from any use of this information.