Turning the calendar to 2023 brings with it optimism and hope for a fresh start in the New Year. Unfortunately for the markets, there is still a cloud of uncertainty hanging out there regarding how much the Federal Reserve will increase interest rates in order to tame inflation. Next week we will know what they decide on Feb 1st but how much more they move rates will depend on the inflation data in the coming months.
At the investor level, we are seeing a level of investor fatigue not noticed since the market correction of 2000-2002. Yes, there were three years in a row where the market declined after the technology fueled rally of the late 90’s. The current market correction is now in the 13th month (average is 19 months) and from a depth perspective we were down 28% (average is 33%). The investor fatigue today reminds me of the part of running a marathon often referred to as the “Wall”. It happens differently for each runner but usually occurs around mile 20-21. There are 5-6 miles to go, and the body doesn’t want to continue so it becomes a mental battle just like the current state of the bond and stock market. Throwing in the towel is an option for the runner, but for an investor it can lead to permanent loss of capital.
What does this mean for us right now? If you listen to the “expert” economists who are often inaccurate at best, a majority are calling for a recession in the US. In a quick check of 20 different firms, 19 called for a recession and many predicted the Federal Reserve would be the main driver. Although a recession is possible, it is not guaranteed (even though it is a popular prediction), and the impact on the markets is likely to be less of a surprise as much of the negative headline news has been priced into the markets. Another interesting statistic is the amount of cash in money markets. As of last week, $4.8 Trillion was parked on the sidelines. The last time those levels were reached was May of 2020. We believe this year is a time for most investors to be fully allocated to stocks and bonds due to the fact that markets will likely look through any slowdown and could rally once the Fed steps to the sidelines. Will it happen in Q1? Probably not, but Q2 and beyond could be an ideal time for the markets to respond to easing inflation and improving financial conditions.
Hang in there and don’t throw in the towel!