The S&P 500 ended 2022 with its largest loss (-18.1%) since the -37% freefall during the financial crisis of 2008. Everything went wrong last year as markets were stung by a series of cascading concerns over rising interest rates to curb red-hot inflation, recession fears, Russia’s invasion of Ukraine and a resurgence of COVID-19 in China.
The era of easy money definitively ended when the Federal Reserve implemented the most aggressive, inflation-fighting interest rate hikes since the 1980s. In all, the Fed raised interest rates seven times in 2022, including an unprecedented four-straight 0.75% rate increases. While many disagreed with the Fed’s strategy in real-time, the approach appears to be working as consumer inflation peaked at 9.1% in June, (highest in over 40-years) before easing to 7.1% in November. Despite the recent progress, the main question going into 2023 is how much longer will it take for inflation to reach the target rate of 2% and more importantly, is a recession or rebound in store for this year?
Many of the talking heads on TV believe that pushing inflation lower will be more challenging, the closer we get closer to the 2% target rate and as a result, are assuming the Fed will push us into a recession at some point during 2023.
While the future is still unknown, if these pundits are correct, this easily would be the most widely predicted recession in American History! Typically, few people can correctly predict such events, so I am choosing to look at the glass as half-full and not half-empty. My personal belief is that the stock market will perform better than many are guessing and it could be for a variety of reasons. Maybe the Ukrainian War comes to an end? Maybe China ends it’s Zero-Covid policy/lockdowns? Maybe inflation returns to normal levels and rate hikes stop quicker than expected.
I am not sure which, if any, of these events will happen so in times like these, I turn to history as my guide. Below are three stats that I found reassuring, provided by FundStrat research.
- During the last inflation crisis in the 80’s, markets bottomed months BEFORE then Fed chairman Paul Volcker ended interest rate hikes. Additionally, the entire two-year market decline was erased completely in four months from the market bottom.
- Experiencing back-to-back negative return years is rare. Since 1946, There have been 21 times where the market finished negative. However, 18 of those times, the market rebounded the following year with the average return being +13.5%.
- (1973, 2000, 2001 were the only back-to-back loss years).
- Following a mid-term election, markets typically outperform the following 12 months with an average return of 16.5%
While these are just statistics and outlier events certainly exist, I am hopeful that history will repeat itself in 2023. December’s Inflation report will be released on 01/12 and could provide a helpful clue on the state of inflation. I am anticipating inflation numbers will come in below expectations for the third consecutive month. Have a great January and as always, I will keep you abreast of the ever-changing landscape.