Year End Market Commentary
- After three consecutive quarterly declines, U.S. stocks moved higher in the fourth quarter, but underperformed their international peers. Investors favored value – and cyclical – oriented segments of the market, which outperformed their growth peers by a considerable margin.
- U.S. bond yields, as represented by the U.S. Aggregate bond Index, appear to have peaked as we approach the end of the Fed’s rate hike cycle, and the markets begin to price in potential cuts down the road.
- Bond returns were positive in Q4, with lower rated, higher risk bonds posting the highest returns for the quarter.
- International bonds posted positive returns, mostly due to the drop in the dollar and the accompanying rise in local currencies.
- Commodities remained volatile amid a pullback in the U.S. dollar, optimism due to eased China Covid restrictions, and global recession concerns, while stabilization in interest rates fostered a rebound in REITS.
Job cuts and jobless claims paint a divergent picture - although the leading indicator of job cuts has picked up noticeably year over year, jobless claims have returned to near 2022 lows, from 650,000 to just over 200,000.
As for inflation, the long-term view suggests that previous surges in inflation were associated with unique events, some of which lasted for years. More active monetary policies have been in place since the early 1980’s, although it is uncertain whether the ultra-aggressive Fed actions can contain inflation in the near term. In the past, higher inflation correlated with weaker markets and economic gains. Goods oriented inflation continues to soften while services prices remain stubbornly sticky. Trends and leading growth indicators, such a money supply growth, are still favorable for a continued easing in price growth; however, the pace of the decline remains unclear.
With most markets hitting bear market territory this year, it is notable that bull markets have been longer in duration and greater in magnitude than bear markets, resulting in gains over time. This bear market has been driven by multiple compression, making valuations look compelling. Yet expected weakness in earnings may limit upside potential for equities. Continued high inflation may indicate that the market is trading gin an uncomfortably expensive zone.
It is important to remember that just five companies account for nearly 20% of the S&P 500’s market cap. While these companies significantly outperformed the overall market in the last two years, they also experienced a sharper pullback during the recent volatility.
At Affinity Capital, we have adopted a cautious approach in the last year, moving to cash easily to avoid significant market risk, investing in Treasury Inflation Protected Securities, and specifically investing in value driven, dividend bearing securities. The impact of dividends as an income generating security on total return is substantial. A hypothetical portfolio with dividend paying stocks invested over the last forty years with dividends reinvested grew sixty three percent over a price appreciation only portfolio.
We have also utilized tax efficient investing, using tax loss harvesting to our advantage with potential savings in taxes over the long run. Sector diversification has been important as variation in sector returns has offered opportunities for tactical tilts.
All of the above commentary about the challenging market this past year is important, and we focus on it every day. It really is one part of your financial picture.
When we sit at the table as part of a team with our client’s professional team, such as tax providers and estate attorneys, we are looking to the future. How will clients plan for their future and that of their families, such as aging parents? How will they sustain assets for a comfortable future? How will they provide for the multi-generational transfer of wealth?
When we adopted the tag line ‘Wealth Management for Life’ it was motivated by the belief that all of these parts are interconnected, and we genuinely enjoy assisting in the strategic vision of your future.
We appreciate the opportunity to collaborate with you and your family and look forward to working with you in the new year and beyond.
Happy New Year!