4Q 2022 Market Summary

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Markets rebounded slightly in the fourth quarter of 2022, capping off an otherwise difficult year for stocks and bonds. Near-term economic trends remain difficult to predict and may lead to continued volatility during 2023, but we believe the current market environment presents opportunities to earn a reasonable return over the long term.

Inflation showed signs of slowing during the fourth quarter, falling from a high of 9% in June to 7% in November. The cost of certain items such as used cars, lumber and energy fell, but the declines were partially offset by significantly higher costs for shelter and food. Even so, the slight decline in inflation led to increased optimism and sharp increases for global stock and bond prices during the quarter. Overall though, 2022 was largely characterized by the Federal Reserve’s battle to bring down inflation. The Federal Reserve raised its key Fed Funds rate 425 basis points to a targeted range of 4.25%-4.50%, marking one of the fastest and largest rate hikes in 30 years. The result was that full-year returns were negative for almost all asset classes for the calendar year. In fact, the 13% decline in 2022 for the Bloomberg US Aggregate Bond Index is the worst calendar year return in the history of this widely followed index. 

The silver lining to this decline in bond prices is that yields are now much higher, giving investors an opportunity to earn higher levels of income.  Equities also remain fairly valued in our opinion, although the possibility of a recession and corresponding slowdown in earnings may be a challenge in the near term. In the first quarter of 2022, S&P 500 Index earnings were growing at a 12% year-over-year pace, but by the third quarter, the pace of earnings growth fell to only 3%. Some Wall Street strategists are forecasting zero earnings growth for the S&P 500 in 2023, although expectations vary from sector to sector.

The S&P 500 ended the year trading at around 16.5 times 2023 earnings, a reasonable level in line with historical averages. We continue to believe the current market provides relatively attractive entry points for investors with a long-term horizon and willingness to take on some short-term volatility in exchange for long-term appreciation.

Regardless of whether the economy slows enough to meet the technical criteria for a recession, it is reasonable to expect an eventual slowdown as part of a normal economic cycle. This most recent growth cycle was exacerbated by low interest rates and speculation in certain parts of the market — like cryptocurrency and meme stocks — and these more speculative areas may bear the brunt of a slowing economy coupled with higher interest rates. That said, we believe that prudent risk management, including sticking with a long-term strategic allocation, and emphasis on owning high-quality businesses at reasonable valuations will serve investors well regardless of what direction the economy takes in the short term.

Equities

The S&P 500 rose 7.6% in the fourth quarter of 2022, led by robust gains in the energy and industrials sectors. Value stocks continued their year-long outperformance over their growth counterparts, with the Russell 1000 Value Index returning 12.4% in the quarter versus 2.2% growth for the Russell 1000 Growth Index. The Russell Mid-Cap Index and Russell 2000 Index of small companies returned 9.2% and 6.2% respectively during the quarter. 

Non-US stocks benefited immensely from a weakening dollar in the fourth quarter, reversing the trend seen throughout the first three quarters of the year. The MSCI EAFE Index returned 17.3% in the quarter, with just over 8.5% of that return coming from a weaker US dollar. The MSCI Emerging Markets Index returned 9.7% during the same period. 

Fixed Income 

Interest rate movements were mixed during the fourth quarter as short-term rates continued to rise in anticipation of continued Federal Reserve rate hikes, while longer-term yields (five- and seven-year rates) saw very small declines as investors baked in lower long-term inflation expectations. The resulting inverted yield curve (when short-term rates are higher than long-term rates) is often considered a predictor of future recessions. The Bloomberg US Aggregate Bond Index returned 1.9% during the quarter. High-yield corporate bonds also benefited from the rally, returning 4.2%, while floating rate bank loans returned 2.7%. The Bloomberg Municipal Bond Index returned 4.1%. 

Commodities 

The Bloomberg Commodity Index returned 2.2% in the final quarter of the year. Oil prices rose slightly to end the quarter at $80 per barrel, while gold prices returned 9.5%. 

Important Information:
The Bloomberg Commodity Index is a broadly diversified commodity price index distributed by Bloomberg Index Services Limited. 
The Bloomberg US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market.
The Bloomberg US Corporate Bond Index measures the investment grade, fixed-rate, taxable corporate bond market. It includes USD denominated securities publicly issued by US and non-US industrial, utility and financial issuers.
The Bloomberg US Government/Credit 1-3 Year Index is an unmanaged index considered representative of performance of short-term US corporate bonds and US government bonds with maturities from one to three years.
The Bloomberg US High Yield Corporate Bond Index is a rules-based, market-value-weighted index engineered to measure publicly issued non-investment grade USD fixed-rate, taxable and corporate bonds. 
The LBMA Gold Price Index is the global benchmark for unallocated gold and silver delivered in London.
The MSCI EAFE Index is a stock market index that is designed to measure the equity market performance of developed markets outside of the U.S. and Canada.
The MSCI Emerging Markets Index is an index designed to measure equity market performance in global emerging markets.
The Russell 1000 Growth Index is a broadly diversified index predominantly made up of growth stocks of large US companies.
The Russell 1000 Value Index is a broadly diversified index predominantly made up of value stocks of large US companies.
The Russell 2000 Index is a small-cap stock market index of the bottom 2,000 stocks in the Russell 3000 Index. The index is maintained by FTSE Russell, a subsidiary of the London Stock Exchange Group.
The Russell Midcap Index is a market capitalization-weighted index comprised of 800 publicly traded U.S. companies with market caps of between $2 and $10 billion. 
The Standard & Poor’s 500 Index, often abbreviated as S&P 500, is an American stock exchange market index based on the market capitalizations of 500 large companies having common stock listed on the NYSE or NASDAQ. The S&P 500 index components and their weightings are determined by S&P Dow Jones Indices.
The S&P 500 Energy comprises those companies included in the S&P 500 that are classified as members of the GICS energy sector. 
The S&P/LSTA US Leveraged Loan 100 Index is designed to reflect the performance of the largest facilities in the leveraged loan market.
The West Texas Intermediate (WTI) oil, also known as Texas light sweet, is a grade of crude oil used as a benchmark in oil pricing. This grade is described as light because of its relatively low density, and sweet because of its low sulfur content.
Bloomberg Commodity Index (BCOM) is calculated on an excess return basis and reflects commodity futures price movements.

This report has been prepared for informational purposes only. It is based on information generally available to the public from sources believed to be reliable. No representation is made that information is accurate or complete. Any opinions expressed are subject to change without notice. Past performance is not indicative of future results. Yields are subject to market fluctuations. Additional information is available upon request. 

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