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Effective Date:  December 31, 2022


Equity and bond markets recovered modestly during the quarter but still finished the year with negative returns. The improvement in markets was due to lower inflation trends and the Federal Reserve acknowledging the improving inflation outlook with a reduced 0.50% interest rate hike at their mid-December meeting. Looking forward to 2023, there is a wide range of potential market outcomes with the most important factors likely being how inflation and monetary policy play out during the year.


                                  S&P 500

                Russell 2000

MSCI EAFE International

MSCI EM Emerging Markets

Barclays Aggregate Bond

10 YR Treasury Yield







After testing the June low in mid-October, markets rallied strongly in October and November only to give some of it back in December. The selling the last two weeks of December was likely caused by tax loss harvesting tactics. After surging in 2020 and 2021, technology stocks led losses in 2022. For example, here are major tech stock returns for 2022 – Apple down 27%, Amazon down 50%, Netflix down 51%, and Google down 39%. One of the interesting developments last quarter was the outperformance of international equities and what that may mean for the future. Many European equity markets outperformed the US this quarter despite them clearly having higher inflation and more likely facing a recession in 2023. This may demonstrate that US investors are overly negative and lead to stronger relative performance in the US in 2023.


It is easy to get caught up in short-term market movements of a day, week, month, quarter or even a year. Considering market losses in 2022, the S&P 500 had five- and ten-year compound annual average returns of 9.3% and 12.6%. Another way of saying it is that even with last year’s losses, equity market returns the last ten years have been above average of the last 100 years and are still strong.



Investor sentiment

Technical indicators

US equity valuations


US Economy

Corporate earnings


Monetary policy

Interest rates


Ukraine War

Market momentum

We made several changes to the Market Indicators and Outlook section this quarter. Notably, inflation, monetary policy and interest rates were moved from negative to neutral. Inflation trends have slowed. While year over year inflation remains elevated at 7.1%, if you annualize the last three months of inflation, it is running closer to 3%. This is an inflation rate that will allow the Federal Reserve to pause interest rate hikes within the next few meetings to assess the impact of what they have already done. Last year, the Federal Reserve raised interest rates 4.25% which is more than they raised interest rates in any year since 1981. Even if they do raise interest rates a little further in 2023 (they are estimating an additional 0.75% in 2023), we are likely near the end of the interest rate tightening cycle. Also of note is the upgrade to positive for equity market valuations. After being elevated for a while, equity valuations are now in-line with average valuations of the last 25 years with the P/E ratio being 16.6. Investor sentiment and technical indicators remain positive.


Market outlooks have a wide range of outcomes because much is unknown and unknowable in advance. In 2022, we correctly identified the primary market movers (Fed policy and Russia / Ukraine) but underestimated the extent of the negative market reaction and length of time it would take for resolution. Inflation, Fed policy, and geopolitics will likely again be the primary drivers of markets looking ahead into 2023. 


The consensus outlook for 2023 is negative and a recession is expected. Investors have been fixated about the possibility of a recession, with some already claiming one has already started. A recession is possible given the Fed’s aggressive monetary policy, but it is difficult to predict in this environment. A recession is just a prolonged slowdown of economic growth that ultimately results in period of economic contraction. Coming off the of distorted economic growth after COVID, the economy has already slowed dramatically but is not contracting yet. This may seem odd, but even if the economy does not actually enter a recession in 2023, it has already contracted more than it would in a typical recession because of the COVID related surge in growth in 2021. This is why it seems like a recession already. If inflation does continue to cool, it will be difficult for the Fed to maintain their aggressive monetary policy that would result in unnecessary job losses. 


The less common positive outlook is that inflation will slow, the Federal Reserve will halt interest rate hikes, the economy will narrowly avoid a recession, and the market will recover. The inflation the US has been experiencing is due to COVID and related policies and it is slowly dissipating. The Fed has already perhaps raised interest rates more than needed to move inflation back to more normal levels. While history is not a perfect predicter of the future, in the 1982 when the Fed stopped aggressively raising rates after fighting inflation, the market recovered quickly. It should be noted that last January the Fed anticipated raising interest rates only 1.00% in 2022. They raised interest rates 4.25% which was the most aggressive policy action since 1981 and caused much of last year’s the market volatility. One benefit of the swift Fed actions in 2022 may be a better-than-expected 2023 as monetary policy and market volatility return to more normal levels.


Much like the last several months, during the upcoming months the markets will be data dependent focusing on inflation data, employment data, and the Federal Reserve. The Federal Reserve meets in early February and updates on inflation and employment will be released between now and then. The Federal Reserve is expected to further reduce interest rates hikes to 0.25% at the next meeting. Then they will meet again in mid-March and by then, they may be able to pause interest rate hikes altogether. That would likely be positively interpreted by markets. Other than inflation and the Fed, China and Russia are other potential risks. 


From a technical perspective, markets are set to be positive in the upcoming year. It is rare that there are back-to-back years for negative returns. Since WW2, there have been twenty-one years in which the market declined and only three of those years had declines the following year. On average market returns following a negative year are above average and more consistently positive than other years. Since the weekly American Association of Individual Investors (AAII) Survey started in 1987, investors were more negative in 2022 than any other year. There was not a single week in 2022 that investors had above the long-term average level of optimism. This statistic does a good job of capturing the malaise that investors felt this year. As we have pointed out in the past many times, periods of negative investor sentiment have led to higher periods of future returns as both retail and institutional investors are under invested and will rush back into the market after it has begun its rebound. 




2022 was a challenging year for investors but having a long-term approach is the best way to approach markets. As we discussed in the last market update, we increased US equity allocations and decreased bond and international equity allocations to position the portfolio to recover faster when the market turns. As a result, most portfolios are slightly overweight US equities and underweight bonds which has worked well so far.  With the increase in interest rates this year, we have a longer-term positive outlook for bonds, but equities should recover more quickly once the Federal Reserve stops raising interest rates. Once markets do recover, we will rebalance portfolios back to their long-term asset allocation weights. We do not believe any further portfolio adjustments are needed at this time and we will wait and see how inflation and monetary policy play out the next six months.

Brian West, CFA, CPA
Chief Investment Officer
(515) 284 1011
111 East Grand Avenue, Suite 412
Des Moines, IA 50309
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