January 2023 Market Commentary

2022 ended and the S&P 500 Index closed out near bear market territory: down 19.44% for the year.  There was no safe haven in…

2022 ended and the S&P 500 Index closed out near bear market territory: down 19.44% for the year.  There was no safe haven in 2022.  The Bloomberg Aggregate Index, a standard measure of the bond market, also ended the year in a rare bond bear market.  The year was filled with volatility, negative headlines, endless recession predictions, and very few people were left with an optimistic view for the new year.

Reflecting on the year, much of the economic disarray was a result of the Federal Reserve raising rates throughout the year at a historically rapid pace to curb once-in-a-generation inflation.  The inflationary conditions were the result of a perfect storm of economic, monetary, and fiscal responses to the Covid-19 pandemic.  The extraordinary responses to the pandemic have kicked off unforeseen effects across the globe.  Like throwing a rock into a pond and the ripples that cascade outward, we are likely to feel continued effects of the measures taken but in lesser amounts over time.

Despite the negatives of the previous year, we are happily looking forward to the new year for the reasons below:

  • As of December, inflation continued its downward trend from the peak reached in June.  Both the US CPI and PCE inflation numbers, along with other broad measures of commodities and price expectations, continue to retreat here and abroad.
  • As of December, the Federal Reserve has reduced its pace of rate increases, which is a clue that they see inflation decelerating.  Other central banks around the world have also begun to reduce their pace of rate increases, or halt increases all together, in the final quarter of the year.
  • Container ships outside the Port of Los Angeles are no longer experiencing above average wait times to unload their cargo which should alleviate price pressures on imports.
  • Oil and fuel prices have fallen from their highs which will significantly impact the cost of food, packaging, and transportation.
  • The labor market has been resilient throughout all the turmoil of 2022.  The unemployment rate has risen slightly yet remained low by historical standards.  The number of companies looking to fill positions far outweighed those unemployed, even with companies reducing hiring plans for the new year.  The labor market should be another source of strength in the new year.
  • The flood of new dollars into the system over the past few years is likely to lead to the ‘soft landing’ that most hope for but few believe will happen.  During the Great Depression, nearly 100 years ago, the central bank reduced the monetary supply which crushed consumers.  Today, the Federal Reserve did the opposite and increased the monetary supply, which we believe is likely to lead to a very moderate impact on the average household if the economy does slip into a recession.
  • Lastly, all bear markets eventually end.  We do not know when, or what, will be the catalyst but know that we will move beyond this to greater things.

The reason we focus on defensive, dividend paying stocks is because we know bear markets can come at any time and for any reason.  Fortunately, the company stocks that we follow have held up much better than the equity markets over the past year.  During times like these, we remind investors to focus on the dividends being paid and the rate at which dividends have been increasing year-over-year.  We look forward to the end of the bear market and know that stocks will turn back up.  Often, they do so when least expected.

Thomas A. Toth, Senior
Chairman
Kenneth Bowen, II
President & CEO