So Goes January, So Goes The Year

financial planning for attorneys financial planning for entrepreneurs financial planning for retirement financial planning for young professionals Feb 16, 2023
Stock Market


January of 2023 kicked off with a bang. We’re in the midst of a stock market rally that we haven’t seen in over a year.  The market rose, and rose, and kept rising – all in the last 8 weeks.  We’re far from all-time highs, and expect that to be the case for a while yet, but this is a positive sign.  For our clients – you’ve weathered a tumultuous storm, one that investors haven’t experienced since the 2008 Financial Crisis. We’ve kept you invested, weathering this downturn, since we know you’re well-positioned for the long term. 

There is an old stock market adage – so goes January, so goes the year. 

It’s not lost on us that when the broader stock market (the S&P 500) achieves positive returns in the month of January (which it did achieve, handsomely) the market’s performance for the year on average has been +17.6% since 1950! It is also not lost on us that when January is up, the market also remains up for the remainder of the year 84.5% of the time historically (source: Nasdaq). Will we see happy results by year-end? Based on these statistics and others, history tells us the odds are in our favor.

That’s good news, so now what?

Do we see the need to make any changes to our portfolios?  No and yes. No – because we already made strategic allocation changes late summer of 2022 to best position portfolios for when the market rises again, as it has begun to do in the past few weeks. Also, Yes – we’re constantly challenging our model portfolios, looking ahead at what is next. Specifically, within the next two weeks we’re going to be focused on two main things – 1. challenging our fixed income allocations to ensure that our clients are well-positioned to gain from the current rising interest rate environment and 2. Pruning some of our growth-oriented holdings and rebalancing where necessary.

What about inflation?

Across the board, inflation is coming down. But let’s be clear – don’t expect the price of a dozen eggs to revert back to what it was in 2020!  The Federal Reserve (which largely got us into this mess in the first place) is looking at where they expect long term inflation to be trending. The Fed raising rates is called a tightening of monetary policy, which has the effect of inhibiting economic growth by controlling the monetary supply circulating in the U.S. economy (and the global economy, really). Though the full results of what the Fed is looking to accomplish won’t be evident until about 2 years after an economic tightening program commences (note: the Fed started raising rates about one year ago at the time of this writing), disinflation (as the Fed calls it) already started showing up in the data in a significant way at the end of 2022.

The chief concern for 2023 right now, by far, is that the Fed is being overly heavy-handed.  Here is an analogy that illustrates the point -- imagine a sports car (i.e. the U.S. economy) going 120mph which immediately proceeds to put on the brakes (i.e. the Fed raising interest rates too much, too fast). If the car slams on the brakes too quickly, the passenger runs the risk of flying through the windshield (i.e. a recession). Not pretty! In other words, we run the risk of the cure being worse than the disease.

Should I be concerned about markets and the economy in 2023?

Though the Fed is still as focused as ever on squashing long term inflation, they’ve already begun backing down significantly on the aggressive rate hikes we saw in 2022. Consensus expectations right now – voiced publicly by the Fed -- are that rates will likely begin coming down again sometime next year, in 2024. 

Yes, the Fed slamming the brakes on the U.S. economy is a legitimate concern. Will this cause economic turmoil in 2023? Without a doubt.  But remember, the economy and the market are two different things. Here is a perfect example from this past week: the CEO of Zoom, the online video platform, recently announced that the company is laying off 15% of staff. How did markets react? Zoom’s stock price was up +10% in one day on this news (source: Forbes). 

You see, we’re going to see more layoffs in 2023 as corporations tighten their belts. On the hyper-local level, the economy of many individual families will be adversely affected. Unemployment will go up. Broader confidence in the economy will go down. Americans will spend less – either because they can’t spend, or because the prevailing economic climate is more cautious and less euphoric compared with the past few years.  People spending less will have the effect of bringing inflation down since there will be fewer dollars chasing goods and services.

The Fed knows this and, in a twisted way, is indirectly pushing for layoffs to occur in order to cool down the economy. On an investor level, markets like to see these layoffs because they indicate increased profitability and deflationary pressure.  

Is there any good that will come of rising interest rates?

Yes!  If your bank isn’t paying you at least 3.4% in a high yield liquid savings account right now, you’re with the wrong bank. Seriously, look into this.  If you’re sitting on $100,000 in cash, you should be earning at least $3,400 on that money. That’s a mortgage payment for many.  Let’s say you have $10,000 in free cash – that’s $340 in interest earned. Not nothing. The big banks have zero incentive to give you a decent interest rate, so you’ll need to look elsewhere earn extra cash on your deposits. It’s generally the online banks that are paying their customers to hold deposits. Look at American Express Bank, Ally Bank, Capital One 360 Performance Savings, Marcus, and others. What are you waiting for? It only takes a few minutes to open up an account online at one of these banks, and even faster if you already have a relationship.  After you’ve opened it up, make sure to fund the account! You can thank us later.

Going forward

Now isn’t the time to make rash investing decisions. If you’re a CameronDowning investment client, we’re managing your portfolio risk. We can never manage the return, but we can and do manage the risk.  Despite a substantial January rally in markets, you can expect a pullback to come. It always does.  But when you manage the risk and establish a diversified portfolio allocation – as we have, as this is our work on your behalf -- you create the conditions for your best opportunity at future growth. We are grateful for your trust, and we look forward to building on that trust for the long term.

By Jonathan Cameron, CFP® 

Principal, CameronDowning

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