Welcome to the first edition of “Ethel’s Diamond Post.” The new year provides an opportunity to reflect on the past and to gear up for your 2023 goals and dreams. It feels new and fresh, and the possibilities are endless. As we prepare for 2023, we must reckon with what happened in 2022. Stock market investors experienced a challenging year as the sell-off across sectors weighed heavily on shareholders’ mental and emotional sentiments. The S&P 500 closed out an excruciating year with a 20 percent decline, the worst performance since the financial crisis in 2008. Plus, the technology-infused NASDAQ fell more than 33 percent in 2022. The US bond market suffered its worst year in history. It is rare for stocks and bonds to fall in the same year, as it has happened only four times before this year, going back to 1928.
Given the market’s cyclicality, the power of diversification and the relationship between stocks and bonds should start to revert to normal. Despite short-term market pullbacks, focusing on the long-term versus the day-to-day performance is more crucial than ever. We understand that the ebbs and flows of the capital markets can increase your anxiety or frustration. VZD Capital Management, LLC is available to discuss any areas of the market with our clients and prospects.
Next, interest rates rose rapidly in the last year and have spiked to 4.3 percent. Investors must digest the macroeconomic challenges ranging from inflation to supply chain disruptions driving valuations of companies across multiple sectors to lower prices. The good news is that inflation slowed on an annual basis for a sixth straight month in December, a relief for households and an encouraging signal for the Federal Reserve. For the Feds, this report confirms that the slowdown in price gains that officials have long expected is finally coming to fruition. This could help policymakers, who have begun slowing the pace of interest rates, feel comfortable moving even more incrementally. VZD expects the Feds to raise rates a few more times this year, but hopefully, the.75 increases are behind us. Markets are betting policymakers will announce a quarter-point move at the upcoming February 1 meeting. Used cars and trucks, a significant driver of inflation in 2021 and early 2022 became cheaper last month. New vehicles have declined modestly.
In the review of last year, the higher commodity prices and the Russian invasion of Ukraine ensured that energy was the best-performing sector. Oil and gas companies managed to generate record earnings and benefit from high oil prices in 2022. Apart from energy, the other top-performing sectors were utilities, healthcare, and consumer staples. Each of these sectors is defensive in nature and recession resistant. Most companies in these sectors enjoy power pricing and stable demand across market cycles. VZD believes in a diversified portfolio representing all asset classes when appropriate. While we continue to digest the ever-changing market conditions, we remain vigilant in spending time in the market versus attempting to time the markets. The current market landscape is widening the potential opportunity to reward patient investors.
Next, the housing market prices have started to correct as interest rates rose sharply in 2022. In the last few years, the home price surge was fueled by low-interest rates and the infusion of capital directly to households following the COVID-19 pandemic-driven shutdown. The current problem is that home pricing is coming down in 2023 as the standoff between sellers and buyers comes to a head. The relaxed lending policies and the artificially low-interest rates lured financially unstable individuals into buying homes they could not afford. We could see another housing debacle if interest rates continue to increase throughout 2023. If home prices collapse, homeowners’ equity turns from positive to negative.
This year, we added more assets into exchange-traded fixed-income instruments with short-term durations. The correlation between bonds and stocks should minimize the risk level throughout 2023. Plus, we are strengthening our dividend-paying strategies and adding value stocks to the equation. Current data suggest three realities: inflation is cooling; job growth remains firm but is likely to moderate, as will wage growth; and service and manufacturing. Markets anticipate two rate cuts in the second half of 2023, while policymakers expect to keep the rate on hold or above 5 percent through 2023. Yet, a diversified asset allocation of stocks and bonds can continue to provide solid investment returns in 2023 and beyond.
Succession planning is a critical component of every successful business – no matter how big or small. Nikisha and I appreciate the trust and confidence you have placed in us. We are searching for more candidates to enroll in the Executive Mentoring program. Plus, we appreciate any referrals for our discretionary investment management or consulting services. We will soon host a “meet and greet” event to unite everyone and celebrate our many milestones.
Please keep on the watch out for the 2023 Five-Star Wealth Manager announcement in February’s “Kansas City” magazine.
Remember, the best is yet to be, and be optimistic that “this too shall pass.”