2023 Market Outlook

The Great Reset – Jason Ritzenthaler, CFA, CTFA

In many respects, 2022 was the Great Reset. From the start of 2019 to the end of 2021, the US equity market (S&P 500) doubled; let me say that again: returned a cumulative 100% including dividends. At the same time, the US bond market (Aggregate Bond Index) returned 15.08% all while US Treasury yields were at their lowest levels since the 1930s and 40s1. Home prices gained 34%2, Bitcoin climbed 1,137%, and NFTs were the new beanie babies. We often talk about investing being a roller coaster of fear and greed. Financial markets were tilting towards the greed side of the equation.

This all was fueled by well-intentioned efforts to get the global economy through the worst economic shock since the Financial Crisis onset by the worst pandemic since the Spanish Flu in 1918. Central Banks around the globe embarked on zero or negative interest rate policy while flooding financial markets with liquidity through quantitative easing. Governments turned on the fiscal policy spigot to ease the suffering of our most economically vulnerable households and small businesses… and yes, wealthy individuals also benefitted substantially. Consumer behavior was altered in meaningful ways as we herded first towards goods and then towards services. Supply chains then unraveled, and the global economy began efforts to shift away from a globalization mandate. Because all of that wasn’t enough, a horrific war broke out as Russia invaded Ukraine causing short-run impacts to energy and agricultural costs.

Inflation moved and then stayed higher, reaching a peak of 9.1% year-over-year CPI in June, causing the US Federal Reserve to embark on its most aggressive plan to hike the Fed Funds Rate and reduce its balance sheet through quantitative tightening. Financial markets and investors were accustomed to the free money and low interest rates of the last two years and were unprepared for a new dynamic.

The shift from excess to scarcity resulted in investor pessimism reaching levels last seen in the lows of the Financial Crisis3. The pendulum had shifted to fear and the Great Reset had begun.

2022 ended with the US equity market (S&P 500) recording its fourth worst year since 1950, down 18.1% and down over 25% at the lows in September. At the same time, the US bond market (10yr Treasury) was down 16.47%4 recording its worst year since 1788.

Many will say now, with the benefit of hindsight, that a reset was inevitable. While we didn’t completely anticipate the speed or scale of the reset, our investment team’s long-standing commitment to managing risk did minimize the downside for our members. In fact, 2022 was one of our best years of relative performance to the market. Driven by our choice to reduce exposure to the parts of the market that were most likely to come under pressure if and when that Great Reset unfolded, we closely managed interest rate risk by owning more short-term bonds and equity risk by owning less of the growth parts of equity markets. Minimizing declines is a large part of improving long-term returns. We will be happier about the out-performance when markets recover, and our members get back to making more instead of losing less.

We believe the majority of the Great Reset is behind us, and fourth quarter returns are evidence of this as the S&P 500 gained 7.56%and the US Aggregate Bond Index climbed 1.87%. Global interest rates are now back into positive territory (Japan is an exception in very short-term bonds) and US treasuries are back to levels from the mid-2000s. Equity valuations are within historical norms and even potentially under-valued when factoring in interest rate levels. Most importantly for future returns, inflation has been on a downward trajectory since June, and the average consumer is still healthy with household debt service levels well below averages of the last 40 years5. We believe the Federal Reserve is close to the end of this rate hike cycle. This is not to say there aren’t risks moving forward. Growth is undoubtedly slowing after the stimulus-driven period of the last two years. The US is at risk of an earnings recession and/or an economic one. The key will be what happens to unemployment and consumer behavior over the next year. Most sectors of the economy have been through a post-pandemic recession, and we believe companies in aggregate are unlikely to lay off workers at the levels necessary to induce a deeper economy-wide recession. The first half of 2023 is likely to remain volatile as we continue to monitor the path of inflation and ultimately corporate profits.

History proves times of volatility and stress in financial markets create opportunities for long-term investors. We believe those opportunities have been created in the Great Reset and both equity and bond markets will post positive returns in 2023. We appreciate the confidence you have placed in our team and will continue to be diligent in providing our members with a path to financial wellbeing across generations.

External sources:
1 10yr US Treasury yield
2 CaseShiller 20 index
3 AAII Sentiment Survey
4 S&P US Treasury Bond Current 10Yr Index
5 US Ratio, household debt service DSR


image of Sharon Giuffre

Jason Ritzenthaler, CFA, CTFA


Fixed-Income Update – Kate Braddock, CFA

We started 2022 being told that “there is no alternative” (TINA) to the stock market. With bond yields near zero, what choice was there?This being the case, we kept our fixed income exposure short duration and high quality in order to minimize portfolio exposure to the rising rates we expected to see in the market. As we enter 2023, we believe that TINA has left the building and BARB (or “Bonds Are Back”) has taken her place. After an extremely difficult year for bonds, we are optimistic as we venture into 2023. Inflation has moderated, bonds are now yielding high enough interest rates to make them attractive, and we believe that the majority of the US Federal Reserve’s rate hikes are behind us. Given these conditions, we have begun to lengthen duration in most of our clients’ portfolios, where appropriate.

At this time last year, the Federal Reserve was forecasting that real GDP would grow 4.0% in 2022, that inflation would be running at about 2.5%, and we should expect three, 0.25% rate hikes by the end of the year. Instead, it looks like real GDP will be up about 0.5%, inflation is up 5.5% year-over-year, and we have seen 4.25% in Fed rate hikes, finishing the year at 4.375%1. No longer are central banks around the globe complacent about inflation as they were at the start of the year. They have acted in unison to aggressively combat the rapid inflation that turned out not be “transitory”. Central banks in the developed world have simultaneously hiked interest rates by roughly 2-4% each - the fastest pace in the past 40 years. No part of the bond yield curve was spared from rising interest rates. On the short end of the curve, rates increased more than 4%, and in the middle of the curve, the yield on the five-year Treasury rose approximately 2.5%. On the longer end, the 10-year Treasury yield rose more than 2% to 4.2% before ending 2022 at 3.9%2.

For 2023, the Fed is forecasting another year of 0.5% real GDP growth, inflation of 3.1%, and the unemployment rate rising to 4.6%. Their dot plot shows another 75 bps of rate hikes in 2023, and no planned cuts3. Despite the central bank's consistent messaging that it plans to lift rates higher from the current 4.25% to 4.5% target, the futures market is pricing in rate cuts late in the year1. Expect the actual path to be data driven in the months ahead.

The question on everyone’s mind is whether the Fed will tighten monetary policy so much that it sets off a recession. The Fed has hiked rates at the fastest pace since the 1980s. In 2022 there was 4.25% of hikes. The yield curve, as measured by the spread between two-year and ten-year Treasury yields, is inverted indicating expectations of both lower inflation and recession. Looking forward, from an economic point of view, we expect that the U.S. economy will slow in the first half of the year but remain positive. If a recession were to occur, we believe that it would be short and mild, and that economic growth would reaccelerate in the second half of the year. In either case, high quality fixed income will likely rally as investors seek safety. Based on this, we have lessened corporate bond exposures and increased exposures to Treasury bonds.

After a difficult year for bonds, there are reasons for optimism. Yields are the highest we have seen in years, inflation has moderated, and the end is in sight for the current rate hike cycle. The combination of higher yields and relative safety make fixed income attractive to investors in times of volatility. We believe growth will be lower but still positive in 2023, that the Fed will continue to raise rates to 4.65%, peaking mid-year with the potential for minimal rate cuts in late 2023. After many years of rates near zero, bonds are back.

External sources:
1 CME Group
2 Google Finance
3 St. Louis Fed


image of Sharon Giuffre

Kate Braddock, CFA

“The combination of higher yields and relative safety make fixed income attractive to investors in times of volatility.”


Equity Market Outlook – Jonnathan De Jesus CFA, CIPM

It’s that time of year again, time to dust off our crystal ball and peek into 2023’s stock market! We joked last year about 2022 sounding like 2020 too–in some ways it might have been nice to have the same returns in the U.S. Equity market. Instead, 2022 was a year with persistent declines in prices across most major Equity investments and above-average volatility, as measured by the CBOE Volatility Index. Despite the unpredictability of the future, we believe there are a few notable themes from 2022 that will continue into 2023 and that will impact Equity returns.

Valuations – Stock market valuations refer to the price of stocks in relation to financial measures of fundamental value. The Price-to-Earnings (P/E) is one of the most common measures of valuation in the stock market. We use the P/E ratio as a proxy for investor expectations of future growth. Increases in the P/E ratio suggest that investors expect elevated levels of future growth and are willing to pay a high price for the future growth of the company. Decreases in the P/E ratio suggest that investors expect slower future growth and are not willing to pay a high price for the future growth of the stock. The P/E ratio in the US, as measured by the P/E ratio of the S&P 500 Index on Bloomberg, fell in 2022. The P/E ratio is now closer to the long-term historical average. In 2023, we expect the P/E ratio of the S&P 500 Index to remain within historical norms as investors continue to adjust their required returns on investments (ROI). Throughout 2023, as it was in 2022, valuations will be impacted by the decisions of the Federal Reserve’s Federal Open Market Committee (FOMC). The FOMC raised the Fed Funds Rate (FFR) from 0.23% at the start of 2022 to 4.50% at the end of 2022.

This decision also impacted the rates on long-term U.S. Treasury bonds, as those rates rose as well. As long-term U.S. Treasury Bond rates rose, the required ROI of investors increased. We believe the combination of a higher ROI and increased volatility explains why valuations fell in 2022. In 2023, we expect investor ROI and volatility to remain within historical norms, in line with our expectations for the P/E ratio of the S&P 500 Index.
Sector – Sectors refer to groups of companies that are classified based on the type of business they are in or the products and services they offer. One of the most common sector classification methodologies is that which is utilized in the Standard & Poor’s 500 Composite Stock® Index (“S&P 500®”). Comparing the relative performance of sectors helps investors see trends developing within the Equity market.

In 2022, we saw some extremes in the relative performance of a few sectors. The total return of the Energy sector in 2022 was 64.17% while the total return of the Consumer Discretionary and Communication Services sectors were -36.27% and -37.63% respectively1. The average total return in 2022 for the remaining sectors was -10.50%. When we look at some of the members of the Energy sector, we see that Exxon Mobile and Chevron make up approximately 42% of the sector, as measured by the ETF XLE on 09/30/20222. Both firms benefited from the higher energy costs throughout the world. The significant members of the Consumer Discretionary sector, Amazon and Tesla, make up approximately 44% of the sector, as measured by the ETF XLY on 09/30/20222. The significant members of the Communication Services sector, Meta and Google, make up approximately 29% of the sector, as measured by the ETF XLC on 9/30/20222. We believe that one of the main reasons for the extremes in relative sector performance in 2022 is attributable to the performance of Value stocks relative to Growth stocks.

Value vs Growth – Value stocks are investments that investors believe are underpriced relative to their future growth and pay higher dividends.

Growth stocks are investments that investors believe deserve a high price for their current earnings as investors expect the investments to have above-average growth in the future and pay low to no dividends. In 2022, S&P 500 Value stocks significantly outperformed S&P 500 Growth stocks. Value stocks, as measured by our holding VTV, had a total return of -2.07% in 20221. Growth stocks, as measured by our holding VUG, had a total return of -33.15% in 20221. Growth stocks, like META (-64.22%), Amazon (-49.62%), and Tesla (-65.03%), struggled in 2022 as the general rise in interest rates reduced the fair value of their expected growth in future cash flows1. Value stocks, like Exxon Mobile (80.26%) and Chevron (58.48%), performed better than Growth stocks as their fair value was not as dependent on their expected growth in future cash flows1. While we do not expect interest rates to rise in 2023 at the same rate that they rose in 2022, we do expect Value stocks to outperform Growth stocks in 2023. The Equity investments in our models are built to benefit from the expected outperformance of Value stocks since our models have more Value exposure relative to Growth exposure.

While forecasting the future is not an exact science, we do believe that considering a range of factors helps give us a sense of how we can best be prepared. In 2023 we will continue to diversify portfolios and focus on fewer, smarter decisions.

External sources:
1 Bloomberg
2 State Street ETF Factsheet


image of Sharon Giuffre

Jonnathan De Jesus, CFA, CIPM

“We do expect Value stocks to outperform Growth stocks in 2023.”


Economic Outlook – Chris Morgan, CFA, CFP®, CAP

2022 has been a year of economic resilience in the US, with annualized real GDP growth (a measure of economic activity) registering at -1.6% for the first quarter of 2022, -0.6% for the second quarter of 2022 and +3.2% for the third quarter of 2022, based on estimates from the US Bureau of Economic Analysis1. Furthermore, the Atlanta Fed’s GDPNow indicator is currently predicting +3.8%annualized real GDP growth for the fourth quarter of 20222. For 2023, our investment team forecasts GDP growth of +1.2%.

US nonfarm payroll employment has continued to be supportive of economic growth, with the addition of 269,000 jobs in September 2022, 284,000 jobs in October 2022 and 263,000 jobs in November 2022, according to the latest estimates from the US Bureau of Labor Statistics3. We believe the relatively low and stable level of new Covid cases has contributed to the job growth, with US daily new Covid cases averaging approximately 50,000, compared to the nearly 1,000,000 new cases reported daily in early January 20224. Our investment team forecasts that the unemployment rate will rise modestly from 3.7% in November 2022 to 4.4% in December 20233.

We expect that this modest rise in the unemployment rate, from unusually low levels up to more normal levels, could serve to better balance supply and demand in the labor market, which could help to reduce the inflation rate in the US. Indeed, our investment team forecasts that the rate of US inflation, based on the Consumer Price Index, will slow from 7.1% year-over-year in November 2022 to 3.5% in 20233.

Some of the concerns that were top of mind for investors at the beginning of 2022 included a possible reimposition of broad stay-at-home orders in the US in response to the surging Covid cases, as well as potential tax increases; for the most part, neither of these concerns materialized.

Now, the primary concerns for investors seem to center around the risk of the US Federal Reserve’s (“Fed’s”) rate hikes potentially pushing the US economy into recession, or economic decline, in 2023. However, we forecast that the Fed’s federal funds effective rate will finish 2023 at approximately the same level that it is currently. We expect that this will help support the positive 2023 GDP growth forecast of +1.2% cited previously.

Consumer sentiment is also supportive of positive US GDP growth in 2023, in our view. Prior recessions have tended to occur after a prolonged economic expansion led to euphoric sentiment. However, the University of Michigan’s Index of Consumer Sentiment declined from 70.6 in December 2021 to 59.7 in December 20225. It seems clear to us that sentiment remains anything but euphoric, which should enable the economic expansion to continue in 2023.

While we forecast that slower, although still positive, GDP growth will come to fruition in 2023 in the US, the International Monetary Fund forecasts that emerging market and developing economies will sustain 2022’s growth rate of 3.7% in 20236. We believe China’s easing of its Covid-related restrictions is a key reason for why GDP growth in emerging markets may sustain a more robust pace, and this reason is supportive of our investment team’s forecast for emerging market equities to generate a total return of+10.0% in 2023 (as measured by the MSCI Emerging Markets Index) vs 8.8% for US equities (as measured by the S&P 500 Index). While we continue to avoid any material exposure to emerging market equities in our least risky primary Investment Strategy (our Income ETF Strategy), we believe clients in our other primary Investment Strategies will benefit from being global investors, including having some exposure to emerging market equities.

External sources:
2 Federal Reserve Bank of Atlanta
4 Worldometer
5 University of Michigan


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Chris Morgan, CFA, CFP®, CAP

“GDP growth in emerging markets may sustain a more robust pace.”


Earnings Update – Katie Cihal, CFA, CPA

The oxymoron “educated guess” is often used in scientific fiction movies or in quiz shows. People take an educated guess when they are not sure of an answer or how to solve a puzzle but guess it by adding all the information that they have to make a conclusion. In the investment profession, analysts use historical information, company guidance and outlook, central bank decisions, global economic outlooks and other factors when coming up with educated guesses, or “estimates,” to help guide the investment process. These estimates can aid our decision making in terms of what types of securities to buy, sell or hold in investment portfolios. While estimates are just that, we think they are a valuable tool to consider to best serve our clients’ investment needs. One such estimate that we look at is corporate earnings per share (“earnings”) growth.

With one reporting quarter remaining, current 2022 S&P 500 earnings growth is expected to be 5.5%1. Consensus analyst estimates for 2023 project S&P 500 earnings to rise 4.1%1 which would represent modestly slower growth year-over-year. The reason earnings growth is expected to slow is due to high inflation and elevated interest rates taking an even bigger toll on companies who are bracing for the likelihood of more moderate global economic growth. This forecast would represent the slowest full-year profit growth since 2020 and the start of the coronavirus pandemic2.

Although we have started to see inflation decline on the margin in recent months, it remains quite high with the Consumer Price Index at 7.1% in November 2022. This does not only affect the consumer, as the cost of goods is much higher today than it was a few years ago, but it also affects companies’ earnings as it costs more and more to offer products and services to the consumer, thereby eating into the bottom-line.

This environment has helped some companies’ earnings while hurting others, based on their specific sector or industry. Companies that have weathered this environment are ones that are more agile and those that can pass on higher costs to their customers. Companies in sectors like Energy are more poised to be able to do this than companies in other sectors like Consumer Discretionary and Technology. In addition, the dollar’s surge against other currencies in 2022 negatively impacted earnings of many U.S. companies, making it more expensive for US multinationals to convert their foreign earnings back into the dollar.

Current analyst expectations are for S&P 500 earnings to reach $231 in 20232, while our median estimate is $229. Therefore, we do expect 2023 earnings to come in near consensus estimates. It is important to note that consensus estimates have come down from over $2502, so analysts have become more cautious towards the end of 2022. From this data, we can extrapolate if the estimate of$231 holds to be true, despite potential downturn in early 2023, earnings should turn positive in the later part of 2023, leading to a positive returns for the full year.
We do expect an overall positive return on the S&P 500 in 2023, which will echo historical data as we continue to see lowering inflation and the effects of the coronavirus pandemic in our rearview mirror.

As always, we appreciate your confidence in us to help you manage your long-term financial goals and are always here to help!

External sources:
1 Refinitiv
2 Factset


image of Sharon Giuffre

Katie Cihal, CFA, CPA

“Consensus analyst estimates project S&P 500 earnings to rise 4.1% in 2023.”


Geo-Political Update – Sharon Giuffre, CFA, CAP

2022 will be remembered as a year where there were few places for investors to hide. The worldwide events led to turbulent and volatile markets. The confluence of multiple factors set the stage for a year of upheaval, uncertainty, and instability in the worldwide financial arena. Although the end of the bull market that investors had enjoyed had long been pondered as to when and how it would happen, the way the events of 2022 unfolded were not for the faint of heart.

The year began with the appearance of a potential global recovery rising from the post-covid ashes, with major market indices having reached new highs in the last months of 2021. Even though inflation was rising, there was still the thought, and hope, that it would prove to be transient. Those hopes were dashed as inflation continued to rise, supply chain issues hit home, and tensions between Russia and Ukraine intensified. When Russia commenced war in late February, supply chain issues escalated, and a rally in crude oil and gold prices ensued, with WTI oil hitting $129 per barrel in March, a level not seen since 20081.

As we moved into the second quarter, financial woes being felt in the US reverberated across Europe and elsewhere in the world, creating wavering consumer confidence. The US CPI inflation rate continued to climb to 9.1%, unseen since the 1980s, with similar increases mirrored in Europe and other spots around the globe2. While the US Federal Reserve (“Fed”) began rate hikes to curb inflation, corresponding measures were being enacted in other parts of the world to address the rapidly spiking inflationary pressures. Markets, domestically and globally, suffered widely fluctuating price movements, as other signs of deteriorating economic conditions unfolded in rising mortgage rates, plunging home sales, skyrocketing consumer prices for food and goods, and fears of recession taking hold. However, even though many countries, including the US, were in bear market territory, earnings held up surprisingly well, resulting in a bear market rally. However, more negative news surfaced, ending the much welcomed, although fleeting market strength. Value stocks outperformed growth, with investors seeking more defensive havens.

China, which had been exercising a zero-Covid policy with severe measures in place, saw a worsening economy, exacerbating global market weakness over fears of the breadth of China’s economic woes. Furthermore, in the last part of the year, China changed its policy about Covid restrictions, which resulted in a rapid surge in cases and newfound concerns.

Conditions also worsened for the UK and Europe mid-year as Russia reduced gas supplies to Europe. In addition, the Euro fell to parity with the US dollar, not seen in 20 years, paving the way for a likely recession in much of Europe3. Their woes and turmoil continued, with the extreme unpopularity of Boris Johnson’s successor, Liz Truss, as Prime Minister, leading to a rapid change to the UK’s third Prime Minister, Rishi Sunak, in the short span of two months, all of which contributed to tremendous downward pressure on its financial markets. This happened on the heels on the passing of Queen Elizabeth II, their monarch of over 70 years, and the countless transitions that accompanied such a monumental change.

Even though widespread global economic weakness began to translate into corporate earnings estimates, the markets enjoyed remarkable strength in October and November, with a hopeful but measured confidence in improving economic conditions.

Unfortunately, lingering fears of recession re-emerged in December, as the Fed continued their rate hikes with inflation remaining high, causing further weakness in market levels.

Despite the many factors that created the widespread volatility in the equity and fixed income markets throughout the year, both domestically and globally, we look forward with optimism. While some anticipated that the bull market would ultimately draw to a close, no one could have predicted the far-reaching impact that the pandemic would have on every aspect of our lives, nor how its aftermath would ripple through our economies and markets. As we hopefully have the worst behind us, we strive to assess how we can best serve our clients moving forward. With recession appearing inevitable for many countries across the globe, we must use this time to determine the best course of action and identify those areas of the markets which will weather the market gyrations in the coming months. We believe that even if we do enter a recession, it will not be lengthy in duration, and that we will see positive, but modest returns for the major indices in the coming year. Even though the Energy sector will likely be the only area of the market having emerged from 2022 with positive numbers, we look for strengthening in other areas of the market, over the coming year, which we will believe will be echoed in many of the global economies as they begin the recovery process. We also feel that the widespread weakness in many markets globally presents unique and exciting investment themes for 2023, particularly in emerging markets, which rallied in the last three months of 2022, injecting positive energy into our domestic markets.

We appreciate the opportunity to serve you, our clients, in navigating through these challenging, but potentially rewarding investment options that this past year has created.

External sources:
1 CNBC.com
3 Google Finance


image of Sharon Giuffre

Sharon Giuffre, CFA, CAP

“We also feel that the widespread weakness in many markets across the globe presents unique and exciting investment themes for 2023, particularly in emerging markets.”