For those of you who missed our first Weekly Market updated of the year please help us to welcome the newest members of our team!!!
Dylan Brooks graduated with a B.Sc., from Georgetown University in 1993. He spent 2.5 years in London working at the EBRD, another 3 years at TCI in Denver in corporate finance, and 4 years with Jupiter in New York as a senior analyst covering the telecoms market. Licensed in 2003, he spent nine years with AXA Equitable, specializing in comprehensive planning. From 2012-22, Dylan worked with Mutual Securities, running an independent wealth management office in his hometown of Telluride, CO. He joined 1st & Main Investment Advisors at the beginning of 2023 and is supported by Lisa Vila Fischetti.
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As we embark on a new year we are certain everyone is happy 2022 is behind us. We wrote over the course of the year inflation, the likes of which the U.S. had not seen since the early 1980s, dominated the landscape. This coupled with an almost stubbornly resilient labor market allowed the Federal Reserve (the Fed) to remain hawkish, implementing seven separate interest rate hikes beginning in March, ending in December. Long overdue in our opinion given the current inflationary environment was measurable dating to early-mid 2021. Rate hikes took the benchmark federal funds rate from near 0% to 4.5% following its December meeting. All to combat an annual rate of inflation that topped out at over 9% in June. And while the hawkish stance has helped to address the root of the problem, Fed chair Jarome Powell has stated very clearly there is more work to be done.
We feel strongly that progress on this front will eventually fuel equities, which experienced the worst performing year since the financial crisis of 2009. And that we don’t necessarily need to reach the Fed’s target rate of 2% inflation for tailwinds to develop. Headwinds, however, could and likely will take shape in the form of recession. Raising the question has the Fed tightened too aggressively cooling the economy into contraction…? Only time will tell, and while most economists we subscribe to believe recession is all but inevitable, most are also projecting it to be relatively mild. More on that from Kathy Jones at Charles Schwab & Co. below for those interested in taking a deeper dive.
It goes without saying the Tactical Allocation Portfolio (TAP) and Sector Equities (SEC EQ) models spent most of the year in risk-management mode. Starting in late January positions held over from the boom that was 2021 were sold, cash became king, and we sat safely on the sidelines for most of Q1 and Q2. The models are constructed to identify trends and thus we embraced small degrees of risk as markets rallied in June and again in October only to be snuffed out by continuously higher readings of inflation. Some positions stuck and others did not, making 2022 the most trade heavy year in recent memory.
Risk-management included our fixed-income model which was also sold early in the year, not taking on risk until June. In a shift from our historical approach of outsourcing most of our fixed-income investments to one of three mutual fund managers spread along the yield curve, we embraced relatively risk-free, short duration U.S. Treasury Bills. Laddering our approach to spread risk and capture ever increasing yield in a rising rate environment. When we started this process Yield to Maturity was sub-1% and topped out late in the year at over 4%. We anticipate this approach will continue at least over the course of Q1 2023.
In an otherwise difficult environment, we feel strongly about the collective models’ results in Q4 and over the course of the year. Limiting equity losses to roughly half of equity market as measured by the S&P 500 index and just a fraction of fixed-income markets measured by the Barclays Aggregate Bond index.
We would like to say returns will make a comeback in 2023 but frankly it seems navigating markets will remain difficult in the near term. We are hopeful recession will indeed be mild if or when it materializes. And that the Fed can begin to ease its approach in the latter part of the year. Uncertainty is always a great time to focus on the long term, review your plan and meet with you advisor. Happy New Year from 1st & Main.