Pivot

Last December our year-end email focused on supply chain issues, growing inflation, the dominance of growth stocks, and surging interest in cryptocurrency. We surmised growth stocks could have a challenging time in 2022 should interest rates rise rapidly and speculative investments could come under extreme pressure. Much of this has happened as the market rotated out of growth stocks into value stocks and cryptocurrency and meme stocks saw massive losses (Bitcoin is down 63% year to date, through December 15th, according to MarketWatch). Bonds struggled mightily as interest rates surged for much of 2022 and a balanced portfolio of stocks and bonds will record one of the worst performances since 1929. All eyes have been on inflation and the markets have plunged and soared based on any perceived changes to the inflationary outlook.

Barring an extraneous shock, we believe inflation has most likely peaked and soon the media and investors will shift their focus toward slowing economic growth and the likelihood of an impending recession. The pivot from obsessing about inflation to obsessing about recession could create additional volatility in the stock market as investors weigh the depth and duration of a recession. Bonds, however, could greatly benefit from a slowing economy especially if it is accompanied by a drop in interest rates and inflation. As interest rates drop, bonds could experience a corresponding rally that may help offset any short-term declines in the stock market.

Historically, as we mentioned in our latest email, being invested in bonds and stocks has been quite rewarding once inflation and interest rates have peaked. We do not know when inflation will peak, but we are likely closer to that moment than we were a year ago. What we do know, per Morningstar Inc. is that since 1926, the average 12-month return for the stock market following peak inflation has been a positive 21.3% and bonds have averaged a positive 7% return. Assuming we are near peak inflation, the outlook for both bonds and stocks could be attractive. There will no doubt be bouts of volatility along the way, especially in the stock market, but looking longer term we believe investors could be rewarded for remaining invested over the coming 12-18 months.

As we finish celebrating our 40^th year in business, we spend time reflecting on our clients who have placed their trust and confidence in our firm over the years. We do our best every day to help our clients toward reaching their financial and personal goals. We wish you all a wonderful Holiday Season filled with good cheer and time spent with loved ones and we look forward to seeing everyone in 2023.