Market Update: Q1 2023
2022 will be looked back on as a pivotal year for markets. After years of below-trend economic growth that led to ultralow interest rates, the inflation we saw in late 2021 was supercharged in 2022 reflecting the impact of the Russia-Ukraine War on food and energy prices, continued lockdowns in China, and a tight labor market globally. Headline inflation peaked in June 2022 at +9.1% and has since slowed to 6.5%. The Federal Reserve’s goal is to bring core PCE (personal consumption expenditures) down to 2%, but this measure has been sticking in the 4.5-5% range, as wages have increased in a tight labor market. The Fed has been concerned that high inflation could become entrenched as in the 1970s, so it is pulling on all its levers to slow the economy down. Most importantly, the Fed has raised interest rates seven times since March 2022, from 0% to 4.25%.
In the face of a strong labor market, stocks and bonds sold off in 2022 as both interest rates and recession fears increased. The S&P 500 fell 18% and the Bloomberg Bond Aggregate lost 13%, the worst year on record for bonds. Historically, bonds provide a safe haven when stocks are selling off, but with the significant rise in inflation and interest rates, this left few areas to hide. While we appear to be nearing the end of rising interest rates, we expect market volatility to continue into 2023 as investors debate how quickly, and to what degree, economic activity will fall and how long rates will stay at these levels.