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Windsor Perspective: Q1 2023

Windsor Perspective: Q1 2023

| January 06, 2023

Windsor Perspective: Q1 2023

Happy 2023! All of us at Windsor Wealth Management want to wish you and your families a very happy new year and to thank you for your trust in us this past year. We know 2022 was a difficult year for investing and appreciate all our discussions and meetings, the great questions asked, and your patience with the market through the year. We look forward to working closely with you and your family in 2023 and beyond, and helping you achieve your financial goals and objectives.

In this edition of the Windsor Perspective, we review the market performance for 2022. In addition, we discuss our initial thoughts on the market as we enter 2023 and we add some interesting market facts at the end.


Q4 of 2022 - A Good Sign for 2023?

Q4 of 2022 was not only the best quarter of the year, but also the only positive quarter of the year. Hopefully this is a sign of the future direction of the market. For the quarter, the S&P 500 delivered a total return of +7.56%.


S&P 500 Index Q4 2022

Source: Bloomberg, Windsor Wealth Management

Unfortunately, the market did finish off the highs of the quarter as comments from the Fed that they will be keeping interest rates “higher for longer” resulted in consolidation in December. Nonetheless, Q4 results helped somewhat offset an otherwise difficult year for the S&P 500.

For the full year of 2022, the S&P 500 delivered a total return of -18.11%, which was the market’s worst performance since 2008.


S&P 500 Index 1-year

Source: Bloomberg, Windsor Wealth Management


S&P 500 Annual Performance 2000-2022

Source: Bloomberg, Windsor Wealth Management

Similarly, the fixed income markets experienced a difficult year with the fixed income proxy (the US AGG Index) having its worst year since its inception in 1977. For Q4, the AGG delivered a total return of +1.87%, while for the year it returned a -13.01%.

Looking back over 2022, the reason for the negative performance of both the equity and the fixed income markets can be directly attributed to four main core issues:

  1. High inflation that proved to be stickier than the Fed anticipated
  2. Inflation causing the Fed to shift from a “dovish” stance to an extreme “hawkish” stance
  3. Elevated geopolitical events driven by the Russian invasion of Ukraine in February of 2022
  4. China enforcing a “zero-covid” policy, which impacted supply chains worldwide.

The pressure of the rising inflation and the increasingly hawkish stance by the Fed continued to increase pressure on both equities and fixed income as the year progressed. Rising rates had a dramatic impact on fixed income pricing, driving prices down as rates continued to rise at an unprecedented rate. These higher rates infected the equity markets with fears of a future recession driven by the higher rates slowing not only the US economy but the world economy. The war in Ukraine, Chinese covid policies, and other extraneous events only poured fuel on the fire of inflationary pressure. This ultimately led to the poor performance experienced in 2022 in both the equity and fixed income markets. As shown below, the current interest rate tightening cycle has been the most rapid in recent history.


Cumulative Increases to the Federal Funds Rate Target During Recent Tightening Cycles

Welcome 2023 - Our Initial Thoughts

As we enter 2023, the headwinds the economy has been facing continue. However, there is mounting evidence all these headwinds are waning, with some decreasing rapidly. As 2023 begins, we are seeing:

  1. Supply chains improving dramatically
  2. China ending the Covid lockdowns
  3. Inflation essentially rolling over across the board
  4. Although the war in Ukraine is not ending, its economic impact in the US has moderated

Looking at where inflation is as we enter 2023, many of the raw materials that spiked in 2022 are now back to levels seen at the beginning of 2022. Gasoline, Crude Oil, and Wheat all made “roundtrips” in 2022 despite surging at least 50% by mid-year.


Commodity Prices at the Beginning of 2022 and Beginning of 2023

Source: Fundstrat and Bloomberg


AAA Gasoline Prices and WTI Crude Oil

Source: Fundstrat and Bloomberg


Wheat Price and Supply Chain Index

Source: Fundstrat and Bloomberg

Despite the evidence that inflation is beginning to slow, the largest threat to the markets in 2023 remains the Fed. However, we believe that inflation is moderating quicker than what consensus is indicating, and this will ultimately lead to a Fed that will behave in a much more predictable and measured manner. And despite the prevailing view that inflation is a major headwind entering 2023, we believe we will continue to receive data showing inflation is declining, and that this will ultimately turn into a tailwind for the market.

Looking at the Personal Consumption Expenditures Index (PCE) as one of the proxies for inflation, we can see that the % of the components that make up the PCE that have prices rising less than 2% now continues to increase. This is clear evidence inflation is slowing.

  • As of November, 40.9% of components are seeing the 3-month annualized percent price change that is below 2%
  • This is the highest percent since early 2021
  • This is also the first time in nearly 2 years that this trend is above the long-term average of 38.6%
  • Recall the Fed target is 2%, so more components continue to drop below their target


Greater Than 40% of PCE Basket Seeing 3-Month Annualized Price Change <2%

Source: Fundstrat and BEA

More importantly, housing (shelter) is the one category that continues to remain stubbornly high. As shown below, Core PCE has begun to come down, but Core PCE ex-housing is significantly lower than Core PCE. Stripping out the housing component it is apparent the 3-month annualized housing number is continuing to run hot.


Core PCE 3-Month Annualized: Core vs Core ex-Housing

Source: Fundstrat and BEA

Housing represents 20% of the Core PCE basket. Thus, for PCE to continue to fall, housing must also begin to fall. The good news is that the housing component of both PCE and CPI has a lag before the data impacts the inflation numbers and we are now seeing rapid declines in housing in real time. For example, the latest Case-Shiller home price data came in this week at 9.2% year over year, down from the peak in March at 20.8%. If we look at the 3-month trend (3-month annualized % change) the result has been three consecutive negative numbers with the most recent reading at -7.7%. Historically, Case-Schiller pricing has led the PCE housing components by 10 months. Thus, the housing component to both PCE and CPI should be a tail wind going forward and we should begin to see this decline in housing prices show up imminently in the PCE data.


Case Shiller US National Home Price - Seasonal Adjusted

Source: Fundstrat and Bloomberg

Fortunately, it is not just housing pricing that continues to pull in, but we are seeing it across the spectrum. As this data continues to decline and flow through to lower numbers in the PCE and CPI, the Fed will be able to become less “hawkish” and slow/stop future rate increases, which will allow for risk assets (i.e. stocks) and bonds to react positively.

In addition, investor sentiment has taken a quite negative turn, with the 51-week average of bearish sentiment hitting an all-time low. Historically, this is a bullish indicator. The AAII Investor Sentiment Survey has a history 30+ years old and we are currently at the most “entrenched” and persistent level of bearish sentiment in the survey’s history (since 1987). This is more negative than the ’02 tech bubble and the ’08 great financial recession. In the past, such periods of depressed sentiment have corresponded with secular lows in the stock market. And when you compare today’s environment to past bear markets, things do not seem nearly as bad as what the sentiment reading is indicating. Thus, any positive news on inflation or rates should result in strong upside moves in the market.


AAII Sentiment: Historically Bottoms Form When Sentiment is this Negative

Source: Fundstrat and Bloomberg

Fun Facts - Interesting Stock Market Facts as We Enter 2023

Although 2022 was a tough year, we must all remember volatility is a part of investing, but over time the market continues to rise. And we are fortunate to be able to invest in the greatest country in the world. Reading some of the facts below demonstrate how great our markets are and despite the occasional set back, our markets will continue to be an excellent source of return over the long term.

  • The US stock market is roughly 60% of the entire world’s stock market capitalization in 2022
  • The US stock market is worth approximately $117 trillion, more than the next 7 stock exchanges combined
  • Microsoft is worth more than the entire Brazilian stock market
  • Microsoft, Apple & Google combined are worth more than the entire Chinese stock market (as of January 2022)
  • In 2022 Apple is worth more than the entire GDP of Canada
  • Lastly and most importantly, every bear market ends and the following bull market is longer and stronger than the bear market that preceded it:


Bull Markets and Bear Markets

Source: Dow Jones and Bloomberg


In Summary

Overall, it appears that 2023 is set up to be a much better year than 2022. The strength of the economy, a relatively healthy consumer, and a strong banking system combined with low unemployment levels should result in any recession we may face in 2023 to be relatively mild. The market has been discounting a recession in 2023 and combined with the economic strength mentioned above should allow the markets to navigate a mild recession. We are very cognizant that the market will not behave in a linear fashion and volatility is expected. But with 2022 behind us, we also think the worst is behind us. We welcome 2023 with open arms and look forward to working with you in this new year.

As always, we will be seeking out opportunities for your overall financial plan based on the current economy and our outlook. Together, we will continue to tailor your plan to suit your unique financial objectives and a risk level you are comfortable with. Thank you for your confidence in our team and in Windsor Wealth Management.

If you would like to talk about any of the issues raised in this edition of Windsor Perspective, or any aspect of your financial plan, please contact us.

Dream boldly. Plan wisely.