Q4 2022 financial

Fourth Quarter 2022 Investment Commentary

2022 was a challenging year for both stock and bond markets.

The broad U.S. stock market (Russell 3000 Index) was down 19.2% in 2022, the first down year since 2018.  The U.S. bond market had its first down year since 2013. The last time both stock and bond markets dropped in the same year was 1974. Last year reinforced the importance of having sufficient cash to avoid selling long-term assets in a down year, not turning what might be temporary losses into permanent ones.

HTG’s equity market strategy helped mitigate the drop.

While we strongly believe in broad diversification, we continue to emphasize smaller, highly profitable companies whose stocks are trading at more reasonable valuations than the largest, most visible ones. This strategy benefited portfolios in 2022, as illustrated by Dimensional Fund Advisors (DFA) U.S. Core Equity mutual funds outperforming their benchmarks by four percentage points.

International stock markets outperformed the U.S. market.

Despite the unanticipated invasion of Ukraine and political instability in the U.K., developed equity markets outside of the U.S. were down 6.5% in local currency and down 14% when translated into U.S. Dollars (MSCI EAFE Index). This performance was significantly better than the U.S. equity markets. For the emerging equity markets which are dominated by S. Korea, Taiwan and China, returns were in line with the U.S. market.

Fixed income securities are now a source of income.

For the first time in a decade, cash and bonds have significant yields: 4.4% for U.S. Treasuries maturing in two years and 3.9% for those maturing in 10 years. Given the rapid increase in rates during 2022, the market value of all bonds adjusted downward to varying degrees: the longer the maturity of the bond and the lower the credit quality, the larger the drop in value. While we did not anticipate as rapid a change as that which occurred, we had positioned our core fixed income portfolios to have less exposure to interest rates than the market, leading to smaller drops in value than the overall bond market.

For inflation to moderate, supply and demand must balance.

Most central banks will likely continue to push short-term interest rates up to cool inflationary pressures. Companies which hired aggressively in the recent past may have to reduce staff. A slowing economy is what is needed, and this appears to be happening around the world. The sooner economies slow, the sooner supply and demand will reach a sustainable balance and inflation will moderate.

Be wary of 2023 market predictions.

The path of financial markets in the near term is unknown. Nevertheless, we are confident in our view that over the next five to ten years, stock markets will provide higher returns and volatility than bond markets which will offer higher returns and volatility than cash. Stock markets tend to start appreciating well ahead of positive economic statistics and in the meantime current fixed income yields will help dampen volatility. Maintaining exposures to both stock and bond markets should lead to you achieving your long-term financial goals.

The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.
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