by Richard Cull
January Market Recap & Commentary
2023 is off to a strong start as almost every asset class turned in healthy returns for the month. The NASDAQ which was down over 30% last year, led the way with its best January (+ 11%) since 2001. Many of the month’s biggest winners were last year’s biggest losers.
Interestingly, there was no big news behind the run up. The labor market and consumer spending remained healthy, inflation continued to slow and the Fed showed no signs of rate hike abating.
The reasoning behind the move can be surmised in a recent Barron’s article with the premise that “Investors aren’t pricing the Fed to perfection…they’re pricing in a fairy tale.”
Those investors are planning on the Fed pivoting (stop raising and start lowering rates) by the end of the year. But the Fed will only lower rates if the economy weakens significantly, in which case companies will be having a hard time making money, which is not good for stocks.
Alternatively, if the Fed guides the economy to a soft landing (brings down inflation without triggering a recession), it will not be cutting rates by the end of the year. A soft landing implies unemployment staying low, which worries the Fed because it can be inflationary (Americans with jobs spend money).
If the economy remains resilient, the Fed will keep rates higher to ensure inflation stays low in the longer term—even if inflation continues to slow sharply in the short term.
And there’s the dilemma...stocks are currently priced correctly only if there’s both a soft landing and rate cuts by the end of the year. They won’t both happen.
At Centric we focus on fundamentals and the long-term outlook. We are very much attuned to large market swings, both up and down, but remained disciplined against short-term speculation about matters that are truly unknowable…such has how and when the Fed will react if the economy slows but does not crash. Our approach is to build diversified portfolios that will build wealth over time regardless of what the Fed does in 2023.
The Risk Number is at the heart of a sophisticated set of tools to precisely measure the appetite and capacity for risk that each client has, and demonstrate their alignment with the portfolios built for them. The following graphic shows the risk of various asset classes as measured on a scale of 1-99 (1 being the most conservative and 99 being the most aggressive) as of the date above.
We start with a Risk Number, a measurable way to pinpoint how much risk you want, need, and already have. Then, your wealth advisor will optimally allocate our investments to help you reach your financial goals. Along the way, you will receive transparency of information, seamless proactive service and the trust and accountability you need to stay on track. All of this will lead to your personal comprehensive investment strategy that is powerful, disciplined, responsive.
Centric’s Market Assumption Disclosures: This information is not intended as a recommendation to invest in any particular asset class or strategy or product or as a promise of future performance. Note that these asset class assumptions are passive, and do not consider the impact of active management. All estimates in this document are in US dollar terms unless noted otherwise. Given the complex risk-reward trade-offs involved, we advise clients to rely on their own judgment as well as quantitative optimization approaches in setting strategic allocations to all the asset classes and strategies. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Assumptions, opinions and estimates are provided for illustrative purposes only. They should not be relied upon as recommendations to buy or sell securities. Forecasts of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. If the reader chooses to rely on the information, it is at its own risk. This material has been prepared for information purposes only and is not intended to provide, and should not be relied on for, accounting, legal, or tax advice. The outputs of the assumptions are provided for illustration purposes only and are subject to significant limitations. “Expected” return estimates are subject to uncertainty and error. Expected returns for each asset class can be conditional on economic scenarios; in the event a particular scenario comes to pass, actual returns could be significantly higher or lower than forecasted. Because of the inherent limitations of all models, potential investors should not rely exclusively on the model when making an investment decision. The model cannot account for the impact that economic, market, and other factors may have on the implementation and ongoing management of an actual investment portfolio. Unlike actual portfolio outcomes, the model outcomes do not reflect actual trading, liquidity constraints, fees, expenses, taxes and other factors that could impact future returns. Asset allocation/diversification does not guarantee investment returns and does not eliminate the risk of loss.Index Disclosures: Index returns are for illustrative purposes only and do not represent any actual fund performance. Index performance returns do not reflect any management fees, transaction costs or expenses. Indices are unmanaged and one cannot invest directly in an index.Riskalyze Disclosure: The Risk Number® is a proprietary scaled index developed by Riskalyze to reflect risk for both advisors and their clients. The Risk Number is at the heart of a sophisticated set of tools to precisely measure the appetite and capacity for risk that each client has, and demonstrate their alignment with the portfolios built for them.Shaped like a speed limit sign, the Risk Number gives advisors and investors a common language to use when setting expectations, recognizing risk and making portfolio selections. Just like driving faster increases hazards, a higher Risk Number equates with higher levels of risk.General disclosure: This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks
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