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Quarter 1, 2023

Just over three years ago, the U.S. stock market was at its Covid-19 lows following the shutdown of the global economy. The Dow Jones Industrial Average (DOW) saw its third worst daily drop in history, declining more than 1,000 points. By mid-March, the Dow and S&P 500 had both entered bear market territory (down more than 20%), and with the spread of the virus increasing each day, very few saw a light at the end of the tunnel. Many may be thinking that same way today as 2022 saw the broader stock markets suffer their worst year since 2008. As the markets continue to ebb and flow with the news of the day, the headwinds evident in 2022 remain, and at least one new headwind has surfaced. Whether it be the latest comments by the Federal Reserve, rising interest rates, higher inflation, fears of global recession, or, most recently, concerns about the global banking system, the news is fraught with negative headlines.

Why do I mention all of this now? Well, in addition to it being a coincidence that I write this nearly three years to the day of the pandemic lows, it is also to remind us that stocks do not always go up, and that bear markets happen a bit more frequently than investors like to recall. In fact, 2022 was our fourth bear market in just over 20 years. The dot-com bubble of the early 2000s, the financial crisis of 2007 to 2009, the Covid-19 pandemic, and now 2022 are all within recent memory for many of us. The other thing we must remind ourselves of is that most bear market periods have been closely followed by periods of strong returns. Even now, the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite are all up nearly 70% from their pandemic lows.

The volatility we saw throughout 2022 remains as we near the end of the first quarter. As of today, both the S&P 500 and Nasdaq Composite are positive for the year, with the DOW being the only one of the three major indices in negative territory. The outlook for stocks for the remainder of 2023 is still cloudy and ever-developing. A retesting of the 2022 lows, set in mid-October, is still something many market enthusiasts are forecasting. The most recent uncertainty surrounding the global banking system, following the collapse of Silicon Valley Bank and Signature Bank, has added increased stress to an already tenuous environment.

On the economic front, many are still anticipating a recession either sometime later this year or perhaps early 2024. The uncertainty created by the recent bank failures is likely to result in tightening financial conditions and even more reason to believe that a soft landing is unlikely. The Federal Reserve Bank again raised rates at its most recent meeting, the second such 0.25% increase this year. This following seven rate increases in 2022. Inflation has been on a downtrend since July 2022, but at its current levels still leaves the Fed with much work to do in order to bring it closer to its target of 2%.

Looking past all of this and focusing on what might lie ahead, we think there are reasons to be optimistic. With inflation showing signs of slowing, it is likely we have seen its peak, and while still at elevated levels, the consumer should begin to see signs of relief. This also should allow the Fed to stop the current cycle of rate increases and maintain a more neutral position. The volatility and uncertainly surrounding the economy and stock markets have led many to increase cash positions in efforts to protect downside. When overall conditions do begin to show signs of improvement, this excess cash should bode well for stocks as investors again seek the better returns associated with this asset class over the long term. Keep in mind that the stock market is often an indicator of things to come and that it is likely we would see evidence of this through improving stock prices well in advance of evidence supporting an improving economic climate.

We recommend that investors remain focused on the long-term and hold well-diversified portfolios that should stand up to the many changes that come their way over the various economic and market cycles. The key to successful investment outcomes is a well-designed plan and part of that plan is sticking to it and remaining true to your risk tolerance, asset allocation, and investment objectives.

As always, your relationship team is here to meet with you in whichever way is most comfortable for you. We value your relationship and the confidence you have placed in Adirondack Wealth Management by choosing us as your financial partner.


Michael Brodt
Senior Vice President
Wealth Management Director