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STATE OF THE ECONOMY AND MARKETS

Quarter 4, 2022

Oh, how things have changed.

As we headed into the latter part of December 2021, the U.S. economy continued to show signs of strength, and 2022 GDP was forecast to be 4%. Inflation was rising but deemed “transient” by the Federal Reserve, and three interest-rate hikes were being projected. Major stock market indices were at all-time highs and the yield on the 10-year U.S. Treasury was 1.50%. The eventual escalation of tensions between Russia and Ukraine was not yet in the headlines but would ultimately play a pivotal role in so many things to come.

Fast-forward to December 2022: The landscape is tremendously different.

On February 24, war broke out as Russia invaded Ukraine, the implications of which would prove to exacerbate many of the headwinds that changed the narrative for 2022. Higher oil prices and supply-chain issues already problematic due to the COVID-19 pandemic resulted in a rapid softening of the global economy.

The U.S. economy is now expected to grow at a very modest rate of 0.5% for 2022. Although not officially declared by the National Bureau of Economic Research (NBER), talks of an imminent recession became part of our daily news as the U.S economy experienced two consecutive quarters (Q1 and Q2) of negative GDP.

Prices rose higher and more rapidly than expected as inflation reached 9.1%, its highest level since the 1980s. In March, the Federal Reserve raised interest rates by 0.25%, setting the stage for one of the most aggressive hiking cycles ever. Since that first hike, the Federal Reserve has increased rates on six more occasions, resulting in a total of seven for the year, and an increase of 4.25%.

Most major stock markets indices reached bear market territory (more than 20% off their highs) during the second quarter. After much volatility, these major indices are only slightly improved from their October lows and the S&P 500 Index is down 20% year-to-date. The yield on the 10-year Treasury was as high as 4.325%, before coming down to its current level of 3.68%, as of publishing. This dramatic increase in yields and a similar corresponding drop in bond prices resulted in the index tracking the total U.S. investment grade bond market to be down over 13% year-to-date.

With the story of 2022 being mostly written, all eyes have turned toward 2023 and what lies ahead.

The Federal Reserve has indicated that additional rate hikes will be likely in 2023, as they continue to monitor the trajectory of inflation. It has become increasingly difficult to imagine the Federal Reserve bringing inflation down to a manageable level, while at the same time avoiding recession. A soft landing, one in which they can accomplish both, is still possible, but most economists are calling for a recession to begin sometime in 2023. While most are calling for a somewhat moderate recession, the length and severity is still very much unknown.

The outlook for equities in 2023 remains uncertain. A continuation of the volatility experienced in 2022 is likely to persist, and many are forecasting that the major indices retest their previous lows sometime in the first quarter. On top of that are forecasts calling for stocks to end 2023 at similar levels to where they are currently. It is likely that current prices are already reflective of a recession of some type in 2023, and that news of such would not send waves through the markets. It may, in fact, set the stage for the next up cycle as stock prices tend to begin recovering in advance of the economy coming out of a recession.

The holiday season has since passed, but I hope that you and your friends and family were able to celebrate them together. Everyone at Adirondack Wealth Management wishes you a happy, healthy, and prosperous 2023.

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—we look forward to working with you in 2023 and the years to come.

Sincerely,

Michael Brodt
Senior Vice President
Wealth Management Director

STATE OF THE ECONOMY AND MARKETS ARCHIVE


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