2022 was a year most investors wish they could forget, as global stock markets experienced their worst returns since 2008. For bonds, you would have to go back over forty years to find rates of return as negative as they were in 2022.
The main cause of this poor stock and bond market performance was high inflation, which brought on rapidly increasing interest rates by central banks globally. In my view, the easy money and very low interest rate environment we experienced since 2008 has finally caught up with us. The FED (US Federal Reserve Board), one of the key central bankers globally, was too slow in 2021 and early 2022 in reducing economic stimulus and gradually raising interest rates.
Instead, the FED waited until inflation was close to double digits in March of 2022 before doing anything to reduce economic growth. COVID made it harder to assess whether inflation was transitory or entrenched, the latter of which became obvious in early 2022. The FED and other central bankers deserve credit that they recognized their error and reacted with quite a bit of force, raising interest rates by 4% in nine months.
The markets have reacted negatively to this because no one knows what such rapid interest rate increases in a short period of time will do to the global economy. The brakes are being applied to economies globally but is the slow down gradual or will it stall, which is what many investors expect to happen. It takes around nine to twelve months for an interest rate increase to influence economic growth. Interest rate increases of this magnitude in such a short period of time have never been done before, so what the eventual outcome will be is unknown.
So, what now? It is my opinion that the bond market has factored in a majority of, if not all, past interest rate increases and the ones for the next three months. This means the bond market in 2023 should perform quite well, because of higher interest rates being paid on the bonds. Interest rate increases should be completed by the first quarter and may be as small a quarter percent. If the global economy stalls, interest rates may even fall in 2023 to provide stimulus, assuming inflation has been brought under control. If this occurs, this would be even more beneficial to the bond market.
For stocks, the peak in interest rates in the first quarter of 2023 should produce stimulus for a rally this year. The extent and performance of this stock market rally will be dictated by what happens to global economic growth over the next nine to twelve months. Most economists expect a modest recession this year, which I feel the global stock markets have already factored in. In 2023, I expect quite a bit of stock market volatility as news of global economic growth emerges throughout the year, but as a whole, I still expect stocks and bonds will provide clients positive returns in 2023.
If you have any questions or concerns, please feel free to contact me.
Best regards,
Bill Achtymichuk, CIM®, FCSI®, CFP®
Portfolio Manager / Senior Wealth Advisor
iA Private Wealth | Active Wealth Partners
Insurance Advisor| iA Private Wealth Insurance*
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Edmonton AB, T5J 3L8
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