I am hopeful that with December, we will emerge from this difficult marketplace and all our lives become a little easier, lighter.  From the war in Ukraine to the remarkable spike in inflation and the unprecedented quantitative tightening by the Federal Reserve, stock and bond prices have delivered one of the most challenging years in my time active in the investment markets.  In all fairness, the S&P 500 did just post back-to-back monthly gains for first time since August 2021.  Stocks closed out the final day of the month of November with a 3.1% rally and pushed the return for the month up to 5.4% (following an 8% lift in October).  It was the second-best monthly bump of the year for the S&P 500. 

The global backdrop is confusing.  Though it may appear worse than ever before, I don’t think the world has ever been all that peaceful or stable a place.  In some ways, it is now learning how to exist in a post-cold-war bubble of presumed peace and prosperity; in others, the world is more digitized, culturally divided and facing greater wealth disparity than at any point. When China was invited into the WTO in 2001, it was assumed a new stability was in place; now this looks as though it’s coming unwound.  China and its attempt at zero COVID is not playing out well in the shadow of President Xi’s third term as party leader.  Ukraine continues to amaze and fend off an ugly Russian attempt to grab land.  The precedent here is significant and thankfully NATO seems to get it. 

At home we have seen some truly constructive guidance and transformative policy out of Washington.  The Infrastructure Investment and Jobs Act will provide funds to repair roads and bridges, enhance our rails, update the power grid and expand our broadband networks, and a good bit more.  The CHIPS & Science Act will re-shore the development and manufacture of important technologies, bringing jobs back to the US.  These are bold steps to position the US for continued future leadership and economic growth.

The Federal Reserve is likely close to wrapping up its tightening cycle.  This has been the bane of the markets this year, driving the multiple on the S&P 500 down nearly 20% from the start of the year. The inflation numbers are coming down, gasoline prices have fallen to the lowest levels since before Russia’s invasion of Ukraine, and November US apartment rent experienced the largest fall in at least five years, according to Bloomberg.  Interest rates have been falling.  The US 10-year has now dropped from a high of 4.24% on October 25th to its current level in the 3.5% range.  In line with this drop, the US dollar has fallen, and is now below its 200-day moving average.  A lower or falling dollar improves the bottom line of US companies that generate significant portions of their business outside the US.

While we are confronted with an array of data painting an unclear picture, there are a few takeaways going forward.  First, the bond market is likely to stabilize in 2023, hopefully resuming their historical place of stability and value in investor portfolios.  For stocks, earnings are critical and at the moment, consensus estimates are for a little over $225 for 2023 and $255 for 2024.   Seasonal trends favor stocks – December is typically a good month to own stocks, and we are about to start the third year of the presidential election cycle, the best year historically for a rise in market prices.  Dividends, reasonable valuations, sound and innovative business practices and ample investor transparency are fundamental criteria we rely on in making portfolio decisions.  Quality stocks have been the preferred asset class of investors for a long time.  The merit in owning stocks has not changed amidst this challenging year – and patience will see stock prices restored. 

Finally, in case you were not able to attend, we had a fantastic 10th Anniversary celebration in our offices in Wayne.  We exhibited the fine artwork of our friend Kirby Fredendall (www.kirbyfredendall.com) whose paintings are still on display.  If you are in the area, we invite you in to see her work and our newly renovated office space.  We wish you and your family a wonderful holiday and a more peaceful and prosperous new year.  Please take care and do not hesitate to reach out if you need us. 

Take good care,

Bruce Hotaling, CFA

Managing Partner

The views and opinions stated herein are those of Bruce Hotaling, are as of this date, and are subject to change without notice. Information contained in this report was received from sources believed to be reliable, but accuracy is not guaranteed. Investments are subject to market risk, including the possibility of loss of principal. Past performance does not guarantee future results. The S&P 500 is an unmanaged index of 500 widely held stocks. Investors cannot invest directly in an index. The PE ratio (price/earnings) is a common measure of relative stock valuation. This note contains forward-looking statements, predictions and forecasts (“forward-looking statements”) concerning our beliefs and opinions in respect of the future. Forward-looking statements necessarily involve risks and uncertainties, and undue reliance should not be placed on them. There can be no assurance that forward-looking statements will prove to be accurate, and actual results and future events could differ materially from those anticipated in such statements.

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