4TH QUARTER EQUITIES

Equity Market: Investors started 2022 with the hope that inflation would be short-lived. That hope was dashed as inflation reached levels not seen in 40 years. The Federal Reserve moved to reverse its modern policy of low interest rates. They moved with four successive rate increases of 75 basis points to bring short-term rates to 4%. The stock market reacted badly to this policy change. It went into a year-long slump despite occasional attempts to rally – especially in the fourth quarter. It ended with the worst year since 2008.

 The S&P 500 concluded the fourth quarter ahead 7.56%,  but with a decline of 18.11% for the year. The Dow Jones Composite Average was ahead 13.26% for the quarter,  but down 8.79% for the full year. The Russell 2000 was ahead 6.23 % for the quarter and still down 20.44% for the year. The worst performer was the Nasdaq Composite which was down 0.79% for the quarter and 32.54% for the year. The market was slightly positive but fluctuating in early 2023.

The Market:  Corporate earnings will be key to stock market performance.  The forecast at the outset of 2022 was for about 10% growth for the year. But earnings have turned negative in recent months – the result of increased interest rates –and the full-year forecast for 2022 is now about 6%.

Not surprising, the prognosis for 2023 is uncertain. Some forecasters see earnings several points positive, others see a basic flat trend, and others see a decline of perhaps 10% if a recession is deeper and prolonged.

We always look carefully at Price/Earnings ratio. The forward 12-month P/E ratio is now 16.1. – as compared to over 20 in the past two years. So stocks are now more reasonably priced but still higher than the 100 year average of 15. The effect of lower corporate earnings on this ratio going forward remains to be seen.

In addition, at Hudson Advisors, we have some concern for the political situation in Washington. Failure to manage the debt limit would sow chaos in financial markets.  It is an unpredictable situation that overrides the other forecasting.

On balance, as stated, we are on the plus side of neutral in our expectations for the market.  One ray of hope is that the U.S stock market will be more attractive than most international markets. Our best guess is for the market to struggle in the first half of the year, but then gain positive traction if we avoid serious recession.