Fourth Quarter 2022 Economic Commentary

Hello from Sycamore,

Performance and the Markets

2022 is now in the books and while it wasn’t one to brag about, we feel that overall, during the last 10 years, the markets have been very good.

The question we’d all like an answer to is how will the markets fare in 2023? The short story is…we’re more optimistic about 2023 than we were about 2022. Before we tell you why let me tell you two things that you already know. One – We cannot predict the future. Two – we’re not market timers. With those thoughts in mind, we’ll be happy to share what we think about the next twelve months.

If you travel back to December 2021, you will remember how optimistic most projections were. The market had just finished a great year. At that time, most investors felt confident and were looking forward to a good 2022. However, we were a bit more cautious. If you look at your annual review follow-up letters we sent you from 2021, you will likely find that we were cautioned against expecting a continuation of the outsized market gains we’d been experiencing. Why? When we conduct our investment analysis, we study the earnings of companies and compare those to the current share price (this is a significant simplification of our research process) to determine if we want to hold that security. In 2022, earnings increased more than expected but not as much as share prices, so we were being cautious. We’ve learned that a strong defense can be as – if not more – important than your offense. What does this have to do with our thoughts about 2023?

During the 3rd quarter of 2022, profits of the 500 companies in the S&P 500 index increased by about 9% vs the 3rd quarter of 2021 (Source; S&P Global Market Intelligence). During this same 12-month period, the average share price of these same stocks declined by about 15%. From our perspective, the relationship between earnings and share prices has improved significantly. We are more optimistic about 2023, but we will continue to invest in your accounts with a strong defense.

Speaking of last year, let’s look at some final numbers. For the year ended 12/31/22, our Growth and Income Composite – gross of fees – declined 6.95% while the S&P 500 declined 18.11%. We are very pleased with our relative performance.

The Economy

First, let’s discuss inflation. For the last year, inflation has been a problem. The Federal Reserve has increased the interest rate over the last year to try to slow the rate of inflation and this seems to be having a positive effect. Additionally, we see that producer prices (commodities like corn and beans for example) have declined from an annualized rate of more than 20% earlier this year, to a more moderate annualized rate of less than 9%, and that decline appears to be continuing. This is good news.

Housing is a significant and weak sector. Interest rates are having a major impact on the sale of existing homes and now they appear to be starting to have a similar impact on new home construction. We expect both declines to moderate as buyers become accustomed to the higher interest rate environment, but in the meantime, housing is likely to be a drag on the economy.

Other economic indicators are in relatively good stead. The sale of automobiles, which have been steady throughout 2022 are beginning to trend higher. Unemployment continues to remain near all-time lows and the economy continues to create new jobs. In December we created more than 200,000 jobs and for the year 2022, we created about 4.5 million jobs. This is the second-highest total ever following the 6.7 million jobs created in 2021. Consumer Confidence, which has been declining slowly since mid-2021, seems to be heading north again.

We could talk about the economic data until your eyes glaze over, but suffice it to say that overall, we are cautiously optimistic about the economy during 2023.

Purchase and sale activity during Q-4

During the 4th quarter of 2022, we were relatively inactive- we bought Alphabet and had no sales.

As always, never hesitate to contact us with any questions or concerns.

Thank you for your continued trust and support,

Sycamore Financial Group

*Data not audited.
**Results reported gross of fees.
***Past performance does not assure future results.  Investors cannot invest directly in the stock market indexes such as the S&P 500.  Investment return and principal value of an investment will fluctuate.  Investor value, when sold may be worth more or less than their original cost.