Q4 2022

Dear Client,

Happy New Year!  We are proud and immensely grateful to begin this new year with you under the aegis of our new Registered Investment Advisor firm, Orographic Financial Advisors.  Thank you for your prompt attention to the paperwork necessary for the transition.  The support and kind words we received from many of you made a very stressful time much more manageable. We look forward to continuing to provide the attentive, and expert service you have grown accustomed to over the years, and to not having to make that firm transition ever again.

As we begin this new year, please take a moment to consider your finances.  If your situation has changed, or you would like to discuss the particulars of your accounts or circumstances, we are available.  Please reach out to let us know, and we will be more than happy to arrange a time to meet or talk.

The equity markets finished the year with a mostly positive quarter although not nearly enough to repair the damage done earlier in the year.  Meanwhile, interest rates continued to march higher causing bond prices to continue their decline.  Inflation finished the year about where it started, and is hopefully going to continue down:

S&P 500 change: 6.36% Fourth Quarter (-19.64% Full Year 2022) 

Nasdaq Composite change: -1.81% Fourth Quarter (-33.47% Full Year 2022) 

Dow Jones Industrial Average change: 14.87% Fourth Quarter (-8.74% Full Year 2022)

Ten Year Treasury Yield change: 4.5% Fourth Quarter (yields are rising and prices are falling) 

Crude Oil (WTI Front Month Contract) change: -3.23% Fourth Quarter (3.58% Full Year 2022) 

Gold (GLD ETF) change: 9.14% Fourth Quarter (.98% Full Year 2022) 

While in many aspects of life the new year is a time of new beginnings and shedding the past, the economy and markets this year are picking up right where they left off in 2022.  We are still facing high inflation, high (and rising) interest rates as The Federal Reserve (Fed) fights the high inflation, likely declining earnings, and the specter of a recession.  All together this paints a picture of what will probably be another tough year for equity markets.

However, there are a couple bright-ish points we also want to mention:

1. There is a strong likelihood that the majority of the shift in interest rates is behind us.  Fed funds rate is up from .25% in January 2022 to 4.5% in January 2023.  Similarly, mortgage rates (avg 30-yr mortgage) began 2022 at 3.2% and ended 2022 at 6.7%.  The rate of change as well as the absolute amount of change during 2022 was impossible for the markets to digest without some difficulty (i.e. volatility and negative returns).  Moving forward, the current projections are for another .5-.75% increase in Fed funds rate which is a much smaller change remaining in both percentage and absolute terms.  We think the bond market has, for the most part, already discounted that change.  The treasury yield curve peaks at 6 months currently, implying the bond market expects rates to at least stop rising, and possibly start falling, by mid-year. 

2. The equity markets likely still have some volatility ahead as earnings and earnings expectations adjust to the new environment.  However, we expect 2023 to be less bad than 2022.

The consensus among strategists and analysts is that we will have a rough first half of the year.  That is mostly based on the thesis that as earnings reports and expectations move down, the market will adjust prices accordingly (down).  Also, the recession we have all been anticipating may be declared at last, as we see higher unemployment and the commensurate declines in economic activity. 

The tough part in the current environment is that if the earnings and economic indicators do not show the expected slowing, then the Fed may move rates even higher than expected.  That will in turn cause earnings and economic indicators to show the expected slowing.  The Fed has said, and continues to show, that they are more concerned with pushing down inflation than anything else.  As a result, they will not allow any real glimmers of hope/re-acceleration, until it is clear that inflation is down and under control.

Amidst all this seemingly negative news, we must focus and invest based on a longer-term outlook.  We are seeing what we think are great opportunities in bonds, stocks, and preferred stocks, given a horizon longer than a year.  Shorter-dated treasury bonds (bills) are offering rates we haven’t seen since fall of 2007, allowing us to lock in positive, risk-free returns over the next year.  We have also been seeing what we think are attractive prices in some stock and preferred stock investments.  That is especially true when viewed with a horizon extending beyond the current tumult as we move on to the eventual recovery.

As ever, we are working hard on your behalf.  We are optimistic over the long term and focused on maintaining sufficient liquidity to meet your needs as well as to take advantage of opportunities as they present themselves.

We wish you all the best for a happy, healthy, and prosperous New Year!

Best Regards,

Bo and Lesley