Broker Check

“It better turn around soon or I’m out.”

January 09, 2023

That’s what a friend, who is a successful small business owner in the local area, said to me over the Christmas break when we were discussing the markets, as he vented about his portfolio and worried that next year would only bring more losses

If markets drop to start 2023, is it important that you stick to your long-term financial plan and resist the urge to just “get out” of the market? 

That’s an important question because, after the worst year in markets since the Financial Crisis, the truth is that 2023 isn’t looking much better (at least to start).

Stocks and bonds will still face 1) Rising interest rates, 2) High inflation and 3) Geopolitical risks.

But, in addition to those headwinds, and unlike in 2022, markets will also have to deal with 4) A probable recession in early 2023 and 5) declining earnings. It doesn't take a market maven to understand that’s not a great setup to start the year, and if stocks and bonds drop again in early 2023, are you tempted to throw in the towel and abandon your long-term financial plan.


 Of course, we all know that’s exactly the wrong thing to do.


Market history is clear: Periods like this in the market are opportunities to secure a long-term financial future, as long as investors can resist the urge for short-term protection at the expense of longer-term gains.

We know that sound financial plans will overcome periods of intense volatility and even bear markets – but only as long as you stick to the plan!  

It is my job to help you understand why markets are falling, putting it in the proper longer-term context, and showing you that I know what needs to happen for the bear market to end.

As we begin 2023, it’s very important that I effectively communicate with you all the facts that help you understand what is going on in the economy, with a historical context.

One of the best and most efficient ways I can do that is through a quarterly letter. In the next couple of weeks, you will receive a quarterly summary of your investments and a realized capital gain report and a letter that will give you the pertinent facts about the markets and economy. This letter will help clarify the most salient facts about where this market is headed. Although long, this letter will give you all of what I deem important to make good decisions in this nerve-racking time in the markets. 

Let’s look at what this past week’s employment data means. Not long after Friday’s Employment Report multiple analysts and commentators were calling it a “goldilocks” report, by which they meant it showed that the economy was neither “too hot” nor “too cold,” but instead, “just right.” In turn, the theory goes, the Federal Reserve could stop raising short-term rates earlier and at a lower peak than previously expected, inflation would continue to cool, and the economy could pull-off an elusive “soft landing.”

The biggest headlines from the Employment Report were definitely good news. Nonfarm payrolls rose 223,000 in December, beating the consensus expected 203,000. Meanwhile, civilian employment, an alternative (although volatile) measure of jobs that includes small-business start-ups, surged 717,000. Rapid job creation helped push the unemployment rate down to 3.5%, tying the lowest level since Joe Namath was a reigning Super Bowl champion. (If you’re a Millennial or Gen Z, yes, that’s the same guy in the Medicare commercials.)

But, behind the headlines, the data were not as good. Temporary help service jobs (temps) fell 35,000 in December, the fifth straight monthly decline, to a level of temp jobs below a year ago. Why are these jobs important to watch? Because, when businesses face increased demand, the quickest way to respond is hiring temporary help. And the same thing happens in the opposite direction.

Meanwhile, the total number of hours worked in the private-sector ticked down 0.1% in December, the second consecutive monthly decline. Even though payrolls were up, total hours worked data show less work was done. Putting it all together, this is the equivalent of losing 125,000 jobs in December, not gaining jobs. Fewer temporary workers and fewer hours worked suggest some weakness in the job market. What this means is that businesses are still hiring, but their workers have less to do.

Why would businesses do that? Because finding qualified workers has been unusually difficult during the re-opening from the COVID shutdowns. In turn, many firms might be willing to keep hiring workers until it’s clear the economy is in a recession. But this also means that if a recession happens – and we continue to think it will – more workers have to be let go.

The figure that the optimists focused on the most was the wage report, which showed a relatively moderate gain of 0.3% in average hourly earnings in December and a gain of 4.6% versus a year ago. Moderate wage growth, the conventional thinking goes, diffuses the potential for a “wage-price spiral” that keeps inflation high or even pushes it higher. But this is a basic misunderstanding of inflation dynamics. As Milton Friedman taught us, it’s loose money that causes inflation to go up. The fact that wages sometimes go up faster at the same time is also a sign of loose money, but it’s not a sign that wage growth causes inflation.

This week’s CPI report, (retail inflation) should show tame overall inflation for December itself, but that’ll largely be due to falling energy prices. The ISM report suggests inflation isn’t going back to the Fed’s 2.0% target anytime soon.

Put it all together and it looks like both the surge in M2 growth in 2020-21 (which created the inflation) and the abrupt slowdown in 2022 (which would cause slower growth) are still winding their way through the economy. If so, we should see weak economic data, soon. That is good news if we want the Fed to stop raising interest rates. 

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