What a difference a year makes! Last year at this time, our new brand, Paragon Wealth Management, was in the planning stages, we were still located at our old office on East Street, the stock market was concluding its 3rd straight year of double-digit growth, 30-year mortgages were around 3%, and the Federal Reserve had interest rates set at basically zero. Now, fast forward a year… We successfully launched Paragon Wealth Management, we’ve moved to our new location on 515 N. Main Street, the market is down double-digits, a 30-year mortgage will cost around 6.5% per year, and the Federal Reserve has raised interest rates a whopping 11 times. As a matter of fact, last year at this time, the Federal Reserve expected to only raise interest rates to roughly 1% in 2022; however, we are currently sitting in the range of 4.25% - 4.5%.
So, what kind of conclusion can we draw from this past year (as with all years)? Change is constant and predictions are usually wrong. If the economists at the Federal Reserve, which are some of the best and brightest in the world, can’t come anywhere close to predicting where interest rates are going to be in a 12-month period (which they oversee), how can anyone else say with any real certainty how the economy or the stock/bond markets are going to perform over a twelve-month period? They really can’t.
This doesn’t mean that we should all just throw our hands up and say forget it. After all, aside from the risk of volatility, the stock market (as determined by the S&P 500) is still one of the most accessible, liquid, and consistent investments available in our opinion. Since 2008, the stock market has only been down 3 calendar years, and the average annualized return over the last 15 years has been 8.83%. So, let’s talk about some of the positive things. We are in a much better position now than we were a year ago:
- Inflation seems to be trending in the right direction.
- Prices of oil and wheat peaked earlier in the year and are back to their pre-Russian invasion levels, which was a major source of inflation this year.
- Much of the government stimulus that was received during the pandemic has made its way through the economy and savings levels are normalizing. This was also a major source of inflation.
- China seems to finally be loosening its zero-covid policy, which will continue to help global supply chains.
- The higher interest rates have ushered in better-paying fixed-income options for your portfolios.
- A seemingly resilient low unemployment rate.
- The speculative investing in companies with little to no fundamentals (think Game Stop) has largely stopped.
- The stock market is currently at a more reasonably historical valuation than it has been in a long while.
- Typically, the stock market is not down 2 years in a row. Other than 2001 and 2002, it hasn’t happened since 1974, and the 1940s before that.
While all these things are good, we will have challenges for sure. A tight labor market may prevent inflation from getting back to the 2% level the Federal Reserve is looking for, there is still a war going on involving major oil and grain producers (which may make commodity prices volatile), and there is a very real possibility that 2023 may experience a recession. However, challenges make us stronger and bring new opportunities. So, as always, we will seek out these opportunities for you, and implement them.
Our strategy for the beginning of the year is to be quite cautious. As the end of the year quickly approaches, we will continue to add positions to conservative fixed-income investments when opportunities present themselves, as we have been all month. There will be a real tug of war between institutional investors that think a recession is set in stone and those that are holding out for a “soft landing,” and we don’t want our clients to get stuck in the crossfire. We are expecting this battle to cause a fair amount of volatility in the market, and with our conservative positioning, we may be in a better position to scoop up good companies at good prices.
So, we head into 2023 feeling optimistic with a healthy dose of skepticism. We would like to wish you a happy holiday season, and a great 2023. We would also like to thank you for your continued trust in us. We promise to always do everything we can to retain that trust.
The Paragon Wealth Management team
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All investing involves risk including loss of principal. No strategy assures success or protects against loss.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that the strategies promoted will be successful.