Week In Review 1/6/2023

Week In Review – Friday, January 6, 2023

After a Historically Weak 2022 for Financial Markets – What might be in store for 2023?

The combined performance of equities and bonds in 2022 is now in the history books and an abnormality from 150 years of performance data. Illustrated in the chart below, the dot for 2022 is way over to the left, a result of both stocks and bonds plummeting in value.

Annual Performance of the S&P 500 and US 10yr Treasury since 1872 (%)

While equities were not down as much compared to other equity bear markets such as the financial crisis in 2008, the dot.com bubble burst of 2002 and the great depression in 1930 and 1931, the combined negative performance of equities and bonds produced an historically week outcome for balanced portfolios(mix of equities and fixed income).

The driver of 2022 performance was the aggressive tightening by the Federal Reserve resulting in a rapid rise in interest rates and valuation compression. The key concern entering 2023 is that the economy will enter a recession with an accompanying reduction in corporate earnings which could lead to lower equity markets and heightened credit concerns for fixed income in the near term.

However, markets could still stage a recovery in 2023 once a peak in short term interest rates has been put in place. Data since 1955 supports equity markets are likely to recover close to the peak in interest rates and inflation, despite often being weak into the final rate rises.

S&P 500 Performance Around Peak in US 2yr Treasury Yields, since 1955S&1955

Data since 1955 supports our thesis that equity markets are likely to recover close to the peak in interest rates and inflation, despite often being weak into the final rate rises. With peak inflation likely behind us and the Federal Reserve likely to temper the rate of increases to the Federal Funds rate in the coming months, the promise of peak rates occurring in the first half of 2023 are high. However, financial markets have historically sold off going into peak rates, which have yet to be put in place. While the seeds have been set for a darkest before the dawn scenario for 2023, corporate earnings, inflation and Federal Reserve actions all remain in play as we enter into the New Year.

Important Disclosures:

The preceding information is for general educational purposes only. It is not intended to be investment advice, and is not specific to any individual’s personal situation. Any decision about investing should be undertaken only after careful consideration of the investment’s risks, costs, liquidity or lack thereof, and the investor’s timeframe. Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product referred to directly or indirectly in this newsletter will be profitable, or equal any corresponding indicated historical performance level(s).

Mark A. Bogar, CFA^®, CAIA^®
Chief Investment Officer
Pallas Capital Advisors

Stephen Kylander
Senior Portfolio Manager
Pallas Capital Advisors

The information contained herein is for informational purposes only, is not personalized investment advice and should not be construed as a recommendation to purchase or sell any particular security, sector or strategy to any individual person or entity. The decision to review or consider the purchase or sale of any security, sector or strategy mentioned should not be undertaken without consideration of your personal financial information, investment objectives and risk tolerance with your financial professional. Past performance should not be considered as an indicator of future results.

Investment Advice offered through Pallas Capital Advisors LLC, a registered investment advisor.

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Advisory services are only offered to clients or prospective clients where Pallas Capital Advisors and its representatives are properly licensed or exempt from licensure. This website is solely for informational purposes. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Pallas Capital Advisors unless a client service agreement is in place.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.

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