Winter 2023 Market Commentary

Steve Lear |

By Marc Usem and the Affiance Financial Investment Committee

Last year was one of the worst on record for combined stock and bond market performance as the Fed pivoted from stimulus to record interest rate increases. Stocks performed poorly, with the S&P 500 falling by -18.1%, but bonds set records. Bonds had the second worst year in modern history (since 1931), with the aggregate bond index falling by -13%. It was the worst year in history for long-term treasury bonds, which dropped by -30%. This is not supposed to happen. Bonds are expected to hold their value, especially when stocks are weak.

While aggressive investors in stocks should expect significant losses to happen over time, conservative bond investors don’t expect substantial losses. The results in 2022 were that a “conservative” portfolio of 50% stocks and 50% bonds was down about -15%, compared to an “aggressive” portfolio of 80% stocks and 20% bonds that was down about -17%. Meaning there was just a 2% difference in performance between conservative and aggressive portfolios. The same spread between conservative and aggressive portfolios during the market downturns of 2008 and 2002 was nearly 10%. We expect this relationship to change in 2023, with bonds providing support for portfolios once again.

A chain of events, both recent and historical, led to these unusual market conditions. The origins date back to the great financial crisis of 2008, which resulted in the Federal Reserve embarking on a decade-long policy of zero interest rates and financial excess. Then, as the Fed was trying to normalize monetary policy and raise interest rates, the Covid-19 pandemic struck and stopped the heartbeat of financial activity worldwide. Massive stimulus on a scale unseen in history flooded the markets. Confounding factors created a perfect storm including: supply chain disruptions, microchip shortages, the war in Ukraine boosting gas, oil and food prices, and avian flu leading to egg prices jumping by 50%. Shortages combined with stimulus led to the biggest jump in inflation in more than 40 years.

Inflation is the menace that led to the Fed’s pivot from record stimulus to the most aggressive interest rate increases in history – jumping from the January 2022 post-pandemic 0.25% fed funds rate to a 4.5% federal funds rate today. The Fed is trying to reduce aggregate demand and tame inflation by making money more expensive. This will work and we have already seen the most interest rate sensitive markets, such as housing, slow dramatically. Inflation likely peaked at 9% in June and is starting to wane, although it is still 7% and far from the Fed target of 2 to 3%. We would note that Fed policy works with lags of about 12 to 18 months, meaning the full impact of the rate increases will not be reflected in the economy until mid to late 2023.

Expectations for a recession now weigh on markets, as the Fed has reiterated its hawkish focus on fighting inflation and raising interest rates. We expect that a recession likely will lead to lower earnings for companies in 2023, and the potential for additional stock market weakness. Markets will be looking for a sign from the Fed that rate hikes are nearing an end to find footing for a more protracted advance. In the meantime, longer-term interest rates likely are at or near highs, making the prospects for bond investors more attractive than they have been in many years.

As part of our ongoing investment planning service, we made changes to portfolios during the year as we anticipated market events. We will continue to make updates as conditions warrant. We would caution that recency bias, thinking that what just happened will continue, can be powerful. We are certain that 2023 will be different than 2022, and events will unfold that we can’t foresee. We can’t control the ups and downs of markets, but we can rely on our disciplined investment processes to provide well-designed, tax-efficient, globally diversified portfolios that suit our clients’ investment planning needs.

Thank you for your continued confidence in our work.  

Sources: Morningstar, Bureau of Labor Statistics,,,

The views represented in this commentary are not meant to be construed as advice, testimonial or condemnation of any specific sector or holding. Investors cannot invest directly in an index. Unmanaged indexes do not reflect management fees and transaction costs that are associated with some investments. Past performance is no guarantee of future results. To discuss any matters in more detail, please contact your financial advisor.