Bautis Financial 4Q22 Market Commentary

2022 was an unpleasant one for stocks and bonds as stubbornly high inflation prompted the Federal Reserve to the fastest series of rate hikes since 1980. But 2022 finished out on a better note, with Q4 out-performing the first three quarters of the year.

Related: Bautis Financial 3Q22 Market Commentary

Equities 

US Stocks turned around in Q4 after falling for the first three quarters of 2022. The Nasdaq Composite continued in the red but was near flat for the quarter. The Dow Jones Industrial Average rebounded the most, posting a quarterly return of 16.01%. Global markets had similar returns, with the MSCI EAFE Total Return index returning 17.4% in Q4.

Ten of the eleven S&P Sectors had positive returns in Q4 of 2022. The Energy and Industrial sectors led the way with 22.7% and 19.12% returns, respectively. Consumer Discretionary was the only sector in the red, posting a -9.08% return for the quarter.

Fixed Income 

The fourth quarter of 2022 brought more action in the yield curve. Treasury Rates continue to rise across the board with the exception of the 5-Year, and by so much in the short-end that the yield curve remains flattened past the point of inversion.

The 1-Year Treasury Rate ended Q4 at 4.73%, greater than both the 10-Year Rate’s 3.88% yield and the 30-Year’s 3.97%. The 10-2 Spread was inverted at the end of the quarter, with a differential of -0.53%.

Trade Rationale

2023 could bring new challenges, and attention has slowly been shifting away from inflation to economic performance. Nevertheless, a recession is not a foregone conclusion. A resilient labor market and a sturdy consumer, with borrowing power and some pandemic cash still in the bank, could support economic growth this year. 

As such, we have been recalibrating a potential environment that is past peak inflation, peak U.S. dollar, and peak long-maturity interest rates. We have slowly been unwinding inflation-oriented hedges across the board, selling commodities, energy stocks, and Treasury Inflation-Protected Securities.

This commentary is for informational purposes only. Consult with your advisor before making any investment decisions.