How to approach your investment strategy in 2023

view original post

Entering January 2022, the Federal Funds effective rate was less than a tenth of a percentage point, the Russell 2000 stock index was only slightly off an all-time high and the Case-Shiller home-price index was catapulting toward a summer peak.

Exiting the year, the Fed Funds rate had shot up to 3.83 percent as the Federal Reserve hiked interest rates to curb inflation, while the stock market was off some 20 percent and home prices had sunk somewhat from that summer plateau.

With energy prices continuing to yo-yo and lingering macroeconomic uncertainty spawned by the COVID pandemic and global tensions, how should you be thinking about your investments throughout 2023? Jason Hendricks, a Milford resident and portfolio manager with Crestwood Advisors in Darien and Westport, shares his thoughts on how investors should approach the financial environment this year.

How were middle-income earners feeling entering 2023?

The majority of folks with upper-middle class income have done well. Sixty-five percent of folks in the United States are homeowners, and people in Connecticut have seen their home prices go up quite a bit just in the last couple of years. 

The majority of mortgage loans in the United States are fixed rate. We had a long period of time when finance rates were very affordable, so the majority of people locked in rates when they were very low. Your payments aren’t going up, but the value of your real estate is much higher than it was before, so your net worth has probably gone up quite a bit on the real estate part of your balance sheet. 

As stocks began their slide this winter, how did investors react?

I think in the beginning it was a bit of disbelief. We had had that rapid sell-off in 2020, and then a rapid recovery that same year. I think many investors are a bit like goldfish swimming around the bowl. They swim around and say, “Oh, look — a castle!” Then they swim around again and go, “Oh, look — a castle!” They forget that they’ve already seen it before. So when they look at a rapid sell-off and then a rapid recovery in 2020 they say, “Oh, that’s what bear markets are like — it goes down but then it comes roaring back up.”

Because a lot of people — particularly young people investing in riskier things like crypto — did really well in 2020, they developed very risk-hungry appetites where they’re comfortable with more volatile assets. And then you fast forward into 2021, things start to slow down but they say, “Hey, it’s going to be just like what we saw before, where there’s volatility but things keep going up.” I think it took time for investors to understand that things are going back to a normal environment. 

How have the markets been influenced by Fed hikes?

If you want to pick a pivot point when things start to crack, I would pick December 2021. It was then that the Fed changed their tune and said, “We’re going to start raising interest rates.” We went from a couple of quarter-point hikes to moving rates to 4.5 percent. That’s a mighty big move, mighty fast. Typically it takes a couple of years for the Fed to be making those kinds of moves, and we did it in roughly eight months. So that caught a lot of investors off guard.

The tricky thing with interest rates is that it takes time for inflation to really come down. If you go back to World War II and you look at the Fed’s rate policy relative to the inflation rate, the Fed Funds rate has always been, except for these little periods, higher than the inflation rate. We’re still upside down — you need time for the rate to stay at that level for inflation to really come down. You need to really slay the dragon. Inflation doesn’t turn on a dime.

Investors should expect volatility — and if you have a long time horizon, volatility is your ally. Where there’s uncertainty and unpredictability, a lot of investors get scared and that’s a time when patient investors can buy things on sale. Expect volatility, and where there’s volatility there’s opportunity. At the same time, keep your eyes open to make sure your investment portfolio is aligned with your plan. It isn’t a competition — your goal is not necessarily to hit a certain benchmark or things like that. You should figure out what you are trying to achieve, and make sure your portfolio reflects that.