Silver Linings - Our February 2023 market Commentary

Market returns in 2022 were definitely ones for the history books…and not in a good way. Going back 100 years, 2022 marked the 7th worst calendar year return for stocks and the worst return ever for bonds1. That combination was definitely felt by 401K investors as Fidelity (the largest 401K provider in the country) reported the average 401K balance was down 23% last year2.

Silver Linings

Entering this year the investment landscape has certainly changed from the year prior. While many of the top investor concerns are still front and center including inflation, geo-political worries, and recessionary fears….the difference is that assets are priced for more attractive returns moving forward, with the most notable changes in the bond markets.

The extremely low interest rate policy of the Federal Reserve for the past 10+ years had suppressed bond market returns. Now with the Fed increasing interest rates to levels we have not seen since 2007, prospects for returns going forward for safer assets have increased.

Winners and Losers

As with most policy changes, the Federal Reserve's decision to increase interest rates is not without winners and losers. On the one hand savers look to benefit from higher interest rates on their savings but meanwhile those who are large borrowers or look to take on new debt….the negative impact can be quite significant.

Take homebuyers as an example. Interest rates on a 30-year mortgage have gone from 3.1% at the start of 2022 to 6.5% today3. This has dramatically reduced the purchasing power for new home buyers. As a result, existing home sales have fallen 37% since January of last year4. But somehow, the fall in demand has not yet affected home prices to the same degree. In fact, existing home prices are actually up 1% over that same timeframe (although prices are down 13% from their peak reached in June last year)5.

One major factor that might be supporting home prices is that many current homeowners are reluctant to put their homes up for sale, limiting supply. This reluctance is due to the fact that relocating would mean giving up their current mortgage, which is likely in the 3-4% range or lower.