|In Every Quarter…|
Our “Reasonable Goal”. At Milestone Asset Management, our goal is to achieve reasonable returns, with reasonable risk, over a reasonable time period using diversified portfolios. Through fundamental and technical analysis, in light of geopolitical events, inflation, corporate earnings, the Fed, and interest rates, we manage each of our portfolios per its mandate, aiming to get optimal risk-adjusted return. Our analysts strive to tame bearish trends to minimize downside risk, while similarly riding bullish trends in order to maximize upside opportunities.
5 Things that Move Financial Markets. As we commonly refer back to, there are 5 key drivers of financial markets in every quarter, which include geopolitical events, inflation, corporate earnings, the Federal Reserve, and interest rates. These factors are the largest catalysts of the financial world and our analysts closely track all of these economic data points in order to best manage portfolios.
Midterm Elections. In November, midterm elections gave Republicans the House majority, with 9 new seats and split the senate 49-49, with Democrats gaining 1 seat. The politics of this new electorate will unfold in the new year, but many political analysts believe gridlock is to come with a divided congress, something markets tend to appreciate.
China’s Zero Covid Policy. Since the start of the pandemic, China has been especially harsh on tampering down Covid-19, compared to the rest of the world. This has affected supply chains, global GDP, and has had many rippling impacts. Throughout the majority of 2022, we have seen this policy maintained, however in December, as citizens protested, the government relaxed some of its Covid-restraints.
It will be especially interesting to see how China’s economy reacts to its opening following its prolonged shutdown. Our team is continuing to monitor how global governments continue to manage cases of Covid-19 and the impact of that on the world economy.
Fed Rate Hikes Continued. In the two Q4 Fed meetings to wrap up 2022, we saw Federal Funds rate increases of 75 bps in November and 50 bps in December, following 300 bps of rate hikes from the first three quarters of 2022. This ended the quarter with a Fed Funds range of 4.25% – 4.5%.
Yield Curve. In Q4, the yield curve widened on the shorter term end of the curve, another increasingly apparent sign of an inverted yield curve. The largest spread from the beginning of the quarter to the end is the 1 month UST, starting off at 2.79% and ending 2022 at 4.12%, a 133 bps spread. Past the two year mark, rates remained generally stable as consensus for the longer term US economy stayed relatively calm.
FOMC Meetings. The FOMC met in early November, as well as mid December to discuss and decide on economic policy. The December meeting was especially significant because of the quarterly Summary of Economic Projections’ release. Although certainly not spot on by any means, this is the best estimate of what the key decision makers are thinking about the US economy.
Consumer Price Index. During Q4, CPI data for the months of September, October, and November came out at 8.2%, 7.7%, and 7.1% respectively; a consecutive (YoY) CPI rate decline continued since July.
Personal Consumption Expenditure Index. PCE inflation also came in for the months of September, October, and November during Q4. Like CPI, it fell consecutively from 6.3% to 6.1%, and then to 5.5% in November. We hope this trend continues in the coming quarters & we look forward to receiving additional CPI & PCE data points in the new year.
Mixed Big Tech Stocks Results. During Q4, we received mixed earnings results from Q3. Apple beat both revenue and earnings expectations. On the other hand though, Meta, Google, and Amazon disappointed investors with slow or negative growth in many KPIs. We look forward to receiving Q4 earnings in the coming weeks & seeing the total performance of fiscal year 2022.
Impact of the Strong Dollar & Inflation. Among the many pressures on corporate earnings, a strong dollar and inflation put pressure on earnings we received in Q4. Despite the DXY Index settling down in Q4, from its high levels in late September, the USD has grown especially strong this year. Tailwinds of forex impacts also pressured Q3 earnings for many international companies.
Q4 Quarter End Results
In Q4 2022, the S&P 500 gained +7.1%, the Dow Jones Industrial Average gained 15.4%, the Nasdaq Composite fell -1%, and the yield on the 10 year US treasury gained +1.3%.
What Worked in Q4 2022
Value Stocks. Despite a small recovery in growth stocks of +1.8% in the fourth quarter of 2022, value focused equities were up +11.52%. This left the Russell 1000 Value Index at a loss of only -9.7% to end the year, whereas the Russell 1000 Growth ended down -29.9%. Investors are seeking companies with sustainable and strong cash flows, as well as the higher dividends that tend to accompany those sorts of value companies.
Dividend Stocks. Similar to the shift towards value stocks we experienced in Q4, companies offered higher dividends performed better than the index in terms of both price returns and dividend returns. SPYD’s 4% dividend yield along with its +11.6% returns in Q4 were quite impressive compared to SPY’s 1.6% dividend yield and +7.1% price return.
Energy Stocks. Despite WTI crude prices hovering and Brent crude prices falling, energy stocks were winners of Q4. For most energy companies, Q3 earnings met or exceeded expectations, posting robust YoY revenue and earnings growth. The energy sector posted a stealthy +21.5% price return in Q4, to finish the year at a +57.6% gain.
What Did Not Work in Q4 2022
Consumer Discretionary. 2022 saw no Santa Claus rally even amidst higher retail sales year over year, with the Consumer Discretionary sector down -9.3% in Q4. Amazon, the largest component of the Consumer Discretionary Sector was down -15.7% in Q4.
Real Estate. Unsurprisingly, in a rising interest rate environment, real estate tends not to be a top performer. Although the real estate sector of the S&P 500 was positive for the quarter, it underperformed the S&P 500’s return of +7.1% for the quarter.
Communication Services. The communication services sector was flat in Q4, returning a slight +0.2% return. Among its top holdings, losers like Meta and Google, which were down -2.0% and -4.3% in Q4 were balanced out by winners in the telecommunications field like Verizon and AT&T, which were up +8.5% and +26.3% in Q4, ultimately keeping the sector flat.
As always, the team at Milestone Asset Management is continually monitoring market movements.
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