5C Capital Markets Update October 2022
October 25, 2022
5C Capital Markets Update January 2023
February 27, 2023
We wish you a peaceful & healthy 2023.
We look towards a stronger 2023, although we expect capital markets to experience greater than normal volatility.
2022 was marked by considerable challenges – the war in Ukraine, inflation at a 40-year high, and Covid’s re-emergence in China. Mortgage rates increased greater than 100% during the calendar year, testing residential and commercial real estate valuations. Although this pricing and income drag should persist for the near term, we hope that the Fed’s eventual easing will stabilize the market.
The Fed Funds target rate is now between 4.25% – 4.5% after last year’s aggressive rate hikes. We expect the fed to raise again on February 1, hopefully very modestly and with strong guidance on a terminal rate. If inflation continues to ebb and unemployment rises, we expect a recession to follow. However, while there is much disagreement on when and how deep the contraction will be, the prevailing opinion is that it will be short-lived.
Again, we hope to experience a relatively short recession followed by an improving macro environment marked by moderating inflation and a yield curve trending towards more normalized ranges.
The better news – employment is relatively strong, corporate and consumer balance sheets are generally well capitalized and – the markets have already incorporated certain recessionary pressures. We hope for a peaceful resolution to the Ukraine/Russia conflict and accompanying positive developments for global markets.
Investment strategy & positioning
A silver lining – short to mid-term fixed income is generating significant income, with yields frequently exceeding 4% on short term US Treasuries, CD’s and high-quality Government Sponsored Entities. In certain situations, municipal bonds provide comparable tax adjusted yields to US Treasuries. We expect short/mid-term fixed income securities that are held to maturity to outperform as they recoup principal value temporarily lost when interest rates rose. Commodities/gold and clean energy outperformed broader equities and provided a modest hedge against inflation.
Key takeaways:
- Continue to stay diversified;
- Consider modestly increasing liquidity to counter additional volatility; and
- Be opportunistic, not fatalistic in response to pockets of market weakness. For example, dividend/value-oriented equity, including broad small cap exposure and targeted growth areas such as clean energy/cyber related technology.
Although financial markets continue to be volatile and negative sentiment persists, we expect long-term investors to be rewarded appropriately for the risk they continue to take.
Please do not hesitate to contact us at any time with questions and to schedule a financial review.
With a deep sense of responsibility,
5C Capital Management’s Investment Team
Michael R Sanders, Principal
Chief Investment Officer
Craig Marson, Principal
Director of Financial Planning
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*Source: Bloomberg. Total returns for period ending 12/31/2022 MSCI World index, NASDAQ Composite index, Russell Indices, Standard & Poors. All returns are rounded to nearest 1% for presentation purposes, with exception of Gold given slight negative return.
