Client Letter January 2023 Excerpt

As we head into 2023, the economic and investment headwinds of 2022 are largely still in place. The difference now is that we are further along in declines and also there is the possibly the economy can shift to become more market friendly late in the year.

Even though the economic and investment horizon is not clear, I welcome the new year.  2022 presented several shocks. 

Both stocks and bonds suffered significant price declines as more liquidity was sucked out of the market with every interest rate hike by the Fed to combat inflation — seven of them in 2022 alone.  By mid-December the central bank had raised its benchmark interest rate to the highest level in 15 years, taking it to a targeted range between 4.25% and 4.5%.

Given how rapidly the Fed has increased rates with the full effect yet to be seen, there is expectation that growth will slow throughout 2023.    

The S&P 500 Index is trading at a PE of 19.7 today which is down significantly from the lofty levels of 2021. But if the consumer does retreat and business slows it is difficult to see how equity returns can get a boost this year. 

We know that forecasting the future is difficult if not impossible. Each year in December Chesapeake’s employees participate in “Crystal Balls Gazing” to review recent events and forecast the year ahead.  While we find this practice fraught, the exercise gives us some discipline to think about what may lie ahead and why we think 2023 maybe another challenging year for investors. 

Linda A. Mundy