In 2022, the prevailing sentiment among professional investors and their firms was that the U.S. was headed towards a recession due in large part to the Fed’s aggressive monetary policy. The focal point of discussion revolved around the nature of the economic downturn – whether it would be a soft or hard landing. Either way, the nearly unanimous consensus was that this recession would be the most anticipated recession in history.

We have already arrived at the end of Q2 and the first half of 2023 and it feels like these past 6 months could have been 12. Market returns also feel like a full year of volatility and returns crammed into just 6 months. Coming into the year, we had expected US equity markets to be mainly range-bound, expecting the S&P 500 to trade between 3600-4200 during first half and for more volatility to return during the second half. But as of the end of 1H 2023, the S&P 500 has decisively broken out of that band to the upside and closed at 4450, retracing to the price level last seen around mid-April 2022.

Beneath a decent rally to start the year, risks to the economy remain. Even though headlines have focused lately on the Federal Reserve’s dual mandates of full employment and controlling inflation, the Fed actually has three mandates and includes maintaining financial stability. Getting all three to line up in the direction they intend often results in at least temporary impairment of one to benefit the others. This is why the phrase, “The Fed will break something” is part of our vernacular.

Happy New Year and we don’t mean this as simply a salutation, but we are genuinely happy to put 2022 behind us. What a year. The S&P 500 would fall more than 1% on 63 separate trading days during 2022. Since 1940, the only years with more downside volatility: 1974, 2002, and 2008.

What made this volatility much more difficult to stomach was the lack of support from the bond portion of investor portfolios. The last 8 years in which stocks finished lower, bonds rose, cushioning the blow. We saw a very different picture in 2022 with both stocks and bonds moving down together. The result was the worst year for a 60/40 portfolio of the S&P 500 and 10-Year Treasury Bond since 1937, and the first time both assets fell more than 10%.