Market Trends 2023 – Q1

The Weight of the Evidence

Tanglewood Legacy Advisors continuously researches and
monitors economic and market trends on behalf of the families we
serve. The current weight of the evidence points to both slower
growth and lower inflation expectations in 2023 than what was
experienced in 2022, while volatility is expected to remain

Three sets of investors were especially disappointed in 2022. First,
those who entered the year with an all-equity portfolio. They
rationalized that with interest rates so low “There Is No
Alternative” (TINA) to stocks. Besides, they assumed that if
markets fell the Fed would once again bail them out with rate
cuts. That didn’t happen.

The second group of disappointed investors were those who jumped
on the speculative bandwagon with unproven, “get rich” strategies
and products. The primary lesson to teach our children: Don’t
invest in something just because everyone on social media is
talking about it or because it has already gone up a lot. Those
speculators learned an expensive lesson.

The third group of disappointed investors were those who entered
2022 with a traditional 60/40 (60% stocks/40% bonds)
portfolio. Since the mid-1980s, the bond portion of the portfolio
acted as a ballast because bond prices would generally rise or at
least be stable when stock prices declined. Not so in 2022. The year
started with yields so low that bond prices could not rise, especially
once the Fed became more aggressive and began to raise
rates. Instead, bond prices fell sharply along with stocks. Many
401ks have a 60/40 allocation and were down for the first time in
many years.

As you can see in the graph below, 2022 (red dot) was one of the
very few years in the past century and a half when both stocks and
bonds lost money.

As we enter 2023, we expect that short of an unforeseen
international crisis or energy disruptions, inflation should remain
elevated, but has already peaked and will trend down some going
forward. The economy will also continue to slow, primarily due to
less fiscal stimulus and the Fed-induced interest rate hikes.

Due to expected Fed rate hikes, a slowing economy, and continued
international hotspots, we expect volatility to remain high. Our
portfolios, therefore, remain defensive, allocating appropriately to
more defensive equities, short-term treasury securities and strategic
alternatives designed to reduce overall volatility.


Inflation’s Silver Linings

If there are silver linings in all the inflation news, it is that retirees
will receive substantially higher social security checks, workers
will have higher contribution limits for retirement plans and taxpayers
will see both higher 1040 standard deduction limits and
possibly lower taxes due to higher income thresholds for each tax