Welcome to the first installment of Top of Mind, a publication of the Carlson Group at Baird. Each month, we’ll discuss investment and financial planning topics that are top of mind for you, our clients.
So, what’s Top of Mind for December?
The transition to Baird has gone well! We are excited for the road ahead. At Baird, we’ll have more technology, expanded investment resources, and more sophisticated solutions to address your financial planning needs.
Importantly, Baird does not prescribe what planning strategies and investments we recommend to clients. We’ll still make those decisions together based on your needs. Baird simply gives us more tools and resources.
Thanks for your patience these past months with the phone calls and paperwork that are part of the transition process. Now that we’re situated at Baird, the hard part is over!
The market outlook for 2023 is Top of Mind following a difficult year in 2022.
Here’s a rule of thumb about the stock market: the short-term outlook is always uncertain, but the long-term outlook is usually positive. History has borne this out, and it’s true again today, in our opinion.
Today, the short-term uncertainty is well-known. The Federal Reserve’s campaign to raise interest rates and to quash inflation makes it hard to say what 2023 will bring. Stocks could rise or fall depending on the direction of inflation and whether the Fed raises interest rates by a lot, or only by a little.
Despite the near-term uncertainty, we are positive on the long-term outlook. In our opinion, this year’s market decline has left stocks – on the whole – attractively valued.
The chart below tells the story. Most corners of the stock market, including small and mid cap stocks and overseas markets, are trading below their historical averages in terms of Price to Earnings Ratios.
Why is this important? Because valuations tend to influence long-term market returns. When stocks are cheap, ensuing long-term returns are often strong. When stocks are expensive, long-term returns sometimes disappoint.
As you’ll note in the chart, the valuation picture for large cap stocks (as measured by the S&P 500 index) is more mixed. Despite enduring two bear markets already this decade, the S&P 500 is not downright cheap -- its Price to Earnings ratio is only slightly below average. This is partly because highly priced technology companies like Amazon and Tesla are prominent in the index. Nevertheless, the S&P 500 is not so expensive as to preclude solid long-term return potential, in our opinion.
Bottom line: broadly speaking, equity markets appear to be attractively valued, which means that a diversified equity portfolio should be able to achieve high enough returns to help investors meet their long-term goals.
What else is Top of Mind as we approach 2023? Lessons learned from 2022!
Looking back, what can we learn from the past year that can help us with financial planning and investment management? As is often said, those who don’t learn from history are doomed to repeat it!
The first lesson from 2022 relates to inflation. If investors did not realize the impact of inflation, the media (and market) sure has reminded us!
How can investors prepare for inflation going forward? While 2022’s extraordinarily high inflation may not continue, we should be prepared for at least some inflation every year. The following charts show the pernicious effect of inflation on purchasing power, and the fact that a diversified equity portfolio historically has been able to help mitigate the impact of inflation.
The second lesson from 2022 is that setting aside adequate amounts of cash to cover upcoming expenses -- whether for the next 6 to 12 months or beyond -- can be very helpful. Although cash paid essentially 0% for many years, having sufficient resources in your “cash bucket” turned out to be the right move this year.
What was unique about 2022 is that both the “bond bucket” and “stock bucket” of portfolios declined significantly. Thus, having one’s portfolio allocated among all three buckets – stocks, bonds, and cash – can be valuable.
Thank you for reading the first installment of Top of Mind!
We hope you enjoyed it. As always, we’re just a phone call or email away. Our new group email address is carlsongroup@rwbaird.com. Let us know what’s top of mind for you!
We’ll write again early in the New Year. Until then, we wish all our clients a happy holiday season.
Warm wishes,
Kurt, Cassidy, Ken, Teresa, and Brian
Past performance is not indicative of future results and diversification does not ensure a profit or protect against loss. All investments carry some level of risk, including loss of principal. An investment cannot be made directly in an index. Robert W. Baird & Co. Incorporated.