The Dow 30 Industrial Average is trading today at 33,787. The high, a little over a year ago was approximately 36,300, and the low a few months ago was just a few points above 29,700. I thought a little perspective would be helpful. The equity markets are hoping that if we see a recession, it will be a soft one. The justification for this is that while the Federal Reserve (Fed) is raising interest rates to slow inflation, the employment numbers remain strong. Also, inflation numbers have been cooling of late, so this may imply that the Fed will slow in its monetary tightening possibly sooner rather than later. This would be considered good for the economy. Of course, the jury isn’t out on this yet, and we are about to enter earnings season for corporate America where they tell us the actual numbers of how well or not, they are doing.

According to LPL Research, the global economy will likely slow from the upper-2% range in 2022 down to the mid-1% range in 2023. Much depends on China’s growth path now that it has largely abandoned its overzealous zero-COVID-19 policy. An important aspect for investors is that the U.S. appears to have fewer headwinds to growth compared with Europe and other developed economies. The divergence between the domestic and international economies is most obvious in the inflation regime. Germany, for example, is still experiencing accelerating rates of inflation, whereas the U.S. has likely moved past the peak. The longer inflation is uncontained, the riskier the growth prospects.

If stocks are going to go higher in 2023, a prompt end to the Fed’s rate hiking campaign will likely be a key component. LPL’s base case is the Fed will pause in early spring of 2023 amid an improving inflation outlook and loosening job market. Should that occur, stocks would likely move higher, consistent with history. Stocks have tended to produce solid gains after hiking cycles end, including a 10% average gain one year later. They say what goes up must come down. For the stock market, it also works the other way. Through many economic downturns, recessions, and geopolitical crises over many decades, the stock market has always recovered. Following down years, the S&P 500 Index (S&P 500) has risen an average of 15%, with positive returns in 15 out of 18 years. Since 1950, a down year was only followed by another down year three times: in 1973, 2000, and 2001.

We wish you a happy and prosperous 2023. Always know that our money managers are working tirelessly to attempt to preserve capital and/or to make capital grow if the opportunity is there, and Elise and I will be here to diligently communicate to you details that we think you should be aware of.

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change. References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and does not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy. All index data from FactSet. This research material has been prepared by LPL Financial LLC. Tracking #1-05355329 (Exp. 1/24).