The S&P 500 stock market index has risen 14% from the October lows with every sector showing positive returns over that time period. Investors are anticipating the Fed slowing the pace of interest rate increases after a 25 basis point (0.25%) increase this week. The leading economic indicators and the inverted yield curve (longer maturity bonds yield less than shorter maturity ones) continue to point to a recession, but it’s the defensive sectors that have performed the poorest so far this year.
With half of the S&P 500 companies reporting thus far, fourth quarter earnings reports have been slightly better than expectations overall. Consensus estimates for 2023 earnings continue to be lowered each month, but the consensus estimate for growth in operating earnings for the S&P 500 companies is still 3.1% in 2023 and a further 10.8% in 2024.
In 2022, stock prices declined while earnings rose, so valuations have improved although they remain above longer-term averages. Dividends grew nicely again last year, and many companies have already announced further dividend increases for 2023. Since 1957, S&P 500 dividends have grown at an annualized rate of 5.7%, more than 2% per year faster than inflation, as measured by the Consumer Price Index.
Investors’ primary fear for 2023 is that the Fed will raise interest rates too far and push the economy into a recession. Earnings typically decline during recessionary periods as unemployment increases and consumer spending falls. Currently, the unemployment rate is at multi-decade low, however. Despite some high-profile layoff announcements (primarily in the tech sector), the US added 517,000 jobs in January.
Despite, the near-term actions of the Fed and the resultant concerns over economic growth, the odds are strong that capitalism will survive and taking diversified equity risk will work in the long run. No one knows future returns, but a sound, customized investment plan works far better than trying to predict the future.
2023 marks LVM Capital’s 35th anniversary and the 25th anniversary of opening our Naples, FL office. We will be celebrating these milestones in Naples on Wednesday, March 22 and in Kalamazoo on Thursday, June 29. Please save these dates and plan to join us!