Weekly market guide - Butler Financial, LTD
12 Wishes for the New Year

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Weekly market guide

Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio and Technical Strategy.

A new year marks a new beginning, but for now the story remains the same for equity markets. Rapid Federal Reserve (Fed) tightening in order to fight high inflation in 2022 will work with a lag on the economy in 2023. This is already showing up in some economic indicators, such as housing where mortgage applications are at 25-year lows. Additionally, banks are tightening lending standards, CEO confidence is low, some layoffs/hiring freezes are being announced (particularly in the Tech sector), and leading economic indicators are negative. We believe the odds are high that a recession occurs in 2023, but we do expect it to be mild.

The big R-word can be scary and it is human nature to recall some of your most recent experiences. However, we view the current environment as far different than the 2000 dotcom bubble and 2008 financial crisis (two of the worst market drawdowns in history). A unique characteristic of the current cycle (coming out of the COVID shutdown) is that supply has been very hard-pressed to meet demand. Inventories are low, and we do not see widespread excess on balance sheets that can often plague economic downturns. Banks are also well-capitalized (much has changed since the credit crisis), and importantly we do believe inflation is set to come down (but will take time) over the coming year which will ease financial strains.

This lends itself to a recessionary bear market likely more similar to historical averages, which have seen S&P 500 contractions of -33% over 13 months. We have already experienced a -25% drawdown over 12 months and believe that this bear market is in its late stages – although sometimes bear markets end with that last capitulation selloff. Regardless of potential downside or volatility in the coming months, the long-term risk/reward skews heavily in investors’ favor. And we remind investors to not lose sight of the bull market opportunity on the other side of the current weak trend. Bull markets can last 4-5 years and appreciate 152% on average. We do believe that equities will be climbing by year-end 2023, despite lower earnings, due to multiple expansion (as stocks discount the future) and use a probability-weighted S&P target of 4365.

Over the coming months, investor focus will likely shift from inflation concerns toward economic damage. We believe a lot of negative news has already been priced in and see underlying technical improvement over the past several months. However, the S&P 500 still remains in a downtrend for now. Volatility is likely to persist, and the bottoming process and recovery may be elongated in this environment. With this in mind, we recommend being patient and pragmatic with positioning- use the weak periods as opportunity (with a long-term perspective) and refrain from chasing the rally periods.

Best wishes for a healthy and prosperous 2023!

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Index Definitions

The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.

The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ.

The NASDAQ Composite is a stock market index of the common stocks and similar securities listed on the NASDAQ stock market.

The MSCI World All Cap Index captures large, mid, small and micro-cap representation across 23 Developed Markets (DM) countries. With 11,732 constituents, the index is comprehensive, covering approximately 99% of the free float-adjusted market capitalization in each country.

MSCI EAFE (Europe, Australasia, and Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States & Canada. The EAFE consists of the country indices of 21 developed nations.

MSCI Emerging Markets Index is designed to measure equity market performance in 23 emerging market countries. The index’s three largest industries are materials, energy, and banks.

Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions.

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