Investment Committee Meeting Highlights
January, 2023


The S&P 500 turned back negative following two months of strong performance, losing 5.77% in December as the Santa Claus rally failed to come this year. Comparatively, international equity markets handily outperformed the S&P 500, with the MSCI EAFE increasing 0.08% and MSCI Emerging Markets falling just 1.41%. For the full year, the S&P 500 ended up in the middle of the pack, though deeply in the red, losing 18.13%, ahead of MSCI Emerging Markets’ -20.09% though trailing the MSCI EAFE’s -14.45%

The bond market lost another 0.45% in December, putting the full-year loss at -13.01% and officially labelling 2022 as the worst-ever year for the Bloomberg US Aggregate index. The losses in the bond market came despite a rally in the first two weeks of the year when the Bloomberg US Aggregate index was up 1.95% through December 15th, only to give up those gains, and then some, in the final two weeks of the year. Rhetoric from the Fed pointed to a continued resolve to tackle inflation and not a pivot that some may have expected.

Across the economy, the data was mixed, but in a way that was a bit abnormal for the year, with inflation improving but the consumer weakening. The inflation report came in better than expected, rising 7.1% on a yearly basis, compared to October’s 7.7% increase. However, retail sales surprised on the downside, declining 0.6%, versus a 0.2% decline expected by economists surveyed by Bloomberg. The surprise triggered renewed recessionary fears, since the consumer has been in the economic driver’s seat for a while now.

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Over 2022, the economy was a bit of a mixed bag. Inflation ran hot throughout the year so far, putting pressure on the Federal Reserve (Fed) to aggressively tighten. The economic risks of aggressive tightening rippled through the economic data along with capital markets. However, the consumer held up reasonably well through a strong jobs market that helped buoy retail sales and kept the consumer in the economic driver’s seat.

Both retail sales and industrial production dipped in November, falling 0.6% and 0.22%, respectively. While neither is a massive drop, industrial production has been one of the economy’s weaker areas, and a weakening consumer could spell trouble for an economy that has been fairly reliant on consumer spending.

Despite headlines of layoffs, particularly in the tech industry, overall job openings continue to be widespread. While they have slightly declined from their peaks earlier in 2022, they remain well above pre-pandemic levels. While labor is a backward-looking data point, the strength of the labor market has been a key component of the consumer to remain resilient in the face of higher prices.

Focus remains on the Fed, the pace of rate hikes, and how long their hawkish stance will need to continue as they navigate inflation and a potential recession. The Fed’s attempt to stomp out inflation clearly wasn’t entirely successful, but there is always a lag between Fed policy and its impact on the underlying economic data. The next FOMC meeting concludes on February 1 and the market is expecting a 25-basis point hike, though it still is putting a nearly one-third chance of a 50-basis point hike. While the market is still expecting the Fed to slow down its aggressive pace of rate hikes over the next two meetings, it largely anticipates the Fed to remain somewhat steady through the middle part of 2023.

As we start the new year, we remain cautiously optimistic. Considering that we are in or approaching a recessionary period, it would not be a surprise if we recovered quicker than previous ones. In times like these, investors tend to trade based on emotions. We disagree, it is more important now than ever to follow the data. Hilltops partnership with Helios relies on facts and data, which we use during our recalculations on a bi-weekly basis. Our models adjust appropriately to market conditions.


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