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Jan 18, 2023

2023 1st Quarter

CPWA Newsletter Main

From the Portfolio Management Team
A Look Back On A Historical Year
2022 was a dismal year for investment returns and a tough year for even the most seasoned investors. As most of the world moved back to normal activities following the COVID-19 shutdowns, the first quarter of 2022 saw inflation rates not seen in 40 years—primarily attributed to continued supply chain issues, the lingering effect of fiscal stimulus, and Russia’s invasion of Ukraine.

In a mission to combat inflation, the Federal Reserve along with central banks around the world made a 180-degree pivot from their prior accommodative stances. The Fed began increasing its overnight lending rate in March, followed by a historic series of rate hikes throughout the remainder of the year. The Federal Funds Rate, which is always quoted as a range, started the year at 0.00% to 0.25% and ended the year at 4.25% to 4.5%.

The Fed's aggressive policy triggered selloffs in both stock and bond markets along with market volatility. Value stocks performed significantly better ("less bad") than growth stocks with CNBC reporting the major US stock market indices finishing the year as follows:
- Dow Jones Industrial Average (value stocks): -8.78%
- Standard & Poor's 500: -19.44%
- NASDAQ Composite (growth stocks): -33.10%
- Russell 2000 (small cap stocks): -21.56%

Indices that track international companies and bonds also finished 2022 in the red:*
- Morgan Stanley All Country World Index (ACWI): -18.36%
- Barclay's US Aggregate ("US Agg" bond index): -13.01%
*Total return, inclusive of dividends & interest. Data provided by YCharts

The chart below was provided to us by our Chartered Financial Analyst® consultant and provides a visual of investment returns of both stocks and bonds for each calendar year going back to 1872. Stocks are represented by the S&P 500 index while bonds are represented by the 10-year United States Treasury. Bond returns are on the X (horizontal) axis while stock returns occupy the Y axis.

In the majority of years, both stocks and bonds offered a positive return as can be seen in the upper right quadrant. In some years, stocks were positive while bonds were negative, and in some years vice versa. In the least number of scenarios, both stocks and bonds provided negative returns. Most noteworthy to us is how large of an outlier 2022 is compared to history. In fact, in no other year in the history of this chart were both stocks and bonds each down more than 10%.

Scatter Plot bond vs stock return

So What's Next?
As we review the chart above along with copious amounts of additional data, we feel confident that the market decline we experienced last year will not repeat itself in 2023. While short-term market movement is impossible to predict and continued volatility may persist as we start the year, we expect volatility across asset classes to settle down as central banks pause and possibly even back away from their hawkish stances.

Worth noting, the economy and financial markets frequently do not move in tandem. Monetary policy can take a long and varying amount of time to impact the economy, and the aggressive rate hikes that transpired in 2022 are undoubtedly still working their way through the system. Conversely, markets are forward-looking as investors attempt to predict the future. We think it is possible that the Fed's actions will tip the economy into recession in 2023, but we are optimistic that the strength of the economy can endure the current monetary policy stance, and a recession—if one occurs—will be mild and short-lived. As the year progresses, markets are likely to look past economic weakness and toward reasons for optimism in 2024.

Our investment process as we move into 2023 persists, with weekly investment committee meetings and ongoing analysis of available economic and market data. Diversification and asset selection remain important aspects of our thesis, and we continue to adjust portfolios based on where we see the best risk/reward opportunities.

Monthly Market Update
We publish a monthly market update on our website. All of the 2022 updates can be found on our News & Insights page. New this year, we will also email the monthly market update directly to your inbox. If you wish not to receive the monthly email then please let us know so we can remove you from our market update distribution list.

Client Portal
The CPWA client portal now includes full-year 2022 information as well as a section for projecting monthly income. We try to make the portal easy and accessible, and we welcome (and appreciate!) feedback on data you'd like to see or enhancements that would make the portal more useful to you. The portal can be accessed by website or app (search "Cerro Pacific" in your app store).

If you have a financial plan then you can click directly to it from the client portal. If you don't yet have a financial plan but would like one then please contact us to start the planning process. Financial plans are included in the comprehensive services we provide without added cost.

Please contact Meredith if you do not currently use the CPWA client portal or do not recall your login.

Quarterly Reports
Your 12/31/2022 quarterly portfolio reports have been uploaded to your CPWA client portal.

Tax Reports
Your 2022 tax reports will be available by February 15. If you elect to receive your tax documents in the mail then you should expect to receive them no later than early March. You may also retrieve them via your login or call our office to request a copy. We are happy to send your portfolio-related tax documents directly to your tax preparer; please contact us if you'd like us to do so.

RMD Age Increases to 73 with More Changes in 10 Years
Lawmakers recently passed SECURE 2.0, which included a list of changes to existing laws along with new provisions. One noteworthy change is the age at which a person must make required minimum distributions (RMDs) from his/her retirement accounts, which was changed to age 73 as of January 1, 2023. If you are 72 or younger as of January 1, 2023 then your RMD age is 73. The RMD age is scheduled to increase to 75 in 10 years (Jan 1, 2033).

California Floods
If you are in California, we hope you and your loved ones have remained safe and without property damage during our recent storms. If there is anything we can do to be of help to you, in or outside the realm of wealth management, please reach out to any one of us directly or by calling the front desk at 805-457-3300.

Thank You
Thank you for your continued business and trust. We appreciate the opportunity to work with you, and we sincerely wish you & your loved ones a happy and healthy year ahead.


Cerro Pacific Wealth Advisors LLC is a Registered Investment Adviser. Advisory services are only offered to clients or prospective clients where Cerro Pacific Wealth Advisors LLC and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Cerro Pacific Wealth Advisors LLC unless a client service agreement is in place.