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Reflecting on 2022 and Looking Ahead to 2023: Market Commentary from Cabana’s CEO – December 30, 2022

1 year ago

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This last commentary of 2022 comes with gratitude. I am grateful for my partners around the country, my clients and the amazing people inside Cabana – all of whom have fought through the historically difficult year we have just experienced. I won’t belabor the myriad issues that have made the past year unique for investors. Suffice to say we all have experienced it differently but with a common intent to emerge stronger, smarter and better prepared going forward.  When investing is easy (and it often is), we tend to forget the value and necessity of work. It is the plain and simple work during adversity that makes us better. Sometimes the work consists of facing fear and uncertainty. Sometimes the work is being there for a client (or a lot of clients) who really needs a guide and steady hand. Sometimes it is acknowledging that you don’t have all the answers and need to dig deeper to find a better path forward. I have personally done quite a bit of this work this year and I hope I am a more seasoned advisor, skilled asset manager and enlightened human for it. It is cliché to say that it is obstacles in life that lead to growth, but I believe it is true.  

As we move into 2023, we continue to grind toward an end to this bear market. Unfortunately, a formal recession appears imminent to me. This is due to shrinking corporate earnings in the face of our Central Bank’s relentless quest to reduce inflation by raising interest rates. As crazy as it sounds, the Federal Reserve is actually trying to stifle economic growth and increase unemployment. Unfortunately, they have the tools to do it and there is not much the rest of us can do about it, other than manage through the process. Eventually, I think things will get bad enough and sufficient people will lose their jobs and quit spending money (because they won’t have any). Inflation may then be tamed and the Fed will stop. At such time, a new bull market can begin. So how low do we go in the meantime? During a bear market that coincides with a recession, history says that the S&P 500 drops at least 24% and on occasion more than 40% from recent highs. We have already dropped 24% so we are within historical range. During the great recession of 2008-2009 the S&P 500 dropped more than 50%. In March 2020 the S&P 500 dropped more than 30%. Nobody knows for sure, but it would seem logical that we hit a bottom in stocks after a recession is formally acknowledged and the Fed pauses its rate hikes. This thinking would suggest a bottom sometime in the second quarter of 2023 and a recovery beginning thereafter. Inflation is the wild card. If inflation remains high for longer, then rates will continue to move up and a recovery will be pushed further out. Conversely, if it abates, we could see a recovery sooner. There is no sure answer here and it is my opinion that a rules-based process is our only free lunch to help us weather the uncertainty. Markets are forward looking, and the turn tends to happen when things look bleakest for the economy. As investors we want to be there and be ready. 

Disclaimers

January 17, 2024

This material is prepared by Cabana LLC, dba Cabana Asset Management and/or its affiliates (together “Cabana”) for informational purposes only and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. This material may only be distributed in its original format and may not be altered or reproduced without the prior written consent of Cabana. The opinions expressed reflect the judgement of the author, are as of the date of its publication and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by Cabana to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by Cabana, its officers, employees or agents.  

“CARA” is Cabana’s Cyclical Asset Reallocation Algorithm. Scenes assigned as per the judgment of The Cabana Group. Scene names and number of scenes have changed over time in an effort to obtain efficiencies and provide clarity of investment objective. 

This material may contain ‘forward looking’ information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. All investment strategies have the potential for profit or loss. All strategies have different degrees of risk. There is no guarantee that any specific investment or strategy will be suitable or profitable for a particular client. The information provided here is neither tax nor legal advice. Investors should speak to their tax professional for specific information regarding their tax situation. Investment involves risk including possible loss of principal.  

Cabana LLC, dba Cabana Asset Management (“Cabana”), is an SEC registered investment adviser with offices in Fayetteville, AR and Plano, TX. The firm only transacts business in states where it is properly registered or is exempted from registration requirements. Registration as an investment adviser is not an endorsement of the firm by securities regulators and does not mean the adviser has achieved a specific level of skill or ability. Additional information regarding Cabana, including its fees, can be found in Cabana’s Form ADV Part 2A or Form CRS. A copy of which is available upon request or online at www.adviserinfo.sec.gov/. 

Past performance is no guarantee of future results. All investment strategies have different degrees of risk and the corresponding potential for profit or loss. Asset allocation and diversification will not necessarily improve returns and cannot eliminate the risk of investment losses. “Target Drawdown” is merely a descriptive term used to describe the general strategy and objective of the portfolio, it is not a guarantee, nor should it be construed to suggest safety or protection from loss. There is no guarantee that portfolio performance will remain consistent with the targeted drawdown parameter. While risk tolerance and targeted “drawdown” are identified on the front end for each portfolio, Cabana’s algorithm does not take any one client’s situation into account and there is no guarantee that Cabana’s strategies will be suitable for any investor. Investors and advisors should not simply rely on the name of any portfolio to determine what is suitable. It is the responsibility of investment advisors to determine what is suitable for their clients. Cabana manages assets on multiple custodial platforms. Performance results for specific investors will vary based upon differences in associated costs and asset availability.  

Cabana claims compliance with the Global Investment Performance Standards (GIPS®). GIPS® is a trademark of the CFA Institute. The CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein. To receive a GIPS Report and/or a firm’s list of composite/pooled fund descriptions please email your request to info@thecabanagroup.com.

All recommendations made in the prior 12 months are available upon request. Cabana’s allocation history is available here. For additional information regarding our services, including performance disclosures and award methodology, please visit https://thecabanagroup.com/disclaimers/. 

Commonly used index/benchmark definitions:  

All indices and categories are unmanaged and an individual cannot invest directly in an index or category. Index returns do not include fees or expenses. Benchmark indices will likely materially differ from Cabana’s portfolio strategies. Detailed information as to how the returns are calculated can be obtained online from the following link: https://thecabanagroup.com/disclaimers/performance-reporting-methodology/. 

Morningstar’s Moderate Target Risk index  follows a moderate equity risk preference and is based on well-established asset allocation methodology from Ibbotson Associates, a Morningstar company.  

Morningstar’s Tactical Allocation category includes portfolios that seek to provide capital appreciation and income by actively shifting allocations across investments. These portfolios have material shifts across equity regions, and bond sectors on a frequent basis. 

The S&P 500 Index is a market-capitalization weighted stock market index of 500 widely held large-cap stocks often used as a proxy for the U.S. stock market.  

The Russell 2000 and 3000 indices are market-capitalization weighted stock market indices that include, respectively, 2000 and 3000 of the most widely-held stocks and are often used as proxies for the U.S. stock market. 

The Nasdaq Composite Index is a market-weight capitalization index that covers more than 3,000 stocks listed on the Nasdaq Stock Market. What is the Nasdaq Composite, and What Companies are in It? | Nasdaq