Tom Graff, Head of Investments at Facet Wealth, joined Closing Bell to recap the final trading day of 2022, look back at the year marked by inflation and rate hikes, and preview what investors want to see in 2023.

Stocks End 2022 Sharply Lower as Investors Hope for Better Year Ahead

let's turn back to those major averages joining us now is tom graff, chief investment officer at Facet wealth of financial planning firm. Tom welcome. So markets ending the year on a down note, what do you make of the recent trading action we're seeing? Well, thanks for having me. Um, yeah, I think right now, um markets are continuing their sort of skittish attitude that they've had most of the year. We're now a bit more certain about the interest rate outlook, where as in the start of the year, obviously we had no idea the Fed was going to hike more than they ever have in a calendar year in history. But now going into 2023, we're looking at a probable slowdown of some degree and a lot of uncertainty about what that means for earnings. And so I think it's, I think it's been hard for investors to find the right place to buy here. So with trading in 2022 officially over, I can't believe I'm saying that, but it is what can we take away from this year tom well, I think um there's a few things I think that we need to reassess what the range for interest rates are going to be in the long run, we rewind a year or two. I didn't even know if it was possible for inflation to rise in a developed economy like the United States and um now we know it certainly can under the right circumstances. And so I think, um it could be living in a world where interest rates in general a bit higher than they had been in the prior decade, which would be great for saver clients, um but maybe maybe change, what kinds of companies are the winners and what kinds of companies are the Losers. I think another thing we've got to think about is never really had a recession, like the one that could come in 2023, most investors remember the huge recession in 2000 and 2009. I remember the very short but very severe recession in 2020, We're probably gonna have something much more mild and certainly something that doesn't have as many sort of systemic parts around it in 2023. What does that mean for stocks? Um and I think that's a that's a big open question that we're going to, we in the market are going to be debating all year. So is it not fair to ask what investors should expect from the stock market going ahead in 2023? Well, I think, Okay, our our view is that a mild recession um is a lot of that's already priced in. Um you know, as you mentioned, SNPs down not quite 20% this year and clearly that indicates a lot of pain in earnings already being priced into stocks. And so I think if it is, does wind up being a mild recession and and if markets can price a rebound for 2020 for then I think it could be a pretty good year for stocks upcoming. Um Whereas if, if the recession winds up being worse than that, then it's going to be a tough year. But our, our view is that a mild recession is much more likely. We've got some economic data on tap next week, including the december jobs report tom what will you be looking for in that report? Well, the big concern coming out of the november report was that wage growth was a little hotter than expected. Um So what we're looking for is, does that turn out to be kind of a statistical quirk measuring changes in wages is tricky for a variety of reasons and can have a lot of noise month a month. And so if it turns out that, that was just a blip and that really um labor market is cooling by some degree. That would be a big relief to the both the Fed and to invite masters. The thing we're looking for really is, does this pattern of solid, if not spectacular hiring continue because that would be a sign that if there is some kind of slow down, it's going to be a pretty mild one. So I think both those things will be really important to look at in the december payroll report next week and earning season starts up again in just a few weeks, what can we expect from the fourth quarter results? What are you looking out for? Yeah, I can't remember a time. Um outside of those couple of crisis moments I mentioned where earnings were so uncertain. You know, I think analysts actual official analyst projections haven't come down that much, but everybody on the street sort of knows that earnings are pro probably gonna be a good bit softer in the next few quarters at least. Right. And so what we want to hear is what kind of guidance our company is going to give about how much softer it could be. Do they have visibility into decent growth the first half of 2023 or do they pull back guidance and say, well, we don't have any idea. I think that's gonna be an important. One other thing we're looking for is, you know, we know that consumer spending has slowed down substantially. Um, and how is that impacting companies, What are they seeing going forward? The last thing I want to look for is hiring intentions and, and just general company spending intentions that goes to how confident companies are about the future. You know, if you think, well we might have a little bit of a soft patch, but it's going to rebound thereafter. You're not likely to pull back, You're not likely to lay off a bunch of people and you're not likely to pull back on the long term spending because you think that will be in use to your advantage over the long run. So be really good to hear how companies are thinking about all those, all those issues in the in the coming quarter. And I don't have to tell you tech stocks suffered greatly in this high interest rate environment. How are you viewing those companies that's soaring valuations in 2021? Are they back down to earth? What's next? Right. Well I think we put them in two different categories. So if you think back to the end of 2021 where you saw as you said, huge run up in the valuation on tech in general. A lot of also consumer discretionary, also a lot of run up there to um you had to kind of companies, companies that were really good companies well established with highly valued products, very profitable etc. Um but just had really high valuations, those companies that your, your apples, your Amazon and Microsoft's and and a bunch of other companies as well. Those companies performed pretty poorly in 2023, but over or 22, but overwhelmingly it was on pure valuation then you had another set of companies that weren't quite as established were viewed as big growers but needed to grow into their valuations significantly in order to justify the price you're paying at the time. And um that's your carbon into extremes, that was your carbon Caribbeans. Those kinds of companies and they've all suffered substantially, but one of them is probably the former is probably in good position to weather a recession, whereas the latter is probably out for the count. And if we look back at prior kind of bust cycles after a boom, so the most extreme one being the 2000 dot com bust, The companies that survive those wound up doing quite well, but they were the ones that had established a really strong profit track record. So, um, so I think I think I don't think it's a monolith in 2023 as kind of was in 2022. All right. Tom Graff, chief investment officer at facet wealth of financial planning firm, we will see you in the new year. Tom thank you so much.