Equity Update

Equity update

Stock Market Update - Ouch!

Bradley A. Ruppert, CFA®
Executive Vice President
Chief Investment Officer
513-932-1414 ext. 59105
Rising interest rates hammered stocks in 2022 with the S&P 500 Index down almost 27% at the October low. Stocks did rally in the fourth quarter as inflation started to cool and the Fed began to pivot away from aggressive tightening. The S&P 500 Index finished the year down over 18%. Stock valuations are a discount on future expected cashflows so as the discount rate goes up, prices go down. Growth stocks that rely the most on future expected earnings were especially hard hit as the Russel 1000 Growth Index lost over 29% in 2022. Value stocks fared much better but still lost 7.6% for the year. The value outperformance reverses a 15-year trend going back to the Great Financial Crisis and may have a little further to go before the gap between growth and value stocks is fully closed. One surprise in 2022 was the outperformance of international stocks versus the S&P 500 Index. The MSCI ACWI-ex US Index was down 16% for the year. The outperformance was very modest, and it is a little too early to say if this is the start of a longer trend or not.

The good news for stocks is that the Fed is winding down its fight on inflation and should be ready to pause by the end of the first quarter. The bad news is that the slowing economic conditions may not be fully priced in just yet. We noted last quarter that in a recessionary environment we might expect S&P earnings in 2023 to be close to the $205 level. Wall St. expectations are still calling for earnings this year of around $230. Much will depend on the labor and consumer spending variables discussed in the economic section above.

In either case, valuations are reasonable for long-term investors. The current forward PE ratio shown below would suggest a projected 10-year annualized return of 9.7%. Even if we adjust for our more pessimistic earnings expectation of $205 and a forward PE of 19.27, the regression analysis below would still predict a 10-year annualized return of 8.15%. While projections and forecasts are never perfect, we do believe stocks are reasonably valued at today’s prices. While we expect a bumpy ride, we have moved our equity targets to neutral to start 2023.

LCNB National Bank (“Financial Institution”) provides referrals to financial professionals of LPL Financial LLC (“LPL”) pursuant to an agreement that allows LPL to pay the Financial Institution for these referrals. This creates an incentive for the Financial Institution to make these referrals, resulting in a conflict of interest. The Financial Institution is not a current client of LPL for brokerage or advisory services.

Please visit https://www.lpl.com/disclosures/is-lpl-relationship-disclosure.html for more detailed information.