20 December 2022

Target Rock Quarterly Update: Higher Rates Have Raised the Bar

By Matthew McKee, CFA, CFP® and Adrian Colarusso, CFA, CFP®

December 20, 2022


The most profound shift in 2022 – of any kind – has been the rise in interest rates. There isn’t a corner of the globe that has escaped its effects.

Covid spurred inflation through the “free money” policy response combined with supply chain disruptions and altered patterns of demand.

Inflation manifested first as higher asset prices, then as higher prices of goods and services.

The Fed raised rates to combat inflation – faster than they have in 40 years.


Rising rates sent both stock and bond prices lower, and hard, in only one of three years since 1926 in which both asset classes declined.

There’s a fundamental see-saw relationship between interest rates and most asset prices: as rates go up, prices fall as future cash flows become relatively less attractive. High-flying growth stocks and long-dated bonds felt the worst of it. Crypto assets revealed themselves as magnets for cheap money and got hammered. Housing and commodities were the exceptions.

After the frothy delusion of 2021, the world woke up from a bacchanalian hangover. 2022 was the year society and the markets started sorting through all the change.

The Fed is indirectly coordinating our action; higher rates raise the bar for what projects deserve capital.

Three things to look out for in 2023

2023 may be the year we settle into a truly post-Covid, post-free-money new normal. It won’t be without its pain points nor pockets of justified optimism.

Like good market prognosticators, we’ll engage in the art of hedged language and flexible convictions.

1. The other shoe could drop 

Stock investors may have their mettle tested further. They will have to carefully match the size of their allocation to their investment time horizon.

Rising rates was the first shoe to drop on asset prices. Declining growth could be the second. What’s different about the second shoe is that it may allow bonds to resume their traditional role in portfolios to cushion the blow of falling stocks.

Reasonable professionals disagree on the details, but the consensus view is that a recession is coming or already here, and it’s easy to see why. The Fed is intentionally engineering one. The key question is “do stock prices already reflect this?”

Despite this year’s market pullback and ominous economic grumblings, stocks aren’t that cheap. The price to earnings ratio for the S&P 500 index is around historical median – not a screaming dip to buy.

We believe the risk of further downside is real enough that those who may need their money sooner than five years should carefully measure the dosage of stocks in their portfolios. Although it sounds like we’re “making a call”, this statement is always true.

2023 S&P 500 Year End Targets
Firm Close
Bank of America         4,000
BlackRock         3,930
BMO         4,300
Barclays         3,675
Citigroup         3,900
Credit Suisse         4,050
Deutsche Bank         4,500
Goldman Sachs         4,000
HSBC         4,000
Jefferies         4,200
JPMorgan         4,200
Morgan Stanley         3,900
RBC Capital Markets         4,100
Oppenheimer         4,400
Societe Generale         3,800
UBS         3,900
Average         4,053




The average estimate of the S&P 500 Index, level at the end of 2023 is around 4,000, but the estimates range widely, suggesting that we can be surprised in either direction.

Investors sitting on the sidelines in cash, waiting for “the perfect time” – the bloodbath that they’ll suddenly be brave enough to wade into – risk missing out on a potential 2023 market rally that could materialize from several possible positive developments.

2. The fat will be cut 

In 2023, the market will demand more of everyone. Projects will require a return on investment that exceeds today’s higher bar of interest rates plus inflation. Irrelevant, unproductive efforts will no longer attract free money looking for a home. Inflation will push us to work harder. Economic growth may slow.

Unfortunately, this may manifest as a rise in unemployment, a trend already afoot. Although a layoff may not sound like the right moment to reach out to wealth advisor, we offer our calendars to anyone facing this situation to help game plan and leverage our active and diverse network.

One investment implication of a fat-cutting environment is that many high-flying growth stocks that are down 50, 60, 70% or more will never again return to their previous highs. There will be exceptions, but even for those, we aren’t holding our breath for a full recovery within the next year.

The good news is that you no longer have to work too hard or take too much risk to earn a four or five percent yield – more if you are willing to take on some credit risk, which is less potent than equity risk.

In equities, we will continue to lean into high-quality companies (measured by balance sheet health and cash flow consistency) trading at reasonable prices (multiples of earnings or cashflow).

3. Every little thing is gonna be alright

Fears about the impending doom of the global economy and fiat monetary system will always be out there and are almost always overblown.

Part of our role is to help you distill the signal from the noise. We’ve read commentaries and have spoken with numerous investment professionals who are quite bearish in their near- and medium-term outlooks.

While it’s not always easy, the best course of action is to stick to a long-term plan built around an intelligently diversified portfolio. Although we are calling for a choppy 2023, the underlying fundamentals of the economy remain strong for the long-term. We don’t know (no one does) when markets and the economy will turn decisively bullish again.

But we can have a healthy respect for what can go wrong – even very wrong – over the course of our investment horizon, while maintaining exposure to the base-case scenario that every little thing is gonna be alright.

Always remember that bad news sells. Even when the world is improving in myriad ways. It’s perhaps best to be a rational optimist.