As 2023 comes to a close and investors look back over the past two years, one can’t ignore the paradigm shift in rising interest rates and its far-reaching effects on markets and the economy. After all, investment portfolios, mortgages, savings accounts, and auto loans, to name a few, have been drastically impacted by rising interest rates, which stand at 5.25% today. To put it into perspective, we have not seen a Fed Funds Rate this high, achieved in such a short period, in over 35 years (see Chart A). Against a backdrop of high rates, risk, and recession uncertainty, it seems prudent to revisit how we got here and how Washington Crossing Advisors considers these challenges when choosing investments in our equity portfolios.

Chart A

The Seeds of Inflation

Nearly four years ago, Americans learned about the COVID-19 pandemic. Looking beyond the tragic loss of life, the U.S. government had to quickly intervene to keep the economy functioning and provide relief for millions of Americans who suddenly lost their jobs. The Paycheck Protection Program and other financial assistance programs took effect later in 2020 and beyond. More recently, two significant pieces of legislation were signed into law in 2021 that would drastically increase government spending in subsequent years. The timeline and impact on government spending for the $1.9 trillion American Rescue Plan Act and $1 trillion Infrastructure, Investment, and Jobs Act are depicted in Chart B. It was also around this time that inflation warning signs first appeared in the spring/summer of 2021.

Chart B

As fiscal policy became more expansionary, monetary policy remained extremely accommodative, and the Fed Funds Rate hovered near 0%. With both fiscal and monetary policies firmly on the accelerator, inflation followed, which we warned about in a May 2021 market commentary piece titled “A Discussion Worth Having.” In particular, Chart C below examined expected inflation and rates expectations. Essentially, the Treasury TIPS market (green line) expected 4+% inflation into 2022, followed by a slight moderation, but still ahead of the Federal Reserve’s (Fed) stated 2% target. The forwards rate markets (orange line), looking at short-term rates, and Federal Reserve forecasts (blue line), both expected near-zero policy rates for several more years. As it would turn out, the Federal Reserve and forwards markets significantly underestimated the historic rise in rates we’ve lived through the past two years.

Chart C

Where’s the Recession?

After brutal declines in equity and bond prices in 2022, many forecasters expected 2023 to be a most challenging year. For example, in a Bloomberg Survey of Professional Investors in December 2022, 60% of those surveyed predicted a recession in 2023. Another firm forecasted “the worst downturn in decades.” As of 10 November 2023, this feared downturn has yet to materialize. The job market remains solid, disinflationary trends persist, and corporate earnings indicate a resilient consumer. Indeed, credit spreads and the equity risk premium are both at 20-year low levels, meaning a “risk on” sentiment that flies in the face of a recessionary environment (Chart D).

Chart D

Having dodged an imminent recession this year, risky stocks have been the best-performing equities, as measured by their beta, underscoring the above attitudes favoring risk. However, looking at the whole rising rate period tells a very different story. Table A below shows how less risky stocks have outperformed riskier stocks as interest rates unexpectedly soared.

Table A


We believe basing investing decisions on interest rate predictions or recession probabilities is a fool’s errand. Events of the past two years, as discussed above, prove that it is tough to correctly estimate or model the path of interest rates and understand when or if a recession will ever materialize. Instead, at Washington Crossing Advisors, we construct our equity portfolios with high-quality companies that have had low debt levels, profitable assets, and consistent earnings. Additionally, our strategies maintain lower betas (risk) than the broader averages. Focusing on high-quality, lower-risk stocks helped insulate portfolios from outsized risk since interest rates started a historic rise early in 2022.

Kevin R. Caron, CFA
Senior Portfolio Manager

Chad Morganlander
Senior Portfolio Manager

Matthew Battipaglia
Portfolio Manager

Steve Lerit, CFA
Senior Risk Manager

Tom Serzan

Suzanne Ashley
Internal Relationship Manager

Eric Needham
Director, External Sales and Marketing

Jeffrey Battipaglia
Client Portfolio Manager


The information contained herein has been prepared from sources believed to be reliable but is not guaranteed by us and is not a complete summary or statement of all available data, nor is it considered an offer to buy or sell any securities referred to herein. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors. There is no guarantee that the figures or opinions forecast in this report will be realized or achieved. Employees of Stifel, Nicolaus & Company, Incorporated or its affiliates may, at times, release written or oral commentary, technical analysis, or trading strategies that differ from the opinions expressed within. Past performance is no guarantee of future results. Indices are unmanaged, and you cannot invest directly in an index.

Asset allocation and diversification do not ensure a profit and may not protect against loss. There are special considerations associated with international investing, including the risk of currency fluctuations and political and economic events. Changes in market conditions or a company’s financial condition may impact a company’s ability to continue to pay dividends, and companies may also choose to discontinue dividend payments. Investing in emerging markets may involve greater risk and volatility than investing in more developed countries. Due to their narrow focus, sector-based investments typically exhibit greater volatility. Small-company stocks are typically more volatile and carry additional risks since smaller companies generally are not as well established as larger companies. Property values can fall due to environmental, economic, or other reasons, and changes in interest rates can negatively impact the performance of real estate companies. When investing in bonds, it is important to note that as interest rates rise, bond prices will fall. High-yield bonds have greater credit risk than higher-quality bonds. Bond laddering does not assure a profit or protect against loss in a declining market. The risk of loss in trading commodities and futures can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition. The high degree of leverage that is often obtainable in commodity trading can work against you as well as for you. The use of leverage can lead to large losses as well as gains. Changes in market conditions or a company’s financial condition may impact a company’s ability to continue to pay dividends, and companies may also choose to discontinue dividend payments.

All investments involve risk, including loss of principal, and there is no guarantee that investment objectives will be met. It is important to review your investment objectives, risk tolerance, and liquidity needs before choosing an investment style or manager. Equity investments are subject generally to market, market sector, market liquidity, issuer, and investment style risks, among other factors to varying degrees. Fixed Income investments are subject to market, market liquidity, issuer, investment style, interest rate, credit quality, and call risks, among other factors to varying degrees.

This commentary often expresses opinions about the direction of market, investment sector, and other trends. The opinions should not be considered predictions of future results. The information contained in this report is based on sources believed to be reliable, but is not guaranteed and not necessarily complete.

The securities discussed in this material were selected due to recent changes in the strategies. This selection criterion is not based on any measurement of performance of the underlying security.

Washington Crossing Advisors, LLC is a wholly-owned subsidiary and affiliated SEC Registered Investment Adviser of Stifel Financial Corp (NYSE: SF). Registration with the SEC implies no level of sophistication in investment management.