Question:  

What can investors expect this year?

Answer: 

Financial markets contract, expand, evolve, and ultimately grow stronger over time. Our Chief Investment Officer, Larry Adam, has compiled ten themes that he expects to advance over the next twelve months.

1. A mild recession

Slowdowns are already taking place in housing, transportation, some retail, and areas of technology. Strong consumer fundamentals such as excess savings and job openings act as buffers. By midyear, weakening labor market conditions and less savings will likely stall the momentum. 

2. Slower pace  

The pace of price increases for many commodities, goods, and services have already started to slow, and pressures on food and shelter costs should ease in the months ahead. As the Fed battles inflation, improvements don’t mean that they’ll cut rates. After pushing rates to an ~5% peak, the Fed is more likely to pause than pivot. 

3. Reduced volatility ahead

The pandemic, Russia-Ukraine war, economic troubles in China, inflation and the risk of a recession caused one of the most volatile years since 1987. The worst-case scenario for many risks may have already been priced in. Midterm elections are behind us, and China appears set to dismantle its zero-COVID policy. It’s likely that some positive developments will reduce volatility in 2023.

4. Globalization is evolving, not ending

Supply chain disruptions during the pandemic called the viability of a multinational approach to business into question. Competitive advantages, cost and production efficiencies, scalability and workforce growth are still intact resulting in a bias towards large domestic based multinational companies. U.S. brands are leading across the globe, and U.S. companies with niche marketing outside the U.S. are experiencing superior earnings growth.

5. Security and safety 

Governments, companies, and investors have learned painful lessons in recent years. Protecting oil and natural gas sourcing, and protecting our most critical supply chains, such as semiconductors and healthcare products, is crucial to protect sourcing from hackers. And, of course, replenishing U.S. and its allies military capabilities will be a top priority.

6. Fixed income back in favor 

As rates seem to have reached their peak, yields are still attractive with higher rates back in fashion. And there’s less risk; investors can obtain nearly as much yield on a 3-month Treasury bill today as they could on a high yield bond at the beginning of 2022. With an inverted yield curve, investors should opt for quality over chasing more income from riskier high yield bonds.

7. Friendly activities 

With a high probability of a recession, cost cutting is a trend for individuals and corporations. If 2022 was about businesses having pricing power, 2023 will be the year of preservation mode. In turn, earnings should be better than previously believed meaning the shareholder-friendly activities like dividend growth and buybacks won’t cease to exist. As a result, our CIO’s year-end forecast for the S&P 500 is ~4,400.

8. Uncovering emerging markets

A stronger dollar, Fed tightening, and weaker global growth has kept emerging markets underground. These same factors are now tailwinds pushing them to the surface. Growth in emerging markets is expected to outpace that of developed markets by the widest margin since 2013.

9. Hot spots

Survival of the fittest is a theme as investors are cautioned to scrutinize speculative hot spots (e.g., meme stocks). Maintain focus on fundamentals and the basics such as quality and free-cash flow when making portfolio decisions. 

10. Opportunities

As 2023 begins, Wall Street strategists call for a much weaker year than we’ve historically seen. In 2023, some of the best opportunities may require moving against the crowd. There are attractive valuations for specific industries within certain sectors (e.g., cell towers, healthcare facilities) where earnings should be less sensitive to downturns. The technology sector shouldn’t be ignored, as more diversified companies still display strong fundamentals.

Investors will find a way

Gloom-and-doom headlines may make investors feel like 2023 will be a lost year. Facing an oncoming recession requires adaptation and work to discover opportunities which has usually proven more successful than acting on fear or emotions. Your financial advisor can help guide you through the year ahead and the ever-changing investment landscape. Stay focused and plan accordingly.