The Great Reset: 2023 Market Outlook
“You don’t find out who’s been swimming naked until the tide goes out” – Warren Buffet
2022 IN REVIEW
2022 was a bad year for investors. The S&P 500 Index was down -18.1% and the Bloomberg US Aggregate Bond Index was down -13.0% for the year. The market wrestled with stubbornly high inflation and an aggressive U.S. Federal Reserve that raised interest rates seven times, taking the Federal Funds overnight lending rate from 0% to 4.5%.1
2022 was also the year when formerly venerable countries, institutions, and individuals were exposed to the world as fragile entities with less substance than previously thought. Before 2022, many believed that Russia was a respected military superpower, China’s government was seen as efficient and effective, blockchain companies and cryptocurrencies were the future, and Elon Musk was a visionary genius. The events of 2022 shattered these perceptions.
A strong argument can now be made that Russia’s military has been exposed as grossly incompetent, China’s handling of Covid unnecessarily extended their pandemic, some of the most respected blockchain companies were exposed as frauds and gone bankrupt, and Elon Musk is now a divisive figure that may have overpaid for a social media company to seemingly run it into the ground.
Given the events of 2022, it’s more than understandable if investors find themselves gloomy and pessimistic. While 2022 is in the rearview mirror, the outlook for the economy remains problematic. Many economists are expecting a recession later this year as the Fed intentionally slows the economy to bring inflation to more sustainable levels.
However, there are reasons to be optimistic.
THE SILVER LINING
First, we believe the era of quantitative easing is over and we’re moving back to an economy with more traditional business cycles. While the benefits of quantitative easing dating back to the Great Financial Crisis are debatable, we can all agree that a world with negative interest rates and central banks buying trillions of dollars of bonds is not normal. While the pandemic was an unusual start to the business cycle, what we’re experiencing now is classic late business cycle behavior. The economy overheated causing prices and wages to rise (inflation) leading to lower company profit margins and earnings.
The Fed is raising rates to slow down the economy and bring inflation to more sustainable levels. Once that is accomplished, they will begin lowering rates again once the economy slows too much, thus kicking off the next business cycle.
Second, the excessive speculation that resulted from trillions of dollars of stimulus has been removed from the system. The inexplicable, unsustainable hot investments of the pandemic era have come back to Earth including cryptocurrencies, blockchain companies, hot tech funds like the ARK Innovation ETF, and meme stocks like GameStop and AMC. In many ways, 2022 was the “Great Reset.”
Third, the long-term geopolitical risk that many fear, specifically China invading Taiwan, seems less likely than a year ago. Russia was expected to takeover Ukraine within a week when they first invaded. That didn’t happen and almost a year later Russia remains bogged down in the conflict. Given Russia’s difficulty invading Ukraine and the political and economic fallout experienced on the global stage, China is hopefully less inclined to consider invading Taiwan. This is good for everyone.
Fourth, the pandemic has led many companies to re-shore production back home. The shift of supply chains back to the U.S. is a long-term, economic tailwind for the U.S. that should last for years to come.
Fifth, and most importantly to investors, the long-term, expected returns across asset classes are now significantly higher than they were a year ago. While the adjustment to higher rates in 2022 was painful for bond investors, current yields are now significantly higher. The U.S. Treasury 10-year yield went from 1.5% at the beginning of 2022 to 3.81% at the end of the year.2 Short-term yields are even higher and now savers can earn meaningful returns for cash investments for the first time in years. In addition, equity market valuations are lower today than they were a year ago and international markets look particularly attractive on long-term valuation metrics.
In 2023, we expect:
1. Inflation to come down
2. The economy to slow
3. The U.S. Federal Reserve to stop raising rates
4. Stock markets to stabilize before resuming their long-term, upward trajectory
Given these expectations, investors should take the time to review their investment portfolio and determine if adjustments are needed based on market conditions that have materially changed from one year ago. Assessing if changes are needed to your long-term term plan and portfolio is critical to achieving your financial objectives.
If you have upcoming spending needs and your liquidity bucket is low, it may be a great time to take advantage of short-term bond yields. If you have too much cash and have been waiting for the next market crash, now may be a good time to explore long-term investment opportunities with favorable risk-reward characteristics independent of market timing.
As always, If you are interested in reviewing your portfolio, discussing potential actions, or exploring what Curi Capital can do for you, please reach out to a member of our team at 984-202-2800.
Please note: This material should not be considered a recommendation to buy or sell securities or a guarantee of future results. Curi Capital is a registered investment advisor. Registration does not imply a certain level of skill or training. More information about Curi Capital can be found in its Form ADV Part 2, which is available upon request.
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1 Source: Bloomberg Finance, LP
2 Source: Bloomberg Finance, LP