Randy and I do not make short-term stock market predictions. Why? Because even the “best” are wrong most of the time. Warren Buffett famously continues to say “neither I nor you are smart enough to predict where the stock market will be within a year from now.” However, we do like to share our thoughts as it pertains to the trends that will influence The Price Group’s decision making over the next 12 months.
Below are the primary trends we believe could have the greatest impact on the economy and the financial markets in 2023.
A Recession... Months in the Making
Most economists are forecasting a mild recession this year. We agree and think this has already been priced into the stock market. As many of you remember, the stock market is a forward looking entity. This means that the stock market typically “bottoms” 3 – 4 months before the worst economic data is released.
The Federal Reserve’s Interest Rate Policy
The Federal Reserve increased interest rates last year at the quickest pace in over 40 years. We are expecting the Fed to increase interest rates 1 – 2 more times to get to a terminal rate of 5.0% (currently at 4.5%). This means that most of the interest rate increases have already taken place. We would not expect the Fed to cut short-term interest rates unless the economy shows extreme signs of weakness.
Inflation
Inflation has been “cooling” for the past few months. We expect this to continue and end 2023 with inflation around 3% (slightly higher than the Fed’s target). The bond market continues to signal that inflation will be at “normal levels” in the next 12 – 18 months.
Reduced Volatility (Compared to 2022)
A balanced portfolio (60% stocks and 40% bonds) had its most volatile year in 2022 since 1987. We do not think this continues in 2023. While there continue to be many risks facing investors (i.e. inflation, war in Ukraine, recession, US politics, etc.), we think these risks have been dialed back when compared to 2022.
Globalization is not Dead
There is a lot written about companies moving their manufacturing back to the U.S. While this is good for American jobs, it has led a number of people to believe that “globalization is dead.” We do not think that is true, but we do believe a number of multi-national companies are re-evaluating where and how they do business. We would expect the big loser here to be China.
Bonds Are Back
2022 marked the worst year for the overall bond market since 1976. Investors can now get the same yield with a 3 month T-bill as they were getting on a junk bond in early 2022. We are of the opinion that bonds offer a lot more value in 2023 when compared to last year.
Brighter Days Ahead For Stocks
Dating back to WWII, there are only three other times in history when the stock market has suffered back-to-back years of negative returns. Each of these periods of history had some type of systemic issue at hand (i.e. WWII, oil Embargo in the early 70’s, tech bubble, etc.). In our opinion, there is no systemic issue at hand to warrant back-to-back years of stocks moving lower.
Fundamentals Matter
The stocks that had the worst performance in 2022 were speculative in nature and were companies that were not profitable. We continue to favor large multi-national companies with healthy balance sheets, good earnings, and the ability to pay (and hopefully increase) their dividends year-over-year. We think that dividend paying stocks could be even more attractive in 2023 as these types of companies have historically done a good job of passing price increases directly to the consumer. Also, in a year of more “normal” returns, the dividend translates into a larger portion of a stock’s total return.
Don't Be A Sheep
Sheep want to do exactly what the other sheep are doing… the animals do not think for themselves. The end of 2022 marked the most bearish reading of investors' outlook for future returns in 30+ years. Historically, this has been a contrarian indicator… meaning that the “herd” is usually wrong.
Conclusion
Overall, we think there are some subtle tailwinds for stocks and bonds in 2023 even with a mild recession. We continue to strongly believe that every family needs a wealth coach who understands and prioritizes holistic wealth planning. Would you like to review your Live Well Plan? Perhaps you would like our team to help you create a personalized Live Well Plan? The Price Group is here to help.
About the Author
Matt Price serves as a Partner and Director for The Price Group of Steward Partners. He resides in Houston with his wife, Emily, their three children and "Fisher" the family golden retriever. Matt studied at the University of Pennsylvania – Wharton School of Business for his Certified Investment Management Analyst (CIMA®) designation after receiving his undergraduate degree from the University of Tennessee - Knoxville. Over the past 11 years, Matt has helped families make high quality, common sense decisions regarding their wealth and their legacy. Matt firmly believes everyone needs a wealth coach!
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The views expressed herein are those of the author and do not necessarily reflect the views of Steward Partners or its affiliates. All opinions are subject to change without notice. Neither the information provided nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Past performance is no guarantee of future results.
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