2023 Market Outlook
Here we are after a very tough market in 2022, kicking off a new year and heading into a fresh start for 2023. The reality is that we do still have some challenges ahead in the markets. In this 2023 Market Outlook, I'll share a little about those challenges and what we see as far as opportunities in the year ahead.
Before I jump into that, I want to back up and review 2022. Looking back, 2022 was a challenging year. I believe the market priced in a recession and higher rates early on in the year and based on these assumptions, we saw both stocks and bonds take a big hit. Throughout the year, the market bounced around from March until now, January of 2023, based on speculation around what the Fed was or was not going to do. It is likely that the market still expects a recession which is why we now see short-term volatility, depending on the news of the week. However, what is important is that there were glimmers of hope. During this inflationary period, value companies with solid balance sheets and strong assets did very well, as did commodities. There were still some pockets of opportunities, even in a very tough year for the broader markets.
Our Viewpoint in 2023
As we move into 2023, we here at Mainsail also still expect a recession is on the horizon. Whether we realize a recession tomorrow, three months, or six months down the road, we don't know. However, we expect to move into an actual recession at some point through the course of 2023. The turn of the year does not necessarily mean any different perspective on the broader side of things as we have felt this to be the case through most of 2022. Based on the assumption that we may be moving into a recession, we still expect to see more of the same for a while.
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During this time, what is essential to keep in mind is that the markets typically price out about six to nine months in advance. If we're suggesting that we may be in a recession at some point in 2023, that doesn't necessarily mean that the market will pull back more than it already has because the market is forward looking. Markets and the economy move very, very differently and can show wildly different signals for extended periods of time.
Additionally, I want to touch on a couple of broader areas. The first is with the election late last year, we are likely to have gridlock in Washington and this concept of gridlock is typically good for markets. Over the next two years, we will likely see political theatrics from both sides as democrats and republicans point fingers and blame the other side for issues. During those periods, we should be prepared for very short-term volatility based around headline angst which is likely to come and go with little actual change.
This climate may feel similar politically to 2011. In 2011, we had a split house and senate as we headed into a presidential election in 2012. Our country was also pushing against a debt ceiling during this time. Sound familiar? As you may remember from that year, politics were a roller coaster with little actual change, and we expect that again in 2023.
The second thing I want to touch on broadly is the Fed. Looking back to last year, the Fed has driven a lot of the market movements based on Fed policy and interest rates. We expect this to continue through some of this year as well. The Fed has been very vocal about their plans; they shared explicitly that there are no plans to cut rates in 2023, and they've been true to their word in the past. We'll see what happens, as the economy shifts quickly, and they have been wrong in their previous economic assumptions. Still, the early 2023 meetings will be essential to pay close attention to as they voice their updated plans for the year to come.
Key Asset Classes to Watch in 2023
A common theme to consider is what worked pre-2022, is likely to be very different from what works in the coming years. For that reason, we are watching a few key areas in the first part of 2023: value stocks, bonds, commodities, and cash.
Number one is value stocks. Value stocks did much better than growth stocks this past year, and we expect that to continue. Companies with strong assets, strong balance sheets, and fixed cost assets, can provide not only stability, but also opportunity, in a period of inflation. When a company is minimally affected by higher costs or rising rates, you can expect much more stability in periods of inflationary pressure and increased financing costs.
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The second is bonds. Lately, we are starting to look at yields differently. Looking back on the last couple of years, interest rates were on the floor, and they have come up quite a bit as the Fed has hiked rates. Here we are in 2023, we've had a good run up in interest rates with the Fed, and it is possible rates may start to come down. Bond prices and interest rates have an inverse relationship, meaning that as rates come down, bond prices go up. This relationship was painful to bondholders last year as rates kept rising and their bond portfolios dropped. However, moving into 2023, we may see some opportunities in interest rates and bond price appreciation. Through the course of the year, it may be advantageous to look at bonds as an opportunity again, as opposed to the risky asset it was last year.
The third area to consider is commodities. We expect commodities to do well still as inflation persists. There's much talk about inflation slowing. Although the inflation rate may slow, it is likely this “slowing” will still be at a much faster pace than it was pre-2022. So, we expect commodities to continue to do well in this environment.
Lastly, have you ever heard the saying, “Cash is King”? That is starting to become true again. This saying is from years ago when cash was paying higher rates (even sometimes near 7%) back in the '70s. Here in 2023, many money markets, CDs, and very short-term bonds are now paying 4% or sometimes even more. This “Cash is King” saying is becoming a little truer again (but maybe not to the fullest extent). In 2022, cash was helpful to reduce our downside; in 2023, cash is useful to play a little offense as well.
To sum up, looking at 2023, we are still likely recession bound for a good chunk of the year. However, we're closer to the light at the end of the tunnel than the starting point. It may be tomorrow, it may not be for another three or six months from now, and that's why we always need to think long-term. That said, we are likely closer to the end than the beginning. The key areas we are watching at the start of 2023 include value stocks, bonds as a potential appreciation opportunity, commodities to handle inflation, and cash to play a little offense on top of the defense.