January 2023 Market Commentary
Our latest notes on the market
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Investors are glad to put 2022 in the rearview mirror. With the S&P 500 down just over 20% for the year, as of this writing, 2022 rivaled some of the worst years for the stock market since WWII. Considering the corresponding decline in bond prices, this year was truly one of the worst years for balanced portfolios since the infamous 1973-74 bear market according to data from Bank of America. The question now is will 2023 bring a rebound, or more of the same?

Our process suggests that we are likely to see more of the same in the short term, especially for stocks. We wrote in late November that the rally over the prior 6 weeks was unsustainable. Thus, we sold stocks and increased cash levels for most clients during the first half of December. Unfortunately, even after the market declines of the last few weeks, our indicators still suggest that it is premature to reinvest that cash. The objective technical indicators suggest that the market still remains weak under the surface. Many economic gauges, such as the Conference Board’s Leading Economic Indicators, point to a high likelihood of a recession in 2023. However, higher interest rates and a lower outlook for inflation makes bonds more attractive. We think that the risk-reward for bonds is appealing, which can help cushion stock market declines for balanced portfolios in the coming months.

But investors cannot merely consider the current situation; we must also consider what is likely to change. Rising interest rates were a significant headwind to stocks in 2022; we think that headwind will abate and perhaps even reverse by the end of 2023. Falling inflation and a Fed Funds rate of 4.375% mean that the Fed has less work to do going forward and may cut rates later in the year. Rising rates effect the economy with a lag; for most of 2022 investors have anticipated a slowing economy. If the anticipated slowdown or recession does arrive in 2023, that, paradoxically, can be good for the stock market. It allows investors to look forward to the recovery. Likewise, corporate earnings estimates for 2023 have been falling since May, according to data from Credit Suisse. By the 2nd half of next year, investors will be focused on 2024 earnings. It is far too early to guess at what 2024 earnings might be. But coming off of a lower base in 2023, with a backdrop of a recovering economy, and a less aggressive Fed, it is reasonable to think they will improve. All of this points to a potential recovery for the market in the 2nd half of the year.

As always, we will continue to monitor our indicators and shift accounts accordingly. We don’t think investors are in the clear quite yet. But we do think the investment landscape will look a lot better a year from now.

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