Your portfolio doesn’t know that another New Year’s Eve ball has dropped, and calendar changes don’t mandate portfolio changes. But the last few years have seen major market shifts worth reacting to, and we’re facing another one. Here are some brief thoughts on our 2023 investment outlook and when this bear market will end to help you.
Our investment team shares its annual market outlook in December. It’s worth a read to understand why we see greater opportunity and risk this year. I also discussed it with our Director of Portfolio Management December here and recapped our conversation here.
2023 Market Outlook
We’re in a new era. A sea change as Howard Marks called it. Just the third of his 53 year career.
Inflation is high. It’s moderating, but not fast enough to reach the Fed’s 2% target anytime soon.
So, the low-rate, cheap money days that kept stock market volatility low and returns high are over. Higher rates and tighter monetary policy should bring more volatility.
Buy back those bonds you ditched a few years ago in the TINA days. Yields are higher and with rates stabilizing, expected bond returns are higher. As Marks wrote,
I believe that the base interest rate over the next several years is more likely to average 2-4% (i.e., not far from where it is now)…highly stimulative rates are likely not in the cards for the next several yearsSea Change by Howard Marks
Adding duration and Treasuries for risk management makes sense.
Stick with global stocks, just don’t overdo it. There are reasons to overweight international stocks (recent outperformance, good fundamentals, and a weakening dollar), but as the team said in our 2023 market outlook “we are holding our year-over-year allocation flat based on the greater potential for exogenous events outside of the United States. Non-U.S. equity remains active and an overweight within portfolios, but risk management compels us to temper that view.”
The Bear Market’s End
This bear market is a year old. Happy stinking birthday. If I knew when it will end, you’d like to think I’d tell you but if I had that crystal ball I’d be using it on a golf course somewhere and not writing this…
But our team shared some thoughts worth mentioning.
Since 1950, the average bear market has lasted 14 months. History’s not a pure guide. As Warren Buffet once said, “If past history was all that is needed to play the game of money, the richest people would be librarians.” But it helps, and we could be close to finding this bear market’s end.
There’s concern that the bear could be prolonged by a recession since that would lower corporate earnings more than the market is expecting.
The team did a nice job explaining why this may be overblown. Simply put, the strength in the energy sector, an anomaly given the Russian invasion of Ukraine, has hid the fact that “earnings are beginning to reflect the economic reality of a moderating economy.”
Value vs. Growth
While not touched on in our team’s 2023 market outlook, it’s worth sharing a quick thought on the value/growth split. I’ve shared in the past that Investment Winners Rotate, not just on an annual basis, but over market cycles as well. It happened again in 2020 and the shift from growth to value that started then has strengthened.
If you’re still growth heavy expecting the glory days to continue you may want to revisit.