As we prepare to turn the page on a tumultuous 2022, investors shouldn’t expect any less dynamism in the year ahead. While we can be sure that inflation and rising interest rates will still weigh heavily on the capital markets, there are sure to be more market-moving elements in the mix that will challenge our strategies and our patience. Indeed, 2023 will require patience, discipline, heightened awareness and common sense from all investors.
Given that challenge, we spoke with three investment professionals who embody those characteristics for their predictions and advice for the year ahead. Anastasia Amoroso is the chief investment strategist of iCapital; Liz Young heads investment strategy at SoFi; and Ryan Detrick chief market strategist for the Carson Group. All three are regular guests across financial media and The Investopedia Express.
Respect the Cycle
Economic imbalances are what got us into this mess. They need to be fixed before we get out. If things like inflation and the labor market are not brought back into balance, they could breed bigger problems with long-lasting consequences. We are quite decidedly late-cycle now, and it’s healthy to let the cycle reset. But respect it—the market and the cycle don’t care about our feelings. They also don’t care about the date on the calendar, so don’t get too wrapped up in “seasonality” as a buy or sell signal.
We may need to go through some economic pain in order to set ourselves up for a durable expansion—both in markets and the economy—on the other side. A Fed pivot is more likely to occur as things are breaking, not as they’re being put back together. Market rallies don’t send the “all clear” signal, cycle resets do.
If You Can Be One Thing, Be Specific
As we near the end of 2022, an overarching theme for the year was “a lot of stuff went down.” But what happened under the surface was, it didn’t all go down by the same magnitude. In 2023, with the Fed likely still hiking, or at the very least staying restrictive to start the year, I expect the dispersion between sectors, asset classes, and specific stocks to be wide.
As an investor, what that means is you’re better off being specific about where you put your money, rather than throwing it all at “risk assets” in hopes of a broad rally. I believe a recession in early 2023 remains the base case, and that one more market flush is likely before a recession is confirmed. Positioning for what could win coming out of it, and what you would buy in a drawdown is a good way to prepare for the new year. Some of the sectors on my watch-list would be: Financials, Health Care, Communications, Software, and Small-Cap Value stocks.
If there is any good news about 2023, it is how bad 2022 was. The truth is, stocks down back-to-back years is super-rare, over the past 50 years happening only twice in ‘73/’74 and three years during the tech bubble implosion. But many of the headwinds from 2022 are likely going to be tailwinds now. The Fed is quickly realizing they don’t need to be so hawkish with inflation coming down like an anchor, while the U.S. dollar likely will weaken significantly as well.
Meanwhile, the economy is on much better footing than the media claim. Yes, housing is in a vicious recession and manufacturing is close to a recession, but those two together make up about 25% of the economy. A big part of the remainder of the economy is the consumer, which remains extremely strong and healthy. To us, 2022 was an economic slowdown in the face of 40-year highs in inflation and a historically hawkish Fed.
Honestly, it is amazing how strong the economy was in the face of those issues. But the key being a slowdown, not a recession. As we look out to 2023, better-than-expected earnings is likely and this will be a nice driver for a bounce back in economic growth and double-digit stock gains.
Slowdown Almost `Fully Baked’
Whether it ends up being called a recession or not, the slowdown we’ve all been waiting for might happen in the next two quarters. This means that the first half of 2023 might be the entry point back into risk(ier) assets.
The recipe for a slowdown is ready to be fully baked. Typically, there is a period that passes when the Fed stops hiking rates, yield curve inverts, and recession onsets (if it does) around 15 months after. But then again, the Fed generally doesn’t hike rates in a weakening economy. What might make it different this time around is that the Fed has been hiking at an aggressive pace since the summer (+75 basis points [bps] per meeting), all while the economy, as measured by the manufacturing, service, and housing slowdown, has been weakening.
In fact, we did print two consecutive quarters of negative GDP growth in 2022 already. Looking ahead, consensus expects GDP in the first and second quarter of 2023 to be slightly negative at -0.1%,while 1-year recession probabilities continue to be elevated on most metrics. Jobless claims have started to inch up, tech layoffs are starting to accumulate, and other industries may follow suit. And yet the Fed still plans to hike the fed funds rate up to 5%, further restricting the economy. All in, the economy should be poised to slow meaningfully in the months ahead, given all this pressure.
The Bottom Line
The silver lining is that this economic slowdown will likely bring inflation under control. More and more measures of inflation are already showing that it may finally be turning a corner. The latest three-month annualized Consumer Price Index (CPI) inflation rate has come down considerably and is currently at 3.6% compared to the peak of 10.8% seen in the first half of 2022. Of course, service inflation is stickier, but there are signs that shelter and wage inflation may be easing up as well.
Intentions to raise wages have moderated. And as job openings and the pace of job creation decline, this should slow wage increases as well. As a result, core Personal Consumption Expenditures (PCE) inflation is expected to fall to 3.2% by the end of the second quarter of 2023, from 4.5% in the fourth quarter of 2022. This will ease pressures on consumers, and also the Fed.
Correction—Dec. 7, 2022: A previous version of this article misstated the title and place of work of chief investment strategist at iCapital Anastasia Amoroso.