2023 outlooks not bound by the calendar
By Kyle Tetting
The most common question as we turn to the new year is what to expect in the year to come. That’s a logical question, even more so in the wake of the challenges we faced in 2022. However, any answer to the question comes with a major caveat.
For starters, 2022 was exceptional for how closely the calendar year encapsulated the market decline. Jan. 3, 2022 – the first trading day of 2022 – was also the most recent peak of the S&P 500. In that regard, the full-year return for the S&P 500 – down 18.11% including dividends – may be unique in how well it encapsulated the challenges of 2022.
Despite the clean measuring stick, the causes of last year’s decline weren’t contained within the calendar year. Likewise, asking what the new year will bring may overlook critical context.
With that caveat out of the way, 2023 will likely serve as a pivotal year for a variety of reasons.
Foremost, we finished 2022 on a downward trend for inflation and with a Federal Reserve that was beginning to lighten up on the pace of interest rate hikes. While the Fed declared a meaningful half-percent hike at its December meeting, that was a step back from the three-quarter-point increases at each of its four previous meetings. Market expectations appear mixed on whether the Fed slows the pace again at its next meeting, at the end of the month, but interest rate traders are clearly indicating that Fed tightening is nearing an end.
With declining rates of inflation in recent months and Fed comments that it shall not let inflation persist, the markets appear to have all but priced in the expectation that the pace of inflation will continue to slow.
The Fed’s meeting Jan. 31 to Feb. 1 coincides with the heart of the S&P 500 earnings season as companies report on fourth-quarter 2022 earnings. The outlook is not particularly positive. It appears likely that the S&P will continue to flirt with an earnings recession and – excluding energy companies – will see earnings decline from the fourth quarter of 2021.
Federal Open Market Committee meetings
Jan. 31-Feb. 1
Oct. 31-Nov 1*
While earnings weakness isn’t encouraging, remember that stock prices are a forward-looking indicator, and earnings reports are decidedly backward looking. As a result, I’m less interested in the numbers themselves than in the messaging around them. When corporate leaders report the numbers, are they discussing last year’s problems or addressing new risks ahead? That will provide greater clarity on how the remaining months of 2023 might develop.
In short, the early days of 2023 appear likely to resemble the waning days of 2022. That is to be expected. While the calendar flipped, the risks and opportunities haven’t changed.
What I focus on now is how the responses to the same opportunities and risks at the end of 2022 shift in the months ahead. February brings the new year’s first stretch of potential new developments. But spring and summer follow closely behind with more Fed meetings and plenty of other developments to watch.
Past performance is not an indication of future returns, which is especially true for bonds. The best indication of future returns for bonds is interest rates. The very higher rates that made 2022 so challenging for bonds suddenly make bonds look significantly more attractive.
For stocks, the near-term outlook isn’t much different than it was as 2022 wound down. The saving grace for stocks is that forecasts for earnings growth now appear more attainable owing to investor pessimism. At the same time, interest rates appear likely to be less of a head wind. That isn’t a recipe for an overnight recovery in stock prices, but it is a sign that the foundation for recovery is beginning to take shape.
As investors, we’d like a clean story tied to the turning of the seasons, the start of a new year. But economic and market cycles don’t follow the calendar.
The cautious optimism I have for investing is not a function of the changing year but a culmination of data that points toward conditions becoming more favorable to investors. More favorable conditions take time to develop, but the good news is that balanced investors remain well positioned for opportunities in the months, quarters and years ahead.
Over the river and through the Fed, by Kyle Tetting
2022 Investment Outlook Seminar, a Money Talk Video with Bob Landaas and Kyle Tetting
Revisit balance: Gain from Powell’s “pain”, By Kyle Tetting
The Fed: What investors should know, a Money Talk Video with Dave Sandstrom
Investor upsides as interest rates rise, a Money Talk Video with Kendall Bauer
(initially posted Jan. 6, 2023)
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