Broker Check

2023 Themes

| January 18, 2023
Share |

Every January most investment firms come out with a list of their favorite stock picks for the coming year. At year-end, the predictions are largely forgotten and only provide narrow perspective on the markets as a whole. Themes are different, they tend to be macro in nature and move in a measured way through the year.  

Below are Themes to Watch for 2023 that we believe are worth paying attention to:

1. BONDS - After suffering one of the worst years since tracking, bonds look to have a much stronger 2023. The Fed is poised for 2 to 3 more interest rate hikes in the first 6 months of the year and most likely at a much slower pace than the last twelve months. This will help fixed income pricing recover and produce 5-6% bond yields that have not been seen in 20 years. This year could be one of the better opportunities to add bond exposure to all strategies.

2. DIVIDEND GROWTH - This is one of the most important trends of our current investment cycle. We will be paying close attention to companies that are committed to increasing their dividend yield. It reinforces that their balance sheet is strong, management is mindful of shareholder returns and believe their near-term outlook is promising.

3. INNOVATION - This theme is not just isolated to the technology or bio-tech sector. Innovation will be a key focus to sectors like industrial, financial, consumer, energy and others. It is the continued improvement of products and processes. For example, John Deere investing in a satellite partner to create a geospatial map allowing farmers the ability to track performance and sustainability of crops. It also includes companies being first to new markets and disrupting historical existing ways of transacting business. Cashless transactions in the financial world continues to evolve each year and 2023 will be no different.

4. JOB MARKET - At one point last year, 1.8 jobs open for every 1 person searching for work. We expect that ratio to decline as the economy slows and firms cut their number of job openings. We see a normalization in workforce participation, specifically in the prime earning age group of 25-54 year old’s increasing participation back in the labor/job market. This potential improvement could be a powerful remedy to employers looking for qualified workers. We believe the unemployment number will hover closer to pre-pandemic levels and move toward a healthier trend.

5. INFLATION - The Federal Reserve has been aggressive in their fight to bring core-inflation down from its peak of almost 10% last year. Interest rate hikes have been rough on borrowers but as I mention in theme one, a potential boon for bond buyers. We believe inflation will continue to slowly dissipate this year as the Fed finished their interest rate tightening and supply chain normalization. The housing market should continue to cool and soften pressure on the costs of new construction. Inflation will be one of the key factors if we end up avoiding or entering a recession. The long-run Fed target is to get the core-inflation number back toward a mandate of 2%.

6. EARNINGS - We believe stability in earnings reporting is going to be more important than recent years. Earnings will be a primary focus in the next 12-18 month fight between the Bulls and Bears. If inflation cools, the job market settles and we avoid recession, then earnings will be the final key to unlocking the next bull market. There are a wide range of earnings outcomes and corporate America faces significant headwinds in 2023. Cost pressures amid high inflation has been rough on companies, and slowing economic growth accompanied by a strong dollar will make earnings expansion hard to achieve. The good news is the market has factored slower earnings growth into the projections, so simply holding projected numbers or slightly exceeding could add fuel to stock growth. 

7. POLITICAL GRIDLOCK - 2023 brings us ‘mixed government’ as Republicans won back the House and significantly shifts the balance of power. Markets have tended to favor mixed government since neither party can get meaningful legislation passed without compromise. It may also be that the government that governs best governs least, and mixed government tends to create gridlock. The 118th Congress does not look like a governing body that is excited to work in harmony together. Historically, a Democratic president with a split congress has led to strong returns in the stock market. The risks will rise though as the year progresses for fiscal deadlines. Two things Congress will have to pass is the need to raise the debt ceiling limit in the summer and renew govt spending authority to avoid a fall shutdown. It is more than likely that this create risk of volatility in the capital markets if there is a lengthy standoff…stay tuned.

8. GLOBAL MARKETS - Global stocks are priced at a discount to the U.S. and offer much higher dividend payouts, making them look like a deep value. The concerns associated with global stock exposure continue to be currency, political, and geopolitical risks so demand has been soft. For a long time, China was the economic powerhouse of the global economy. Recently, growth has been slowing due to their former rigorous zero-covid strategy. China now has abruptly changed their policy and infections have soared.  They are attempting to avoid trade production interruptions that would cause further supply bottlenecks in Europe. This places a highly unpredictable outcome for the Chinese and global economy as we head into 2023. Due to the invasion of the Ukraine, a decisive factor of the health of the European economy will be how abundant the energy supply will be toward mid-year. If Europe can stabilize the natural gas storage facilities and show sufficient alternative supplies, there could be a strong economic upturn toward second half. This coupled with very attractive valuations on non-US global equities could create a demand for international stock exposure.

Our base case for the coming year is that the economy will be sluggish accompanied by a possible mild recession. It’s difficult to have a deep recession when unemployment is low and consumer spending continues to expand. We believe the Fed will pause raising rates in early spring and earnings should hold, even though they may be fairly flat. Bond yields will continue to look attractive and stocks are poised for mild gains. These outlooks most likely will continue to change and we are committed to navigating portfolio management around any updated forecast that comes our way.

Cheers,

Jay


Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

 All investing involves risk including loss of principal. No strategy assures success or protects against loss.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

Share |