What's ahead for investors in 2023
The combination of a likely economic downturn and, especially, significantly slower inflation may allow interest rates to decline next year – helped further if financial markets expect the Fed to ease monetary policy later in 2023 or in 2024.
We are coming off a rough 2022, one of the rare years with double digit declines in stocks as well as fairly negative returns in bonds. One of our basic investment tenets at
Economic outlook (
While the
Nothing about economic forecasting is certain, however, and there is still a chance that the economy will simply slow into a soft landing instead. The recent ebbing of inflation may allow the
But there is good economic news. The supply chain problems that hit the economy as a result of COVID (and resulting lockdowns) are diminishing – quickly in some sectors. This will allow for both heightened economic activity and slower price gains (if not some outright price declines). Indeed, the 12-month change in prices as measured by the Consumer Price Index (CPI) has moved lower for six consecutive months as supply chains have healed. The positive impacts of improving supply chains on inflation will be helped by slower (negative?) economic growth this year. While overall inflation may not drop all the way to the Fed's goal of 2% by the end of 2023, it should be closer and clearly moving toward it. Moreover, the job market remains solid, with the unemployment rate near 50-year lows. If the likely recession is on the modest side (as most analysts expect), then increases in unemployment will also be less severe.
The combination of a likely economic downturn and, especially, significantly slower inflation may allow interest rates to decline next year – helped further if financial markets expect the Fed to ease monetary policy later in 2023 or in 2024.
The
There is considerable uncertainty about what 2023 will bring and whether the
As for Fed policy,
Where will the rate increases end? That, Chairman Powell now argues, is the key question. Again, participants have shared their views on this recently.
One last point: It is important to know who is voting on the
Equity markets (
As always, flexibility will remain key to operating successfully in the equity markets, both domestically and internationally. Interest rates and financial conditions will always dictate allocation decisions we make as a top-down investment manager. Our tilt towards value and equal weighting remains consistent, but we cannot ignore the historically large performance spread between value and growth over the past 18 months. We will continue to monitor the dynamics between those two factors on a weekly and monthly basis. Broadly viewed across strategies, Cumberland's domestic positioning skews defensively entering 2023, with overweight allocations in Healthcare,
After more than a decade of nonperformance, international equity markets have begun to pick up their heads vs. the
Taxable fixed income (
2022 was a down year for most asset classes, with the
Spread securities such as corporates and taxable munis also experienced sharp declines as spreads widened. The Bloomberg
Going into 2023 we expect continued volatility in taxable fixed-income securities, driven by key economic data and
We view the higher interest rates and wider spreads as an opportunity to lock in yields that haven't been available for several years. During 2022, we increased our duration target on taxable fixed-income accounts to take advantage of the higher-yielding opportunities and will continue to look for those opportunities in 2023. Given current market conditions, we plan to maintain our durations longer than the benchmark, as we expect the
Tax-free municipal bond (
After what will be remembered as one of the all-time municipal bond market selloffs, we believe that tax-free bonds should provide better returns in 2023 driven by higher demand (because of higher yields and compelling relative value calculations) and lower supply levels. In what was a brutal year, longer term municipal bonds sold off hard enough to move yields from 2% to 5%. Since early November they have rallied back to begin moving yields back down to 4.25%–4.5% for longer 'A' or better rated bonds. Our view is that with a slower economy looming (forecast in part by the inverted
As we know from past bond market selloffs in the municipal sector, they generally take a longer time to repair themselves than the duration of the selloff itself, with the exception of the COVID period in
Municipal issuance was down 21% to
It is important to remember that the selloff isn't so much about how high the federal funds rate has risen as it is about how fast we got here from the artificially low rates deployed in response to COVID. We do feel that the Fed started late in raising short-term rates, and the bond markets paid the price for that in 2022. We should see some reversion to the mean in 2023.
The combination of a likely economic downturn and, especially, significantly slower inflation may allow interest rates to decline next year – helped further if financial markets expect the Fed to ease monetary policy later in 2023 or in 2024.
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