2022 Recap: the COVID hangover

Entered the year with inflation escalating.

Further exacerbated by Russia’s invasion of Ukraine.

Fed raised interest rates at the most aggressive pace ever.

Stocks and bonds BOTH lost money.

Almost all major asset classes except oil lost money.

Value stocks significantly outperformed growth.

It was the 6th most volatile year for stocks since the Great Depression.

Commodities rallied and then sold off.

Housing began to capitulate into year-end.

2023 Outlook: more of the same?

It is the time of year when strategists come out with their targets for stocks for the following year. Based on forecasts of 23 analysts, the average forecast for the S&P 500 is to finish 2023 at 4080, which would be up ~6% from where it finished 2022. Only three analysts had the S&P 500 finishing down next year, with the worst coming in at down ~14% from current levels. Despite these relatively upbeat forecasts, everyone is predicting a recession in 2023. We should note that at the end of 2021, according to the same strategists, the median forecast for the S&P 500 to end 2022 was 4910, ~27% higher than where it is.

Here is our humble opinion:

• It is very hard to make predictions; generally, most miss the mark
• We believe we are in a market paradigm that looks very different than the prior few decades
• We believe the relationship between the Western (US, Europe) and Eastern (China, Russia) worlds is in the process of a significant shift
• This will likely lead to de-globalization, which will put upward pressure on inflation
• We think the Fed will be stubborn in reversing their current policy
• Meanwhile, the employment market continues to be fairly strong, and wages are rising
• Hence the US consumer (read 68% of the US economy) seems to be in decent shape, although starting to show signs of strain
• Housing is beginning to show real signs of weakness into year-end 2022
• Corporate balance sheets are very strong relative to history
• The US Government just passed a $1.7 trillion spending bill
• Many of the dynamics above are in conflict with each other
• This is likely why the stock market has been range bound for the last six months
• It also suggests continued uncertainty as we enter 2023
• We believe materials, industrials, energy, and healthcare sectors will continue to outperform
• We believe technology and consumer discretionary sectors will continue to underperform
• We believe it will be important to have commodities exposure
• However, it will be essential to be actively involved and adjust as conditions change

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