The MTC Investment Team presents the 2023 Market outlook:
- The Great Reset – Jason Ritzenthaler, CFA, CTFA
- Fixed Income Update – Kate Braddock, CFA
- Equity Market Outlook – Jonnathan De Jesus CFA, CIPM
- Economic Outlook – Chris Morgan, CFA, CFP®, CAP
- Earnings Update – Katie Cihal, CFA, CPA
- Geo-Political Update – Sharon Giuffre, CFA, CAP
History proves times of volatility and stress in financial markets create opportunities for long-term investors. We believe those opportunities have been created in the Great Reset and both equity and bond markets will post positive returns in 2023.
The Great Reset – Jason Ritzenthaler, CFA, CTFA
In many respects, 2022 was the Great Reset. From the start of 2019 to the end of 2021, the US equity market (S&P 500) doubled; let me say that again: returned a cumulative 100% including dividends. At the same time, the US bond market (Aggregate Bond Index) returned 15.08% all while US Treasury yields were at their lowest levels since the 1930s and 40s1. Home prices gained 34%2, Bitcoin climbed 1,137%, and NFTs were the new beanie babies. We often talk about investing being a roller coaster of fear and greed. Financial markets were tilting towards the greed side of the equation.
This all was fueled by well-intentioned efforts to get the global economy through the worst economic shock since the Financial Crisis onset by the worst pandemic since the Spanish Flu in 1918. Central Banks around the globe embarked on zero or negative interest rate policy while flooding financial markets with liquidity through quantitative easing. Governments turned on the fiscal policy spigot to ease the suffering of our most economically vulnerable households and small businesses… and yes, wealthy individuals also benefitted substantially. Consumer behavior was altered in meaningful ways as we herded first towards goods and then towards services. Supply chains then unraveled, and the global economy began efforts to shift away from a globalization mandate. Because all of that wasn’t enough, a horrific war broke out as Russia invaded Ukraine causing short-run impacts to energy and agricultural costs.
Inflation moved and then stayed higher, reaching a peak of 9.1% year-over-year CPI in June, causing the US Federal Reserve to embark on its most aggressive plan to hike the Fed Funds Rate and reduce its balance sheet through quantitative tightening. Financial markets and investors were accustomed to the free money and low interest rates of the last two years and were unprepared for a new dynamic.
The shift from excess to scarcity resulted in investor pessimism reaching levels last seen in the lows of the Financial Crisis3. The pendulum had shifted to fear and the Great Reset had begun.
2022 ended with the US equity market (S&P 500) recording its fourth worst year since 1950, down 18.1% and down over 25% at the lows in September. At the same time, the US bond market (10yr Treasury) was down 16.47%4 recording its worst year since 1788.
Many will say now, with the benefit of hindsight, that a reset was inevitable. While we didn’t completely anticipate the speed or scale of the reset, our investment team’s long-standing commitment to managing risk did minimize the downside for our members. In fact, 2022 was one of our best years of relative performance to the market. Driven by our choice to reduce exposure to the parts of the market that were most likely to come under pressure if and when that Great Reset unfolded, we closely managed interest rate risk by owning more short-term bonds and equity risk by owning less of the growth parts of equity markets. Minimizing declines is a large part of improving long-term returns. We will be happier about the out-performance when markets recover, and our members get back to making more instead of losing less.
We believe the majority of the Great Reset is behind us, and fourth quarter returns are evidence of this as the S&P 500 gained 7.56% and the US Aggregate Bond Index climbed 1.87%. Global interest rates are now back into positive territory (Japan is an exception in very short-term bonds) and US treasuries are back to levels from the mid-2000s. Equity valuations are within historical norms and even potentially under-valued when factoring in interest rate levels. Most importantly for future returns, inflation has been on a downward trajectory since June, and the average consumer is still healthy with household debt service levels well below averages of the last 40 years5. We believe the Federal Reserve is close to the end of this rate hike cycle. This is not to say there aren’t risks moving forward. Growth is undoubtedly slowing after the stimulus- driven period of the last two years. The US is at risk of an earnings recession and/or an economic one. The key will be what happens to unemployment and consumer behavior over the next year. Most sectors of the economy have been through a post-pandemic recession, and we believe companies in aggregate are unlikely to lay off workers at the levels necessary to induce a deeper economy-wide recession. The first half of 2023 is likely to remain volatile as we continue to monitor the path of inflation and ultimately corporate profits.
History proves times of volatility and stress in financial markets create opportunities for long-term investors. We believe those opportunities have been created in the Great Reset and both equity and bond markets will post positive returns in 2023. We appreciate the confidence you have placed in our team and will continue to be diligent in providing our members with a path to financial wellbeing across generations.
External Sources: 10yr US Treasury yield1, CaseShiller 20 index2, AAII Sentiment Survey3, S&P US Treasury Bond Current 10Yr Index4, US Ratio household debt service DSR5
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