After a year that left us feeling rather hungover, fundamentals, profits, and diversity are crucial. Considering the investment prognosis for 2023, there was nothing to celebrate in the investing sector last year.
In 2022, all three major stock indexes – the Dow, S&P 500, and Nasdaq – sustained losses 2022. Even the bond market did not want to be left behind, with the Bloomberg Aggregate Bond Index falling by double digits.
A few bright spots did occur; energy sprung into life. The major stock and bond indices experienced a poor year in aggregate. Persistent COVID troubles, the crisis in Ukraine, persistent inflation, and what appeared to be interminable Fed rate rises all took a toll. Not to add, many stock values were overvalued in 2021.
As we approach the new year, it feels like we are waking up with a hangover, as many of the concerns from the previous year remain.
The Crucial Issue for 2023
The crucial question for 2023 is whether or not a recession will occur. A portion of the answer relies on how a Recession is defined; is this a Great Recession? Or an official downturn? National Bureau of Economic Research data indicates that the Pandemic Recession lasted only two months, whereas the Great Recession lasted from December 2007 to June 2009.
Much will rely on the decisions made by the Federal Reserve Board. If inflation does not decline and the Fed continues to raise rates, the near-term outlook for equities is not favorable.
Inflation will most likely decrease, resulting in a worldwide downturn. A shallower recession is possible given the healthy labor market and the fact that, as Sebastien Page, head of Global Multi-Asset and Chief Investment Officer at T. Rowe Price, noted in 2022, “Corporate and household balance sheets appeared strong.”
In 2022, “value” equities, such as some insurance firms and consumer staples such as health care, fared better than “growth” stocks, such as technology. Given the magnitude of their price declines in 2022, many growth companies now resemble value plays.
2022 has also brought an increased interest in dividend-paying stocks. High-dividend equities may experience stress if investors abandon them in favor of safer interest-bearing Treasury notes. Valuations are crucial, too. Numerous dividend-paying stocks are energy businesses whose valuations skyrocketed in the past year; one should be conscious of the price they are paying as they might be slightly overvalued.
It is predicted that there will be further volatility in the stock market, although the market may rebound before the economy. American Funds predicts that the stock market will rebound six months before the economy.
According to the Capital Group, the last time both equities and bonds were in the red at the same time was in 1977. Hopefully, fixed income will perform better this year, and higher yields can now contribute to current income and provide a cushion against potential price drops.
Municipal bonds were hit particularly hard in 2022, but the fundamentals remain robust according to Nuveen’s 2023 forecast, suggesting that the market “should be ripe for a rebound.”
Inflation, increasing interest rates, and an impending recession may still spark a flight to quality, so investors should exercise caution when selecting credit.
Whatever you decide for 2023, plan carefully and investigate thoroughly.