As we exit a tumultuous 2022 and face the inherent uncertainty of a new year, we adopt the wise words of Goethe as our mantra for 2023: “Enjoy what you can, endure what you must.”
This means we will continue to look for opportunities in the volatility and disruption of weak markets, finding ways to (safely) seek higher yields, lower valuations, and better entry points. But we will also continue to be balanced and realistic about the persistent headwinds that must be endured, including tight liquidity and policy, slower growth, and weak trends.
Enjoy and endure.
We would all like the down markets of 2022 to be left distantly in the rearview mirror, but many of the same trends of 2022 must still be reckoned with in 2023.
We observe a U.S. economy that is currently far too resilient, with far too high inflation to support an about-face in Federal Reserve policy, meaning hopes of an imminent pivot to ease are likely misplaced. We observe a U.S. bond market that is likely ahead of itself in pricing in support of the Fed. We observe a U.S. equity market that, for all its weakness in 2022, is not trading at a level that can be considered “cheap” or with a sufficiently low bar for earnings growth estimates.
One huge and helpful difference between 2022 and 2023 is positioning and sentiment. 2022 began with many forecasters and investors having lofty goals for a continuation of the market ebullience of the bubbly years of 2019-2021. But these bullish hopes were epically dashed in 2022 by the harsh reality of tight policy confronting high valuations for both equities and bonds. We call 2022 “the year the everything bubble died,” with unprecedented dual weakness in the combination of equities and bonds.
Now as we start 2023, market forecasters and investors are far more subdued in their hopes for the coming year (though there is an eye-popping range between equity bull and bear expectations). Positioning is now lighter/shorter in both equities and bonds, though not at extremes, while sentiment is far more downtrodden. This process of deflating expectations, valuations, positioning, and sentiment is likely, not complete, but we have certainly made progress.
2023 is going to be a market that demands discipline. This discipline requires balancing short-term drivers (technicals, positioning, and sentiment), medium-term drivers (fundamentals like valuations and earnings), and long-term goals. There will be periods where these time frames will disagree or tell different messages. We saw this dynamic in 2022 with powerful bear market rallies driven by short-term technicals and positioning, while medium-term fundamentals continued to weaken. We stay disciplined, balancing short- and medium-term signals, so as to continue to make progress toward our long-term goals.
Overall, we expect another year of rationalization, rotation, uncertainty, and volatility in markets and the economy in 2023. However, emerging from these dynamics are to be opportunities of which we are prepared to take advantage.
And so, we go with Goethe: “Enjoy what you can, endure what you must.”
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All data is as of 1/17/2023 unless otherwise noted.
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