Investors are wondering what's in store after last year's bear market. Many predict that a recession will occur this year, with many expecting the economic downturn to hit in mid to late 2023. Business leaders and company surveys also indicate a widespread agreement that contraction is imminent, with 98% of CEOs seeing a US recession in 2023, according to the Conference Board's poll. However, wise investors know that the more an event is anticipated, the more it is mitigated. Most CEOs have prepared their companies to withstand the volatility of a low-growth environment. For example, big tech has already cut jobs and become leaner, freeing up cash flow to account for lower growth and offsetting losses to total profitability.
It's important to remember that profit is the difference between revenue and expenses. Good CEOs try to increase revenue while decreasing expenses, thus raising profitability and the company's enterprise value. If CEOs anticipate lower growth, they take action to reduce expenses.
Moreover, a recession does not necessarily mean that stocks will falter. Stocks usually move ahead of news, not after. The expectation of a recession means that fear has been priced into the market, thereby reducing its future impact on global equities. The bear market seen in 2022 may have been the market pricing in the expectation of a future recession. This also leads to the potential for large positive gains, should no actual recession occur. Positive surprises are bull market fuel, and nothing is better for markets than a widespread fear never coming true.
Investors tend to focus on negatives and discount the possibility that things are better than they seem. Households still remain flush with cash, unemployment is low, and wage growth is high. Input costs have dropped significantly since the spikes seen in 2021. Energy, materials, and shipping costs have dropped sharply from their highs, and supply chains continue to heal and become more fluid. Although the markets can do anything over the short term, patience will be rewarded. As Sir John Templeton said, "Bull markets are born on pessimism."
Nothing herein is intended to be investment advice. Investment in the stock market involves risk of loss, including the loss of principal. Past performance is no guarantee of future returns. The content contained in this article represents only the opinions and viewpoints of the Interlaken Advisors editorial staff.