2023 Outlook

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.

The Market and a Look Ahead

Stock and bond market returns in 2022 have left investors frustrated and dour about the future. But as Warren Buffet is known to have said, “the stock market is a device for transferring money from the impatient to the patient.” Bear markets are normal expected events that can be as equally rewarding as they can be devastating. Although past performance is no guarantee of future returns, every bear market in history has only served as a great entry point in retrospect.

It seems important to note that the recession in 2020 was not so much a recession but a lockdown. Now, with two consecutive quarters of declining real GDP, many believe we are back in recession. However, we believe that as of now we are not in a recession and that the economy is much stronger than many believe. Current data shows Initial Jobless Claims, Continuing Jobless Claims, and the ASA Staffing Index are all healthier than they were before the 2020 pandemic. Nonfarm Payrolls Increased 263,000 in September, another sign no recession has started or is about to start.

Wages also continue to grow, as average hourly earnings are up 5.0% versus a year ago. Although we estimate that the consumer price index is up 8.1% from a year ago, we also like to follow total wages paid, which is based on average hourly pay and total hours worked. Total wages are up 8.6% from a year ago, meaning wages are beating inflation (mainly because workers are working more hours). However, the point remains that household income and balance sheets remain strong and are able to weather the storm of inflation.

Although we do expect a recession, we do not believe it is here and now. We believe rate hikes, which have already impacted the housing market, will likely cause a recession by the second half of next year, with some variability of that timeline. There is certainly more economic pain to come, in certain areas, like the labor market, but that pain is almost completely in front of us, not behind.

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.

Look Forward To The Recovery

Investors are feeling pessimistic about the future, with high inflation, the Fed raising rates, war in Ukraine, and high energy prices contributing to a sense of doom and gloom. Although the current market is technically a bear market, with the index down by almost 24% after six months, we believe that it lacks the power for a long, drawn-out bear market like those we have seen in the past.

Bear markets typically last around nine months and experience an average decline of roughly 35%. However, we see underappreciated positives globally, such as positive yield curves, healthy loan growth among developed nations, solid earnings and revenue growth in Q1, and American households being in a strong position to weather inflation.

The market moves on the gap between expectations and reality, so as good news starts to emerge, the market will leave behind investors who are expecting a more catastrophic downturn. While equity markets can be unpredictable in the short term, we believe that well-positioned assets will benefit from better days ahead over the long term.

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.