Navigating the Waters of 2023
Below are the key investment themes for the year and a more detailed update on our 2023 investment strategy. Overall, the range of potential outcomes is wide. There is good reason to be optimistic, although the possibility of a more significant recession and further equity downside can’t be discounted either.
As always, our portfolio is balanced and diversified with a focus on high quality investments. We have equity hedges in place. We are keeping a keen eye on signs that the fed will pause their interest rate increases (which would be positive for equities) and will be ready to capitalize on investment opportunities as they emerge.
Key investment themes:
Inflation trends: Yesterday’s CPI release came in at 6.5%, down from 7.1% the prior month. We are still cautious on the high level of overall inflation, though continued declines are a positive signal for markets. The trend of inflation this year will be a driver of asset performance in 2023.
The labor market: Unemployment is hovering around all-time lows at 3.5% and the labor market is robust. A moderation in the labor market would likely push service inflation lower. Employment data will be a key theme in 2023 (a moderation in the labor market would be positive for equities).
Corporate profits: Interest rate increases have started to impact economic activity. This is likely to impact corporate profits in some areas of the stock market (especially for some cyclical companies). However, other parts of the market are benefiting from wage gains, a strong consumer and solid commodity prices. 2023 is set to be a year of winners and losers.
Economic growth: A slowdown in economic activity may actually be good news for the stock market if it is orderly enough to allow the fed to pause their interest rate increases and eventually look to cut interest rates. However, if a slowdown in economic activity is not orderly, that could cause further equity downside.
Interest rates and a (potential) fed pause: A pause or cut on interest rates would likely be positive for equity prices. The direction of interest rate moves will be a key theme in 2023. The fed’s first meeting starts on January 31, and we think interest rates will most likely be lifted by 0.25% (0.5% is a possibility). Since 1980, the average S&P500 return is +15% in the 12 months following a fed pause. However, there is no guarantee that stocks will rally if the fed pauses rate increases in 2023.
Russia / Ukraine peace talks: Any peace talks would likely be positive for global inflation rates and investor sentiment.
Below are targets on key metrics that could drive some equity upside (all else being equal). These metrics may move in opposing positions throughout the year (creating competing factors that are driving equity upside and equity downside). These targets are indicative only and do not state or imply any kind of guarantee.
Wage growth: Below 2%
Unemployment: Above 4.5%
Core CPI: Below 4%
2023 earnings per share: $225
Fed funds: 5% - 5.25%, followed by a pause
Ten-year yield: 4.25%
Russia / Ukraine peace talks in 2023
Portfolio strategy
We are holding our high-quality core and yield investments over the long term, with defensive tilts and hedges in place to mitigate near term risk.
Our tactical positioning will be data dependent as we move through the year as we watch for signs of a fed pause and a potential equity market recovery. We will be ready to pivot our position as appropriate.
On the equity side, we are overweight companies with resilient earnings streams, pricing power and reasonable valuations heading into an uncertain year for company earnings. We are overweight value, slightly underweight growth and underweight international.
We continue to hold a healthy allocation to alternative investments including commodities, private debt and private equity.
On the fixed income side, we are overweight short duration bonds as the fed look set to further increase interest rates while the yield curve is substantially inverted. We are making use of volatility where appropriate to invest in structured yield notes with what we view as attractive payoff structures and are ready to capitalize on opportunities as they emerge.
Disclaimer
The information presented should not be considered personalized investment, financial, legal, or tax advice. This notification is not an offer to buy or sell, or a solicitation of any offer to buy or sell, any of the securities mentioned herein. Certain statements contained herein may constitute projections, forecasts, and other forward-looking statements, and are based primarily on assumptions applied to certain historical financial information. Certain information has been provided by third-party sources, and although believed to be reliable, it has not been independently verified, and its accuracy or completeness cannot be guaranteed. Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as of the date of this document and are subject to change. Past performance is not indicative of future performance. Principal value and investment return will fluctuate. There are no implied guarantees or assurances that the target returns will be achieved, or objectives will be met. Future returns may differ significantly from past returns due to many different factors. Investments involve risk and the possibility of loss of principal. The values and performance numbers represented in this report reflect management fees. The values used in this report were obtained from sources believed to be reliable. Performance numbers were calculated by Black Diamond using the data provided by your custodian. Please consult your custodial statements for an official record of value.
The securities involve risks not associated with an investment in ordinary debt securities. Selected Risks Associated with any of these structures include: - Notes are not principal protected and investors can lose some or all their initial principal if the underlying asset falls below the Principal Barrier Level. - Contingent coupon payments. Investors may not receive periodic interest payments if the performance of the underlying asset falls below the Coupon Barrier Level. It is possible that investors will not receive any coupon payments over the life of the Note. - Potential for early redemption and reinvestment risk. Notes will be automatically called if the performance of the underlying asset is at or above the Initial Strike Price on the defined Observation Date. If called, investors may not be able to reinvest their proceeds in a product with a comparable coupon. - Returns are limited to the coupon payments, if any. Investors will not participate in any price appreciation of the underlying asset. Additionally, investors will not receive dividend payments generated by the underlying asset. - Limited secondary market. Notes should be considered buy-and-hold investments and investors should hold them to maturity. They are not traded on an exchange and there may be little to no secondary market available. - Issuer credit risk. Notes are senior, unsecured debt obligations of the issuer and all payments of income and principal are therefore subject to the creditworthiness of the issuer. - Complex investments. Notes may have complex features and may not be suitable for all investors.