SUMMARY
It's a perplexing market - both for contrarians and investors seeking steady gains from long positions. As we see it, stocks are rallying on hopes that the Fed will slow its rate increases soon and on unrealistic expectations that markets have already properly priced in economic declines to come in 2023.
US equities, which plunged as much as 25% this year, are down 17% (total return) as of Friday – and managed to notch an 8%+ gain in the past two weeks
Despite some recent hints from Fed officials expressing concern over unintended consequences of rapid tightening, the Fed’s focus on making up for its excessive easing last year leaves it unlikely to pivot, but merely to pause in the coming year.
Sign of stress have appeared in the bond markets. Illiquidity has caused events in the UK gilts market to ricochet back to the Treasury market. Rapidly widening mortgage bond spreads have made mortgages more expensive for borrowers.
When equities and bonds move in tandem, that’s a further sign of risk aversion.
We remind our readers: No prior equity market bottom has been reached before a recession has even begun.
For investors who might want to take greater overall risk after this year’s market decline, we believe it makes sense to understand when a recession might begin and assess its likely depth and duration. These are 2023 events, in our view.
We are repositioning fully invested diversified portfolios toward potentially reliable sources of return: investment grade bond income and dividends paid by industry leading firms.
We’ve increased our overweight to US investment grade fixed income to 14% of medium-risk global portfolios and added most recently to short-duration US Treasuries with yields at 4.5%.
