SUMMARY
Despite the unforgettable market turmoil seen in 2022, investors should not be backward looking when thinking about potential market opportunities.
- 2022 was a year of turning points – for global markets as well as politics. In addition to a breakout of war in Europe and marked bifurcation of the world as China rises in power, financial markets experienced reversals.
- The US Federal Reserve went from accommodative to restrictive policies as financial assets experienced a great revaluation. In our view, the Fed’s boom and bust policies will not end well. We don’t see a scenario where earnings remain steady – instead, they’re likely to decline 10% in 2023.
- We think the Fed will need to reverse policy again in 2023 when job losses accelerate, and by mid-2024, we expect the Fed will have reversed half of its 2022 tightening steps.
- We urge investors to look forward and be forward thinking too. Markets look ahead. We suggest considering 2009 to remind us why. Just as GDP was plunging at a -4.6% rate and unemployment grew consistently across the whole of 2009, US equities bottomed on March 9, 2009 – quite early in the year.
- Inflation in the coming decade could average a bit higher than the decade preceding the Covid shock. However, we believe many investors will be surprised when it recedes sharply in 2024. As a result, bond market performance in 2023 and 2024 should improve. Attractive yields now may also benefit from bond appreciation in the future.
- Historically, equity markets associated with recessions typically bottom halfway through the downturn. For example, in 2009, the bottom occurred 80% of the way through a full contraction.
- Unfortunately, 2023 will not begin with smooth sailing. Investors should not expect that markets will bottom in a period of growth or optimism, but rather in the heart of contraction. But the New Year will also likely mark a transition for the world economy as it enters a growth period in 2024 and beyond.
