Market Commentary January 2023
JANUARY MARKET COMMENTARY
Embrace the Fog—2023, A chance for upside surprise?
Every calendar year, as one year ends and another begins, we receive a deluge of financial forecasts and predictions for the new year. When looking back on these predictions 12 months later, they tend to be wildly off base and, in the vast majority of times, flat out wrong. If the forecasts and predictions of the most highly-trained and well-seasoned financial professionals are universally and consistently wrong, why do we, as humans, continue to read them, take them seriously and look to them for guidance? The reasons are many and varied and too numerous to mention in a relatively brief article. That said, to briefly summarize, humans tend to believe that things move linearly and that we can intuitively predict, based on recent past events, what is going to happen in the future. While this type of thinking may work in certain realms of life, when it comes to finance and economics, it is deeply flawed and needs to be adjusted. The following paragraphs will provide a better roadmap for dealing with uncertainty and the unknown. First, let us take a look at the December 2021 predictions for where the S&P 500 would settle on 12/31/22:
The S&P 500 began 2022 at an index level of 4,778. The average strategist’s estimate for the 2022 ending value of the S&P 500 was 4,950. As we now know, the S&P 500 entered bear market territory in 2022 and the index finished the year at approximately 3,840, leading to a total return that equated to a loss of 18.1%.
Now, we fast forward to the November-December 2022 forecasts and look at the predictions for where the S&P 500 will close on 12/31/23:As you can clearly see from the previous two charts, when valuations were high, strategists predicted they would go higher. Now that things have cooled off and valuations are lower, the average strategist is predicting little to no appreciation in the S&P 500 for the calendar year. This type of behavior and forecasting seems counterintuitive to the age-old mantra of “buy low, sell high.” It is not surprising though, being that it aligns with plentiful statistics pointing out that strategist and analyst forecasts have been known to be lessons in futility.
Most astute investors have a bit of a contrarian style to their approach, as good investments often start off feeling uncomfortable. Being able to oppose popular opinion or go against conventional wisdom can be key to successful investing. Therefore, the lack of strategists’ confidence, to me, is a bullish sign. Also, several leading economic indicators are pointing to hints of good news. This further suggests that 2023 may not be as bad as many analysts, economists, and strategists think. In the view of Wolf Group Capital Advisors, big negative surprises that depress valuations, impair company earnings, damage fundamentals and deflate stock prices, remain unlikely.
Armed with this knowledge and point of view, what is an investor to do? Stay invested! And perhaps consider putting excess cash to work. For arguments’ sake, let’s even assume there is a recession on the 2023 horizon.
When looking back on the past dozen recessions, some patterns begin to emerge. Namely, in the 6 months leading up to the recession, markets lose a bit of value, about 1.1% on average. However, during recessions, because the stock market is a forward-looking mechanism, stocks actually increase in value, by about 3.8% on average. And the real hook? 1 year, 3 years, and 5 years after a recession, stocks have cumulatively increased on average by 21%, 49%, and 94%, respectively. Those are some serious returns for patient and disciplined investors who are willing to stay invested during the bad times so that they can fully participate in the good times. In case you are curious, here is the granular recession data:Other positives in the economy and in various asset classes exist as well. For the first time in years, bonds are showing signs of life and are compensating investors with reasonable yields. Labor markets remain robust and wages continue to grow. The dollar began the year weakly which led to international and emerging market investments outperforming for the first few weeks of the year. And while things are muddling along in many economies and there are still plenty of inflation issues to work through, we believe the picture is not as dour as financial commentators would have you believe.
In summary, because stocks move on the gap between reality and expectations, there is a good chance stocks have a stronger than expected year in 2023.
Chief Investment Officer
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