The NEI team shares their market outlook for 2023 with a focus on looking through short-term volatility to identify long-term opportunities.
If markets and investors had any say in determining Merriam-Webster’s 2022 word of the year it would surely be ‘Inflation’. From January 2022 onward the monthly U.S Consumer Price Index (CPI) release dominated headlines as investors digested the data to gauge the response of the Federal Reserve. The U.S CPI showed inflation above 7.5% for the first time since the early 1980’s and it continued to accelerate through most of the year, with headline inflation peaking in June and core inflation peaking in September. Inflation remains stubbornly high despite the extraordinary pace of tightening which has taken a toll on economic growth and asset values.
While the old saying “during a market a crisis all correlations go to 1” may not be precisely accurate, the spirit of the saying rang true this year. Equity and bond markets both saw steep declines as the US Aggregate Bond Index and the S&P 500 showed an increasingly positive correlation throughout the year. To put it in perspective, on a real return basis the traditional balanced portfolio of 60/40 US stocks/bonds had one if its if worst performances (possibly the worst depending on how December ends) in over a decade.
Outside of the U.S, international markets also didn’t offer investors any shelter from the storm, as developed and emerging markets also faced inflation in addition to other idiosyncratic risks.
Europe felt the knock-on affects of the Russian-Ukraine Invasion, the U.K produced its own home-grown currency crisis and China continued to sacrifice economic growth to pursue its covid-zero policy.
The combination of high inflation, aggressive monetary tightening, war in Europe and the knock-on effects of a global pandemic presented a challenging year where investors had no place to hide. In most cases the market took no prisoners, as returns were negative regardless of geography, sector, factor exposure or investing style.
Even the alternatives like crypto, gold or commodities offered no respite from a down market. The lone sources of positive returns were only in the US Dollar, Natural Gas and Oil.
In many ways 2022 was a perfect storm, so it was no surprise this year marked one of the worst years for balanced investors. The silver lining is that active managers who are willing to weather the volatility will likely find long-term opportunity ahead. These ideas are outlined in our full 2023 Market Outlook.
