Time and tide wait for no man (or person in more modern parlance). I learned the proverb at a young age from a first-generation Irish immigrant who had as much influence on my early childhood development as any non-family member could. I have since learned that it dates as far back as the 13th century and was a passage in the prologue of Jeffrey Chaucer’s 1395 work, “The Clerk’s Tale.” So, its sourcing is decent, I suppose. Fortunately, many of us have taken the moral of the statement – to seize what are often fleeting opportunities in life as many inevitable and uncontrollable influences on our existence will try and get in the way – to heart. And there’s certainly some applicability on that toward the end of this missive. Candidly, though, I thought of the quote simply because of how long ago 2022 already feels, and how the market tides impacted our collective moods these last 12 months.
Despite rebounding in the fourth quarter, financial markets were unkind to investors last year. Inflation and higher interest rates collided with global economic uncertainty and geopolitical conflict and weighed on stocks and bonds. It is a rare year in which equities and fixed income decline simultaneously, but they do occur. The speed at which the Federal Reserve increased rates and the historically low level from which they started magnified the challenges in both asset classes.
Solace was a relative concept during the year. Value-oriented equities, for example, fared better than growth-oriented stocks even though both were down. Similarly, short duration bonds declined by less than longer duration issues. It’s important, but not always easy to remember that a few percentage points saved is as important (and sometimes more so depending on timing) than a few extra earned.
I think we use turns of the year to remind us of just how few checks we seem to write anymore, but also, to reset the baseline of our expectations. There’s some rationality to the process, especially when we consider the practical effects of matters like tax years and benchmarking. Often, however, the markets ignore what day it is and instead focus on what data there is. As we enter 2023, the data points to some potentially still challenging themes for the early part of the year but also some interesting opportunities over the long-term.
If 2022 was the year of inflation and the Fed, we believe 2023 will include a shift in market focus to fundamentals (economy, corporate earnings, etc.). This isn’t to say that investors, or the media, will ignore the Fed completely. It’s too big a player in markets to do that. But the Fed’s playbook is far more scripted today than it was at this time last year. The window for peak interest rates is now roughly 0.50% wide, versus 4.00% in January 2022. Today the duration of our stay at those levels is the primary question. We’re also starting from a significantly higher level in terms of rates which lessens rates of change from here.
As the attention migrates toward actual results, investors may be somewhat discouraged by what they see in the near-term. Economic data continues to slow in the wake of higher rates and the maturing economic recovery. Consumers have spent through most of their COVID savings cushions and are beginning to tap credit cards again to fund the gap between earnings and the increased costs that inflation has widened. Businesses have also indicated more reserved outlooks in surveys and through behavior. On top of these issues, corporate earnings expectations remain above where any normal slowdown would shake out which means that revisions to those estimates are more likely to be negative in the coming months. All this likely means that the near-term will remain volatile for risk assets, like stocks.
Remember to take advantage of fleeting opportunities, however! And there are some to note. First, in the near-term, prospects for fixed income securities have improved significantly from a year ago. In addition to current income and the potential for better long-term returns due to higher starting interest rates, we believe bonds will again add diversification benefits in 2023 as the focus shifts from inflation to growth. Second, many of the challenges for stocks are well known and, thus, priced into the markets. As valuations have meaningfully declined in the last 12 months, longer-term returns for the asset class are likely to be higher. Third, as the focus shifts towards fundamentals and away from macro issues like interest rates, the differentiation between high-quality, well-diversified portfolios and average ones will likely widen.
So, as we reflect on 2022 and look forward to 2023, there are reasons for continued caution but also for optimism. The things in which we are confident are that time will fly and opportunities won’t wait.