Quarterly Newsletter

Key Themes For 2023                                                                                                    Join our Quarterly Newsletter            January 2023                                                                                             

Mark R. Hoffman

CEO, Principal

2022 was rough.  For pretty much everything and everyone.  The question on investors’ minds is this: “Will 2023 be any better?”  With the Holidays behind us and a new year starting, what will be the key themes for 2023?  2022 was rough.  For pretty much everything and everyone.  The question on investors’ minds is this: “Will 2023 be any better?”  With the Holidays behind us and a new year starting, what will be the key themes for 2023? 

Before we get there, I feel obligated to give a brief recap of 2022 for context.  I’ll keep it brief – no sense rolling around in pain for too long. 

- Soaring inflation, aggressive interest rate hikes, the war in Ukraine and supply chain issues caused almost all assets to decline significantly

- The S&P 500 lost 19%, the seventh-worst year since the 1920s

- Within the US stock market, growth stocks got crushed and ended the year down 37%

- All sectors were down except for energy

- The bond market was down 13%, easily the worst year for bonds since the inception of the bond market index

- The 60/40 blend was down 17%, the worst performance since the 1930s

- Developed international equities lost 15% and emerging markets lost 18%

- Real estate (REITs) lost 25%

- Commodities began the year on fire, moderated in mid-year and ended up roughly 10%

- Select alternative investments and cash were about the only place to hide

Truthfully, as bad as 2022 was, it could have been worse.  Corporate earnings held up for most of the year – otherwise we would have had the double-whammy of earnings AND multiple declines.  

Looking ahead, what are the key themes that we see for 2023?  We think there are five.

1. Real US GDP growth will be anemic.  At least for the first half of the year.  Inflation – while coming down – is still high, negatively affecting the spending power of the consumer.  High interest rates are hurting home building and corporate investments.  The strong dollar continues to boost imports and hurt exports.  If we aren’t already in a recession, many believe it will come early in 2023.  Here are the real GDP forecasts from the US Bureau of Economic Analysis. 

                                                                                       

2. Corporate earnings will be challenged.  Companies are facing higher input costs and slower sales growth.  While earnings held up in 2022, 2023 will be a challenge.  Some of the cost increases have been passed on to consumers through price.  But that is putting pressure on overall sales (demand).  Many believe that margins will suffer as a result.  

3. Interest rates should remain elevated.  The Fed has tightened at the fastest rate on record.  The battle against inflation isn’t over and while we expect the rate increases to stop in 2023, we don’t expect rate cuts any time soon.  High interest rates directly hurt the housing market (mortgages).  They also squeeze the consumer through higher credit card costs, higher rates on auto loans, etc.  

4. The second half of the year should be better than the first.  Most expect a mild recession with recovery beginning in the second half of the year.  Generally, recessions are accompanied by lots of layoffs which exacerbate the problem.  That is one bright spot this time around.  There have been numerous announced layoffs in the corporate world.  But unemployment remains very low and there are more job openings than available workers.  This from the St. Louis Fed:

                                                         

5. There should be excellent buying opportunities.  If you are patient!  Volatility in the stock and bond markets was highly elevated in 2022 and most expect that to continue in early 2023.  But as the economy works its way through the (hopefully) mild recession, the declines in asset values should stabilize and volatility should subside.  Many believe that a large portion of the declines are already baked into the current price.  [We remain dubious of that.]  That will leave excellent buying opportunities for the long-term investor at much more reasonable P/E ratios.  

Mark is a co-founder of Lanier Asset Management and serves as its Chief Executive Officer. Prior to founding Lanier, he was a partner at The Boston Consulting Group. Mark is an honors graduate of The University of North Carolina at Chapel Hill with a BA in Economics, and holds an MBA from The Harvard Business School.