“Bull markets are born on pessimism, grow on skepticism,
mature on optimism and die on euphoria.”
- Sir John Templeton
I love that quote and as we move into 2023, pessimism reigns. Notwithstanding December weakness, Q4 brought some relief from 2022’s troubles with some reasonably healthy returns for global equities which also extend the long history of post-midterm positivity that I wrote extensively about last year. It remains too soon to know if the bear market has ended. Time will tell as turning points are impossible to predict and are only clear in hindsight.
Regardless, if the new bull market began in June or October or arrives this year, everything I see and read points to stocks ending 2023 higher – possibly quite higher, than where they began. Timing aside, if history is any indication the new bull market should bring big early returns and that’s what makes timing the market so incredibly difficult. Using U.S. equities for their long history of reliable data, the postwar average returns off bear market lows are significant and as you can see come quickly in a short period of time.
Blink and stay scared on the sidelines – you can miss them. The market trying to humiliate investors is a tale as old as time and we must not fall prey. Instead, keeping our long-term goals and in focus is paramount. Furthermore, I should mention the obvious which is the compound growth they deliver throughout the ensuing bull market.
Without question, 2022 the medicine was administered and was a challenging year across the board. Transition periods such as last year are difficult, but I think overall investors shouldn’t be discouraged. Regardless of the market environment that’s presented to us, my value add and goal in managing portfolios is to simply be better than your portfolios respective benchmark. In a year like 2022 which was decidedly poorer across the world, U.S. and to a lesser extent Canada the goal is to do better. When I look at our mandates, for the most part, that’s exactly what we accomplished and in turn have set the table for 2023 which I believe has promise.
Considering what we have come through and what the first couple weeks of 2023 have delivered I have good reason to remain optimistic for 2023. In my view, investors will soon look back at 2023 as a recovery year. I am very optimistic, and the thesis is very simple:
- Inflation is coming down and has fallen for 6 months in a row. CPI has completely moderated the past 3 months and if we extrapolate the CPI data over that time and annualize them, they’re in line with the target rate. The next couple of months should be very promising in this regard as some of those high year over year numbers we felt early last year will rollover.
- Fed is nearly done raising rates. Powell told us 5.1% is the terminal rate. The fed fund futures are saying 4.9% and the fed funds are 4.5% - so very close to the fed being done and that’s because inflation is coming down.
Against those two very significant positives you have the two E’s:
1) Employment: The greatest number of people are working ever. Unemployment in the U.S. is down to 3.5% - that’s the lowest in 53 years. The consumer, despite inflationary pressures of the past year, is doing reasonably well because they not only have a job but because of wage growth, the highest gross income ever.
2) Corporate Earnings: It’ll be interesting over the next few weeks as companies report Q4 earnings and provide guidance moving forward. Perhaps we may have a little hiccup on this front as consensus estimates are projecting it will be down -4% this quarter. On the flip side, I heard from portfolio managers last week that attended the J.P. Morgan Healthcare Conference in San Francisco and the healthcare names they own gave a sneak peek at their upcoming earning results. Their results were a surprise to the upside and just as importantly they have provided upward guidance. In saying that, if you look at 2023 as a whole, it’s up +4%.
In summary, with inflation coming down, the Fed signalling they’re close to done, employment incredibly strong and finally earnings ‘okay’ - it really sets up for a reasonable backdrop moving forward.