2023 Outlook

January 19, 2023  |  Planning

General Thoughts

• Ignore 2023 market forecasts.  Markets aren’t predictable in 12-month increments…now or ever.  Be wary of anyone that believes otherwise.        
• Instead focus on things that can be controlled: having a well-constructed plan, matching your allocation with your plan, tax saving strategies, and legacy planning.
• Historically, building and protecting wealth over the long run is done through owning businesses and real estate.
• The way to deal with the short-term unpredictability of inflation, interest rates, and a variety of other factors is by keeping money you need in the next 3-5 years in cash and bonds, only investing money in stocks, real estate, and private investments that can be there for 5 years or more.
• Make each category of investments (short–term, intermediate–term, and long–term) as productive as possible.

Current Markets

• Short-term:  money markets are now paying over 4%.  Let us know if you have excess cash to put into money market funds.  There is a good chance rates will start falling in the next 6-12 months, so look to lock in rates over the intermediate term if you don’t need that money soon.
• Intermediate-term:  after the worst year ever for the bond market, bonds now look poised to return 4-6% per year for the next several years.
• Long-term:
  • Stock indices were down 20-40% in 2022.  We believe they are poised for above average returns over the next 5 years.  We may be nearing a peak in interest rates for this cycle.  Earnings are likely to grow over the next 5 years appreciably.  Multiples will likely stay the same or even increase if rates fall, adding to stock returns.
    
  • We also like private equity, private debt, and private real estate for long term investments.  We believe double digit performance over the next 5 years is likely.

Our Investment Playbook For 2023

• Overall, we are currently neutral between stocks and bonds.  They both look attractive.  We are looking to increase stock exposure on dips in the market as that balance would shift in favor of stocks.
• Now that interest rates have increased, we have repositioned cash and bonds to take advantage of those higher rates.
• We continue to look to add businesses to portfolios that have dropped further in price than they should have.  Proverbial babies thrown out with the bath water. 
• There are many private funds that are now available with more liquidity than there has been in the past.  We are looking to increase exposure to privately held businesses, real estate, and debt.

2023 Outlook

This is the time of year when every Wall Street firm will parade their investment strategists to the media outlets to make their predictions for the year ahead.  With confidence they will give specific year-end price targets for the S&P like 4,550 and 3,725.  They are all very smart and will have a well thought-out rationale that will be presented in a confident, polished way.  Wells Fargo’s target year-end range is a range between 4,300 and 4,500.  Which could be comforting since that is 10-15% above current levels.  Unfortunately, in my opinion, just like the emperor in the children’s parable, the investment strategists wear no clothes.  But before we judge the strategists, note the children’s parable is less about the emperor and more about his subjects who willfully suspend rationality to go along with the crowd … no matter how obvious reality may be.

To quote Donald Rumsfeld when he was Secretary of Defense, “There are known knowns…there are known unknowns…but there are also unknown, unknowns.”  The return for stocks over the next 12 months is a known unknown.  Be careful listening to anyone that says otherwise – bulls and bears alike. 

Rather than focus on forecasts of the unknowable, we would rather focus on activities that build and protect long-term wealth.  As we start another lap around the sun, we are focused on the following for you and your family:

Your Overall Plan

• Cashflow and spending – Making sure you can support your lifestyle through retirement and accomplish any other goals you have as well.  That you aren’t overspending or underspending.  When you overspend you take the risk you may eventually run out of money.  However, if you underspend you don’t get to enjoy life or help others (family, friends, or charity) as much as you could.  As in much of life, we believe a balanced approach is the key.
• Taxes – While we don’t give tax advice per se, we do spend a lot of time thinking about taxes and how you might benefit from different strategies.  For example, over the past year we spent a lot of time harvesting losses to be used to offset capital gains either now or in the future.  We will continue to look for opportunities to potentially create tax savings for you.  A dollar saved in taxes is equal to a dollar earned in after-tax return. (Wells Fargo is not a legal or tax advisor.)
• Legacy – If you haven’t met Vicki Meadors on our team, expect to hear more from her this year.  She brings more than 25 years of planning experience and over 20 years’ experience as an estate planning attorney to our team.  She can help you understand the current plan your attorney put in place and discuss other potential strategies to be contemplated with your attorney in the future.

Aligning Your Investments With Your Plan

• Making sure you have enough in short-term investments to cover your spending needs for the next 6-18 months.
• Making sure you have enough in intermediate-term investments to cover you the next 3-5 years.  
• With the remaining dollars in long-term investments focused on maximizing growth and outpacing inflation.   By keeping enough in short and intermediate-term investments, we negate the impact of the unknowns and can capitalize on the returns available for the long term. We will still have some mistakes over the long term, but our likelihood of being right goes up proportionally with the amount of time we have for our thesis to play out. 

Productive Time Horizon Categories

• Short-term investments:  money market and high-quality short-term bonds are now yielding more than 4%.  These yields may decline during the year if the economy stutters and the Fed decides to start cutting rates.  It could make sense to lock in current yields if you don’t need those funds in that time.  Let us know if this is the case or if you have cash in bank or savings accounts you would like invested in money market funds to get a higher interest rate.
  
• Intermediate-term investments:  we are utilizing several bond funds right now that have relative low levels of interest rate risk and are yielding between 3-7% tax free and 5-8% taxable.  After the worst year ever in the bond market, bonds look poised for a potentially great year.   Rate hikes appear to be nearing their end.  The markets are pricing in 0-2 more rate hikes and then rate cuts in the second half of the year.  I am not prepared to start pricing in rate cuts, but it seems logical that rate increases are nearing an end.  If we truly are nearing the end of the rate hiking cycle, bonds are likely attractive whether rates fall the second half of the year or not.
• Long-term investments: many individual stocks look very attractive right now.  This is a market where we favor individual companies over the general market.  We may have a recession in 2023, most economists are forecasting one.  In fact, one pundit recently said if there is a recession it will be the most anticipated in history given how many people are predicting one.  But since stocks are a leading indicator, and most pundits are predicting recession, many stocks already reflect a potential recession.  For example, the economically sensitive semiconductor sector is down about 30% over the last 12 months, with some individual companies down over 50%.  Could prices go lower?  Of course, the next 90 days isn’t any more or less predictable than it has ever been (see known unknown above).  However, we can buy quality businesses for prices that are 20-40% lower than they were a year ago.  If you have a 3–5-year outlook for those stocks, these prices may likely lead to above average returns in the future, especially if you have a good idea of what those businesses are worth, which I hope we do!  The time to buy straw hats is in the winter and right now it is winter for the stock market.  Have we reached the low temperature in this stock market winter … that is unknowable (see above), but I am willing to invest money based on the idea that summer is coming, it is just a matter of when.  Jim, Alek, and I spend the majority of our time contemplating and researching investments in this long term category.  We leverage research from seven different firms along with our proprietary research.  In addition, we are leveraging funds with Blackstone, Starwood, and Partner’s Group, among others to invest in private real estate, bonds, and businesses.  Reach out to your lead advisor to discuss potential investments in these categories and if they make sense for you.  They have different qualifications, hold periods, fees, etc.  But buying straw hats now, will likely be good for your family’s long-term wealth once summer comes.

Specifically, heading into 2023, the portfolios we have discretion over are close to being fully invested.  For example, if your plan dictates 65% in stocks and 35% in bonds, we are currently within plus or minus 2-3% of those targets.  We don’t believe investors should be defensively or aggressively postured right now.  There are too many attractive opportunities to be defensive.  We would prefer instead to simply make sure you have enough in short and intermediate investments to be able to wait out any volatility in stocks, real estate, or private equity.  On the other hand, if we do have another price drop in stocks, we believe it will be appropriate to go overweight stocks by 5-10%. We think that stocks falling further is far from a forgone conclusion.  However, we have yet to see a panicked capitulation that typically marks bear market bottoms.  If we do get a recession, it may be accompanied by a capitulation, which we would see as a buying opportunity.

One final thought…

The stock market is an amazing invention.   In my experience, true long-term wealth is built through owning quality businesses and real estate through thick and thin.  We are fortunate to live in a country and at a point in history where anyone can own both businesses and real estate through investment vehicles like publicly traded stocks and funds.  It doesn’t matter who you are or where you are from and you don’t have to be royalty to own property.  

But the stock market has one major drawback, that is you get to see what someone else is willing to pay you for your share of the businesses that you own on a regular basis.  Can you imagine if you got a firm offer for your house over 200 times a year.  One day, buyers might be manic and offer you prices that are way more than it is worth.  Another day, they might be depressed and offer way less.  Regardless, the true value of your home wouldn’t really be changing, what would be changing is the mood of the people making the offers.  In the same way, I don’t believe the prices of the businesses (stocks) we own are really changing all that much.  What is changing is the mood of the people giving us offers to buy and sell them.  I really think it would be better if we only got to see those offers once a quarter or even once a year.  We would then be much more inclined to pay attention to how the businesses themselves were doing and not so much on the mood of the people willing to buy our shares.

Great investors don’t value their investments by what other people are willing to pay in the moment.  They know the true value of what they own and that it is often vastly different from the current quoted price.  The only reason to pay attention to the current quoted price is to take advantage of people willing to sell for a lot less than a business is truly worth or willing to buy for significantly more than it is worth.  We make our fair share of mistakes, but we strive to be great investors.  We feel strongly about the true value of our businesses and are only willing to sell to people willing to pay more than they are worth.  In the meantime, we are willing buyers of those willing to sell us shares at a discount.

Thank you for your continued trust and business.  Your relationship means the world to us.  Please don’t hesitate to reach out with any questions or needs you may have.

Authored by
Jason Hyrne, CFP®, CIMA®, CPWA®
Senior Private Wealth Advisor, Owner

CAR-0123-01149

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