2023 Observations and Outlook
January 11, 2023
Themes of 2022:
Decreased equity weightings across all portfolios in January of 2022 and increased cash and short duration fixed income.
As interest rates rose across the economy, we increased duration and credit risk toward the end of 2022.
Increased Metals and Mining and country weighting in Brazil on weakness in prices due to: Chinese lockdown, high levels of US dollar, and slowing growth. This reflects our view that the structural demand for metals will remain very high in the coming years while producers will be reluctant to increase production. Margins should remain very high.
Increased international weighting in diversified low-cost ETF’s.
Reduced UK exposure due to increased political and economic uncertainty in the UK specifically.
Marginal increase to US technology from a very low weight.
Inflation inputs pointing to much lower headline CPI numbers into mid-2023.
Fed remains adamant they will fight inflation by keeping rates high, but they acknowledge that the pace of hikes will be reduced and possibly stop hiking soon.
Market mood still suggestive of inflation worries and lower stock prices.
Energy transition is happening.
China is more pragmatic on growth and opening engagement with the West again.
On-shoring of tech and sensitive supply chains. Diversifying from China reliance.
Employers shedding workers. Wage gains should slow.
Wealth and incomes of the lower end of the income spectrum in the USA have benefited dramatically from Covid money and wage increases.
Outlook for 2023:
Always focus on the highest probabilities, and it looks to me like inflation will continue to fall into the middle of 2023. If correct, the Fed will likely stop hiking rates. We were not interested in fixed income 18 months ago, but we are very interested today in taking advantage of the higher yields being offered.
The Fed may try to keep rates high for too long, and this may cause the economy to slow too much. This suggests that equity prices may not rise in the short term. More uncertainty. This again suggests that our heavier weighting to fixed income for now makes sense.
Despite this uncertainty, I believe equity prices in the long term are excellent value compared to a year ago (obviously), and in the long-term prices of good companies will continue to rise. That suggests we should stay invested in our usual diversified approach.
Energy transition should benefit utilities and commodity producers. It looks to me like governments are disingenuous on how much wind, solar, and technology will transition our economies away from fossil fuels over the next 10 years. Mining companies and oil and gas producers are not expanding production fast enough because they lack enough government support in the long run. This should keep margins high and return excess capital to shareholders. Our weighting in metals and mining is relatively high, and we have scope to increase our oil and gas exposure. We have remained light on oil and gas because it has become very popular this year compared to a pariah industry in 2020.
Chinese re-engagement with the outside world should ramp up supply of manufactured products, increase monetary impulses and increase global growth on balance.
Supply chains will shift and change. This is a source of uncertainty which we are watching closely. It will result in increased investment in the USA on shore, but it is disruptive, and we need to be open minded about the implications.
Employers seem to have the upper hand over workers again. This should keep inflation well contained, but this is something that will develop over the course of this year. It will depend on not only how much growth slows, but many other factors.
Covid created many behavioral changes which I have discussed many times in the past. This continues to cause historical relationships in economic data to break down. Uncertainty is increased, and therefore we must keep an open mind when prognosticators and economists suggest that their models are telling us important information about future direction of the economy and stock prices.
I suspect demand will be structurally higher than other downturns caused by Fed rate increases because of all the Covid money that flowed to households, and because of the wage gains experienced at low-income levels. This is developing and we will continue to engage in game theory and adjust probabilities as we obtain more evidence.
Joseph Cardello, Principal August Wealth Advisors, LLC 51 Riverside Avenue, First Floor Westport, CT 06880 Direct (916) 461-9451 toll free (800) 985-9477 email@example.com www.augustwealthadvisors.com
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