By Tim Courtney, Chief Investment Officer
Investors undoubtedly struggled through 2022, which represented the worst year in history for bonds1 while also seeing stocks drop nearly 20%.2 That rough ride led many market observers to forecast an imminent recession in 2023.3
But once this year arrived, spending numbers proved stronger than anticipated,4 GDP growth outpaced expectations5 and people began to wonder whether we might be able to dodge a recession in the near term after all.
Opinions have been seesawing ever since amid unreliable market signals. An inverted yield curve, in which shorter-term bonds yield more than longer-term bonds, is viewed by many as a strong indicator of impending recession. While the curve has been inverted for several quarters now and is flashing warning signs,6 no recession has materialized. It still could, but the bond market over the last few years largely missed the mark on predicting inflation and rate trends.
What about the stock market? It’s currently celebrating, as virtually every asset class rose during the just-completed second quarter.7 But remember that the stock market also went into party mode in 2021, only to quickly reverse course in 2022.7 It didn’t anticipate Federal Reserve (Fed) actions well, nor did it anticipate that higher cost of capital would have a large impact on venture capital, fast growing tech and lower profitability companies.8
What’s the reason that market predictions have been so unreliable and contradictory recently? It is almost certainly because there is no precedent for what we have experienced over the last three years. Large parts of the economy were shuttered for the first time.9 Then came extremely generous fiscal and monetary policies,10 followed by similarly extreme tightening measures.11 What happens when an unprecedented economic scenario leads to unprecedented stimulus and then unprecedented tightening? The market continues to guess.
There can be valuable information in market prices. But prices today are extremely noisy due to policy actions. We believe some economic slowing is likely, but a recession is far from a sure thing. Signs continue to be mixed.
The prescription is to diversify and be disciplined. While diversification is almost always a sensible strategy, its applicability is heightened in the current environment, justifying investments across a wide range of assets – including those the market is very keen on as well as those to which the market is currently indifferent, to mitigate risk.
We’re here to help investors navigate times like these with disciplined strategies and investment processes. If you have any questions, please contact your Exencial advisor.
- CNBC (1/7/23) — 2022 was the worst-ever year for U.S. bonds. How to position your portfolio for 2023
- CNN Business (12/30/22) — Goodbye 2022 – and good riddance. Markets close out their worst year since 2008
- CNBC (12/23/22) — Why everyone thinks a recession is coming in 2023
- Bureau of Economic Analysis (7/5/23) — Consumer spending
- Bureau of Economic Analysis (6/29/23) — Gross domestic product (third estimate), corporate profits (revised estimate), and GDP by industry, first quarter 2023
- Seeking Alpha (4/5/23) — Inverted yield curve
- MarketWatch (7/5/23) — S&P 500 Index
- CNBC (3/16/22) — Federal Reserve approves first interest rate hike in more than three years, sees six more ahead
- International Monetary Fund (4/14/20) — The great lockdown: Worst economic downturn since the Great Depression
- Investopedia (2/28/23) — U.S. COVID-19 stimulus and relief
- Forbes (6/14/23) — Federal funds rate history 1990 to 2023
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