By Tim Courtney, CIO of Exencial Wealth Advisors

As we reflect on the market predictions made in January, 2023 has proven to be a year that defies expectations. The anticipated recession failed to materialize¹, consumer spending did not pull back² and interest rates did not decline³, contrary to initial headlines. Now, we find ourselves in an economy that, while still growing, is navigating through challenges.

Corporate earnings, the reason why we look to invest in companies, also revealed unexpected developments this year. We saw a positive trend across large, mid and small caps with third quarter earnings results coming in relatively solid.⁴ If the fourth quarter maintains this momentum, it could pave the way for an earnings record in 2023⁵, eclipsing the previous record in 2021 when earnings were juiced with near zero percent rates and stimulus and spending were flooding the economy.⁶ 2022 witnessed a decline in earnings as some of that stimulus diminished and interest rates rose.

The potential to outdo the record set in 2021 comes with a little assist from inflation. Bottom line numbers are higher in part because the top line from prices charged are higher. It is a lesson that inflation is a double-edged sword for stocks – it helps stocks in that some of the inflation is captured in earnings, but inflation also detracts from stocks because investors tend to use a higher discount rate when they price stocks during periods of inflation. So overall this is not a total win for investors, but it does deviate from the initial projections of a challenging year.

Looking ahead to next year, indications suggest an economy that is likely slowing down.⁷ We assume that the Gross Domestic Product (GDP) will decelerate and the intended effects of interest rate increases will contribute to the slowdown. While consumers continue to spend in response to inflation, signs of strain are emerging. Default rates on auto loans and credit cards show an uptick⁸, and borrowing is becoming more difficult for some companies.⁹

Despite these incoming challenges, there are also anticipated advantages in the market next year. The housing market has remained relatively stable, partly because owners with locked-in low mortgage rates are hesitant to move, constricting supply.¹⁰ The market gains this year will also help household net worth as markets fully recover from 2022’s decline. These two sources of wealth should help households remain on an even keel.

As we enter the new year, the investment landscape remains as it usually is, featuring a mix of headwinds and tailwinds. Thankfully, although there have been virtually no headlines about them this year, earnings have been a steadying force. If you have any questions, don’t hesitate to get in touch with your Exencial advisor.

Sources:

1. CBS News (June 6, 2023) — Remember that looming recession? Not happening, some economists say
2. AP News (September 25, 2023) — Why the US job market has defied rising interest rates and expectations of high unemployment
3. U.S. News & World Report (December 1, 2023) — Mortgage rate forecast: When will rates go down?
4. FactSet (November 3, 2023) — S&P 500 earnings season update
5. Yahoo! Finance (November 23, 2023) — Bank of America forecasts S&P 500 to reach record 5,000 in 2024
6. Fortune (March 31, 2022) — U.S. companies post their biggest profit growth in decades by jacking up prices during the pandemic
7. Reuters (December 1, 2023) — Global economy to slow down but likely avoid recession in 2024
8. The Washington Post (August 30, 2023) — Delinquencies rise for credit cards and auto loans, and it could get worse
9. The New York Times (April 10, 2023) — Bank Turmoil Squeezes Borrowers, Raising Fears of a Slowdown
10. FRED Economic Data , St Louis Fed: Households, Net Worth Level through Q3, 2023

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