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:
PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE RETURNS. Information and opinions provided herein reflect the views of the author as of the publication date of this article. Such views and opinions are subject to change at any point and without notice. Some of the information provided herein was obtained from third-party sources believed to be reliable but such information is not guaranteed to be accurate. In addition, the links provided within are for convenience only and the provision of the links does not imply any sponsorship, endorsement, or approval of any of the content. We do not guarantee the content or its accuracy and completeness. The content is being provided for informational purposes only, and nothing within is, or is intended to constitute, investment, tax, or legal advice or a recommendation to buy or sell any types of securities or investments. The author has not taken into account the investment objectives, financial situation, or particular needs of any individual investor. Any forward-looking statements or forecasts are based on assumptions only, and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. Any assumptions and projections displayed are estimates, hypothetical in nature, and meant to serve solely as a guideline. No investment decision should be made based solely on any information provided herein and the author is not responsible for the consequences of any decisions or actions taken as a result of information provided in this book. There is a risk of loss from an investment in securities, including the risk of total loss of principal, which an investor will need to be prepared to bear. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular investor’s financial situation or risk tolerance. Exencial Wealth Advisors, LLC (“EWA”) is an investment adviser registered with the Securities & Exchange Commission (SEC). However, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. EWA may only transact business in those states in which it is registered, notice filed, or qualifies for an exemption or exclusion from registration or notice filing requirements. Complete information about our services and fees is contained in our Form ADV Part 2A (Disclosure Brochure), a copy of which can be obtained at www.adviserinfo.sec.gov or by calling us at 888-478-1971.