2023 Investment Outlook: When Will the Stock Market Recover? | Investing

Investment predictions are like ambrosia or upside down fruitcake at a holiday gathering. They are widely available, but it may take some discernment to know exactly what to do.

Yet, much like the gentle hands that have prepared holiday delicacies for generations, each year investment managers collect and curate the world’s data for investors to consume.

By way of background, investors’ current outlook for the market is neither cheery nor rosy. In late December, the Association of Individual Investors investor sentiment survey revealed that only about 27% of investors were optimistic about the market in 2023.

Moreover, recent inversions in the 2- and 10-year Treasury yield curves appear to be flashing recession red flags. The Federal Reserve doesn’t see it that way, predicting a mix of slowing growth, lower inflation, and a benchmark interest rate of over 5% in 2023. It’s hard to understand how both are correct.

Professional investment managers and strategists see some headwinds ahead for the market in 2023, with upside potential for patient long-term investors. Below are some key takeaways from multiple experts from prominent investment firms.

  • The 2023 recession is still here.
  • Bonds look more attractive.
  • Patient investors can be rewarded.
  • Diversification is the key to better returns.
  • Review capital market forecasts for investment firms.

The 2023 recession is still here

“Based on current valuations and recession expectations, equities are likely to see another 10% more growth going into 2023,” said Rich Weiss, senior vice president and chief investment officer for multi-asset strategies at American Century Investments. “I think it could go down,” he said. “If the coming slowdown turns into a real recession, especially in the face of persistently high inflation and interest rates continue to rise, a high double-digit or even high single-digit price/earnings ratio would be unheard of. No.”

Mike Collins, Managing Director and Senior Portfolio Manager at PGIM Fixed Income, added: A soft landing in the United States

For context, much of the market volatility in 2022 and anxiety in 2023 stems from aggressive Federal Reserve initiatives to crack down on rampant inflation. A sizeable market decline followed as the Fed raised its benchmark interest rate to his 4.5% range from his 4.25%, the highest in 15 years. By December 31st, the tech-laden Nasdaq Composite was down 33.1% for the year, while the US Aggregate Bond Index was down about 11%.

“2022 will be a tough year for both equity and fixed income investors, with 60/40 portfolios down about 15% (as of mid-December),” said Andrew Patterson, senior international economist at Vanguard. What drove these returns is that interest rates mean higher asset returns are expected in the future.”

Bonds look more attractive

PGIM’s Collins added: % is well priced in, so the US bond market offers attractive yield levels, with some room for price gains if the Fed starts cutting rates in his second half of 2023. ”

Meanwhile, the stock market has priced in a large rise in interest rates (through higher discount rates and lower earnings multiples) but not the potential for a sharp decline in earnings expectations, Collins said.

Patient investors may be rewarded

Some investment managers and strategists believe that beyond the prospect of a possible slowdown in the U.S. economy and the prospect of a looming recession, shallow or not, there is still an opportunity for patient investors. “As equities typically lead the economic cycle, we expect equities to rebound at some point in 2023. This presents investors with one of the best buying opportunities of the past decade, he said. It’s possible,” he said Weiss. “All in all, we expect 2023 to be a very positive year for risk assets.”

In December, American Century, PGIM, T. Rowe Price and Vanguard released estimates of capital market returns for various core asset classes over the next three to ten years.

investment manager Large Core US Equities Non-U.S. Development Stocks U.S. core bonds Development REIT
American Century (3-5 year estimate) 6.25% 7.5% 3% 7.25%
PGIM (10-year estimate) 7.76% 10.04% 4.72% 7.47%
T Rowe Price
(5-year estimate)
8.7% 10.01% 5.7% 9.8%
Vanguard (estimate for 10 years) 4.7% to 6.7% 7.2% to 9.2% 4.1% to 5.1% 4.9% to 6.9%

Decentralization is the key to better returns

The key strategy for income investors over the next few years will be “from simple U.S. Treasuries to international exposure,” said Kim DeDominissis, portfolio manager of target-date strategies for T. Rowe Price’s multi-asset division. and expand and add more.” An asset class that helps protect investors from rising interest rates, such as short-term (inflation-protected securities on government bonds) and variable-rate loans. DeDominicis believes this strategy will improve the overall return profile of fixed income portfolios.

One way to think about an investment firm’s expectations of the capital markets is to view them as reasonably prospective rather than predictive or prescriptive in nature. For example, if a 67-year-old investor needs a 6% return from their investment portfolio over the next 20 years to sustain their retirement needs, including out-of-pocket medical and long-term care costs, what does that mean? Kind of an asset? Would class together reasonably help her achieve such results? You can look for other asset classes with

That said, the PGIM’s estimated return for a mixed portfolio of 60% stocks and 40% bonds over the next 10 years is 7.55%.

Review of capital market forecasts for investment firms

Pension plan managers often use capital market expectations to help shape investment portfolios and plan long-term funding needs. In September, investment research firm Cliffwater released its 21-year annuity performance report, which found that “long-term annuity returns are determined primarily by the capital markets, not by investment skill.” Did.

An important takeaway for retail investors looking to properly plan for their long-term financial needs: broadly diversified investment strategies can be very effective over time, and investment firms’ capital market forecasts , serves as a resource for investors to develop and execute strategies. strategy.

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