January kicked off 2023 with equity markets continuing to exhibit the same ‘chop’ that characterized 2022. However, unlike many months last year, likely only dedicated short sellers or investors sitting mostly in cash complained at last month’s action. The price of stocks and bonds surged for three reasons.
For the second consecutive year, predicting the rate of inflation should prove to be the most important variable for investors to consider as we enter 2023. During the holiday season of 2021, the Fed’s median projection for the upper bound of the Fed Funds Rate for year-end 2022 was 1%, with the terminal rate forecast to ultimately reach 2.5%. Investors were happy with those estimates and stocks exited 2021 trading comfortably north of 20X forward earnings. The world then changed, causing most investors to suffer sizeable losses during 2022. In this note, we will review last year, discuss the performance of our funds and table our outlook for financial markets during 2023.
This year’s U.S. Thanksgiving was no turkey for investors as the price of pretty much everything, other than energy commodities, moved sharply higher. There were three drivers catalyzing this fifth beta rally during an otherwise tough year for investors: October’s softer-than-expected U.S. inflation data, soothing words from Fed officials, and the positioning of investors. The key question is whether this latest rally is another headfake, or does it constitutes a sustainable bounce off the bottom. Before tackling this question, let’s review the performance of our funds.
Based on the aspiration that the timing of the Fed’s inevitable pivot may occur before year-end, perhaps as early as last week, equities enjoyed a huge move higher during the month of October. Unconvinced that various macro variables had yet to advance from flashing yellow to exhibiting the all-green, our funds remained conservatively positioned. While frustrating to the team in light of the big bounce in equities, given our long-term net returns, we’re cognizant that protecting client capital during this exceedingly rough 2022 has been top-of-mind for our investors. Hence, we will continue to aim to be the tortoise versus the hare. After discussing last month’s results, this note will update our views on the outlook for markets and the positioning of our funds.