Bull markets are born on pessimism - John Templeton
Seduction of pessimism is a common theme these days in market outlooks and commentary from the pundits... perhaps one appears wiser or sounds smarter when prognosticating on imminent or far-off disasters. Everything is veiled or covered in a view where nothing can ever get better, trouble lurks in every corner.
Remember markets are forward-looking discounting mechanisms typically operating on a 3 to 30-month time horizon. Anything longer than that they tend to either ignore or await further data.
So, what do the next 3 to 12 months hold for us... first, we want to acknowledge that 2022 was a hard year for all of us and I'm proud of every one of our members. You did not panic and commit the cardinal sin of exiting holdings at the lows of the market and so we have seen asset value recoveries of our portfolios from the depths of the bear market of '22.
In 2022 we were off the charts wrong in the timing of the market direction due to geo-political events we did not forecast happening yet our portfolios continued to survive and did not get crushed like so many others who held concentrated holdings in Crypto/ new economy tech stocks / or in the meme stocks... your ability to not lose one's heads when everyone else is losing theirs and is chasing the next new shiny thing is key to the market upside that the future holds.
Every correction or bear market historically has been followed by higher highs. Bear markets are short-term events typically lasting no more than 6 to 18 months... on the other hand, the average investor has an investment time horizon of decades. Hence bears have minimal portfolio impact as long as we stay invested... that said, we at OneNorthStar are always on the lookout to avoid or at least partially sidestep bear markets because even if we sidestep/ avoid one bear market within your investment horizon it will significantly accelerate your return profile to state the obvious.
Onwards to 2023: Look for a 20-30% market return year.
The skepticism towards the market is alluring and many seem to have fallen for it believing we will never recover and even worse days lie ahead. Perhaps they do. However, consider the historic fact that markets have not seen a negative third year of a president's term except for 1938 (WW II) and 1931 (Great Depression). So, history is strongly on our side... even more important along with correlation we have causation on our side also... as the risk of legislation, regulations, and sky-high market expectations all look to have abated.
Legislation risk is minimal because there is perfect gridlock in the US... between the Senate at the hands of the Democrats and the House in control of the Republicans, it's unlikely any meaningful legislation is agreed upon and passed.
Market expectations are close to rock bottom/ quite subdued... hence any upside will lead to a consistent market rally as expectations will be exceeded. Hence in such a calm environment investors and businesses can plan and execute capital expenditures without the overhang of the above issues which in the medium term will lead to higher earnings per share as these capital projects come to fruition and accelerate GDP.
Furthermore, returns are likely to be front-loaded in 2023 in our view as the relief rally continues despite skepticism that this is a head fake or a bear rally, etc.
Debt Ceiling, in one word, ignore. The debt ceiling has been raised, extended, or revised 78 separate times since 1960. This is political shenanigans/ typical posturing on both sides of the aisle and is not relevant to the market otherwise Treasury yields would have shot up significantly if the market perceived a risk of default. Anytime the market does go down in response to this consider it a likely buying opportunity.
Economy/ GDP, while they both are not the same, for our current purposes let us assume them to be similar. We do not need a roaring economy or high GDP numbers for markets to perform, just as long as expectations or sentiment are exceeded, the market rips up to price in the upside surprise and today many assume a recession or negative GDP as the base case.
Interest Rates and the Fed, it feels like they have no idea how many rate hikes they have to do to cool down inflation as the commentary keeps changing in every press release from the Fed on the expected rate trajectory. In our view inflation has peaked... Prices, specifically input prices for finished products are on a downward spiral, be it for metals/ timber/ fuel/ shipping etcetera... And hence output prices should accordingly soften in the coming time window. It's likely the Fed overshoots on interest rate hikes and then starts to cut as it sees the economy soften is our base case expectation.
Job market/ layoffs, while unfortunate for individuals impacted, we still see tightness in the labor market in many sectors (healthcare, leisure, etc.) so wages and hence earnings may be impacted by this and is a risk worth monitoring.
Dollar strength/weakness, the recent trend of a strong dollar should reverse as worldwide economies show strength or are above market expectations coupled with the Fed slowing or stopping its rate hikes. This may allow non-US stocks to outperform relatively and is an allocation decision we will act on potentially.
So, what does all this English mean for your portfolios, and your financial objectives?
A recession seems to have been priced in by the market, so even if one occurs or does not, we expect the market to move upwards in a strong manner. We are conservative in our holdings, to which we will add aggression in the right places... with moderation to achieve your portfolio objectives.
We look to keep shining a light on opportunity, together.
Warm Regards...Team OneNorthStar
This material is general in nature and intended for educational purposes only; it should not be considered tax, legal or investment advice, or an investment recommendation. Consult your financial advisor for personalized advice that is tailored to your specific goals, individual situation, and risk tolerance
Explore The Seen and The Unseen with Best Indian Financial Advisor in CT