2023 Investment Outlook’s Big Question Focuses on Recession

Fundamentals, earnings and diversification are key after a year that left us feeling like we have a bit of a hangover.

An investor tracks the stock market's ups and downs on a tablet.
(Image credit: Getty Images)

There wasn’t much to toast to last year in the investment world as we look ahead to the 2023 investment outlook.

All three of the major stock market averages – the Dow, S&P 500 and Nasdaq – suffered losses in 2022. Even the bond market didn’t want to get left out, with the Bloomberg AGG (opens in new tab) down double digits. Some bright spots, like energy, roared to life. But all in all, it was a dismal year for the major stock and bond indexes. Lingering COVID issues, the war in Ukraine, sticky inflation and what seemed like unending Fed rate hikes took their toll. Not to mention many stock valuations were high coming into last year.

As we look ahead to the new year, it feels like we are waking up with a bit of a hangover – many of the issues last year are still with us. Alas, onward we must go, once more into the breach. Just as January is the time for New Year resolutions, it is also the time for market forecasts.

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As I look deep into my crystal ball, I can’t exactly make out the direction of the markets – if only! – but there are some themes that pop out as interesting and worth exploring. Here, I lay out some of those themes from our 2023 Investment Outlook (opens in new tab).

The Big Question for 2023

The big question for 2023 is will we or will we not fall into a recession? I suppose part of it depends on how you define recession – is it a Great Recession? Or an official recession? According to the National Bureau of Economic Research, The Pandemic Recession lasted two months, while the Great Recession (opens in new tab) went from December 2007 to June 2009.

Much will depend on the Federal Reserve Board. If inflation doesn’t subside and the Fed continues to hike rates, that doesn’t bode well for stocks in the near term. Overall, I think it’s too close to call for a near-term recession.

My best guess is we see lower inflation, but that will lead to a global slowdown. This doesn’t mean a Great Recession like in 2007, but a shallower downturn could be in store given the healthy labor market and as T. Rowe Price’s head of Global Multi-Asset and Chief Investment Officer Sebastien Page noted, “Corporate and household balance sheets appeared strong” in 2022.

Stock Market Themes

Technology and growth stocks took it on the chin last year, while “value” stocks, like some insurance stocks and consumer staples like health care, held up better in 2022. I don’t know if I would get too caught up in the value vs. growth debate — that’s too simplistic. Many growth stocks are looking like a value play, given how far their prices declined in 2022.

I see more attention being paid to high-dividend-paying stocks. But be aware that high-dividend stocks may come under strain if investors flee them for more conservative interest-bearing Treasury bills. Valuations are important, too. Many dividend-paying stocks are energy companies whose valuations soared last year, so you must be careful about what you buy and should be aware of the price of what you pay for any stock.

Instead, I prefer buying quality companies at a reasonable price that pay a dividend. In my opinion, dividends, earnings, valuations — the so-called fundamentals — are back in vogue. I also like growth at a reasonable price (GARP) stocks, like parts suppliers to the electric car industry. I like some of the pharmaceutical companies tackling the big problems, like obesity, which according to the UN Population Division (opens in new tab), is expected to affect over 1 billion people worldwide by 2030.

Overall, we believe there is more turbulence ahead for stocks, but the stock market could recover before the economy. One study by American Funds expects stocks to recover six months before the economy does.

Fixed Income

According to the Capital Group, it is so rare for stocks and bonds to be down together that the last time before 2022 was in 1977. Fixed income will hopefully fare better this year. Higher yields today can help with current income and can provide a buffer against possible price declines.

Municipal bonds (opens in new tab) particularly took a beating in 2022, yet the fundamentals according to Nuveen’s 2023 outlook still look strong, suggesting that market “should be overdue for a snapback.”

Inflation, rising rates and a looming recession may still trigger a flight to quality, so investors should be careful about credit selection.

The Best Advice

In our upcoming webinar (opens in new tab), I dive into more granular topics, but for now the best advice I can give you is fourfold:

  • Be as diversified as possible. Last year, the MSCI EAFE Index — a broad measure of large international stocks — held up better than the S&P 500 index (Source: Bloomberg), yet how many investors own international stocks?
  • Continue to add to your accounts. I do believe markets will be higher by the end of 2024, and if that is the case, then 2023 is a buying opportunity.
  • Be patient. Like every year, anything can happen. In times of investment stress, a little bit of perspective (opens in new tab) can help. For example, in 2018, the S&P 500 index saw a correction of more than 10% in the first quarter of the year and again in the fourth quarter, followed by a rebound of more than 13% in the first quarter of 2019 (Source: Bloomberg). Stocks are volatile, and big surges – up or down – happen.
  • Look at guarantees. My retired clients with a reliable income source – pensions, annuities, rental income – were concerned about market fluctuations, but less than those without. I think there is something to a steady, consistent paycheck in retirement. Last year, with most stocks and bonds both down, guarantees looked pretty good.

For some investors, it can make sense to review alternative ways to save money, like whole life insurance. Other investments, like structured products (opens in new tab), can buffer against some losses but capture some upside. Keep in mind that these investments are not suitable for all investors and should not represent a significant portion of an individual’s portfolio.

All in all, we can’t control the events that shape markets, so we must focus on what we can control. We can control our asset allocation and the mix of investments. Getting that mix right is essential to the long-term performance of your portfolio.

We can also control our emotions, like getting too greedy or too fearful and making rash decisions.

We can also control our expectations. I think that is something we need to adjust — our expectations of future stock and bond returns, a little slice of humble pie as they say. How might lower investment returns affect our retirement plans? What can we do to make up for possibly lower stock prices this year?

January is a good time to make a financial plan or fine-tune an existing plan. Now that’s a New Year’s resolution worth keeping.

Michael Aloi (opens in new tab) is a Certified Financial Planner with 22 years of experience. For more information or a complimentary review of your pension options, please feel free to send him an email at maloi@sfr1.com.

Investment advisory and financial planning services are offered through Summit Financial LLC, a SEC Registered Investment Adviser, 4 Campus Drive, Parsippany, NJ 07054. Tel. 973-285-3600. This material is for your information and guidance and is not intended as legal or tax advice. Clients should make all decisions regarding the tax and legal implications of their investments and plans after consulting with their independent tax or legal advisers. Individual investor portfolios must be constructed based on the individual’s financial resources, investment goals, risk tolerance, investment time horizon, tax situation and other relevant factors. Past performance is not a guarantee of future results. The views and opinions expressed in this article are solely those of the author and should not be attributed to Summit Financial LLC. Summit is not responsible for hyperlinks and any external referenced information found in this article.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC (opens in new tab) or with FINRA (opens in new tab).

Michael Aloi, CFP®
CFP®, Summit Financial, LLC

Michael Aloi (opens in new tab) is a CERTIFIED FINANCIAL PLANNER™ Practitioner and Accredited Wealth Management Advisor℠ with Summit Financial, LLC.  With 21 years of experience, Michael specializes in working with executives, professionals and retirees. Since he joined Summit Financial, LLC, Michael has built a process that emphasizes the integration of various facets of financial planning. Supported by a team of in-house estate and income tax specialists, Michael offers his clients coordinated solutions to scattered problems.