Top 10 Investment Themes For 2023

My overall macro theme for 2022 was “still growing but yet slowing.” The theme proved to be relatively accurate, at least as it relates to the economy overall (as of December 14, 2022, the Federal Reserve’s median forecast for U.S. Real GDP growth in 2022 is 0.5%) but fell far short as it relates to capital markets growth as both equity and bond markets contracted in 2022. Persistent high levels of inflation, rising interest rates and the impending threat of a recession were among the primary culprits for the pullback. Consistent bouts of volatility marked the year. Consider that of the first 237 trading days of 2022, there were 102 up days and 135 down days as measured by the S&P 500 Index, with daily moves of 1.5% or more occurring on 76 of those days—that’s 32% of the time! As a result, many investors were happy to see 2022 conclude and hope that better days are ahead in 2023.

Coincidentally, I see the theme for 2023 as “better days ahead.” This theme does not imply that inflationary pressures will disappear overnight because they will not. It also does not mean that the Federal Reserve will stop raising interest rates because the Fed will not (at least for the foreseeable future). And finally, it does not imply that the periods of short-term bouts of volatility are behind us because they are not. What it does suggest, however, is that the worst is now behind us for this rate hike cycle. In my view, we have reached both peak hawkishness on the part of the Fed and peak inflation, and better days may be ahead in 2023 for certain areas of the stock and bond markets, although not necessarily the economy.