Investors entered 2023 with great uncertainty about what the year might bring for financial markets. On the one hand, a strong labor market, decelerating inflation, and the Federal Reserve indicating a reduction in interest rate increases boosted equity markets to a strong December and January. Investors seem confident that any potential economic weakness will be met with monetary stimulus from the Fed. Bond markets, often better predictors of future economic events, are beginning to anticipate lower rates, possibly starting near the end of the year.
On the other hand, the interest rate hikes of 2022 could have a big impact on economic activity and corporate earnings in 2023, ultimately depressing equity prices. Equity losses in 2022 were almost entirely due to declines in the price multiple investors were willing to pay for future earnings growth. The highest-valued stocks typically saw the greatest losses during the year. Based on current earnings levels, stocks are less expensive than they were a year ago, but any declines in earnings will likely send stocks lower. The year is looking like a volatile one with large market movements expected around economic data reports. Fortunately, the longer-term outlook is as positive as we have seen in many years.
Alan Bergin is the Senior Vice President of Fund Evaluation Group in Dallas, TX, the Foundation’s consulting firm.