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We are approaching the close of 2022, an extremely complicated but, in some ways, very instructive year.
First of all, looking at what has happened since January and October, we have had respectively the worst year for the bond market, one of the worst years for the stock market, the worst year for the 60/40 balanced portfolio, an inflation rise that eroded purchasing power (so even cash, in this case, was not spared), and only commodities and energy stocks that have held up with positive performance.
In addition to these asset classes, the US Dollar also performed well; this also weighed heavily on America's equities, however, as many companies get 50% or more of revenue outside the U.S. (several big tech companies for example).
The difficulty of this strange and peculiar bear market, in my opinion, has been twofold:
2023: Some reasoning and insights
I always say in my analyses that no one can know what will happen one month or one year from now, but we can prepare strategies depending on the different scenarios we face.
The issues that affected the markets were different last year, including the conflict in Ukraine (especially for the European markets), inflation, and the Federal Reserve interest rate raises.
The November CPI index finally signaled the decline in inflation that the markets were so eagerly awaiting (not coincidentally, on that day S&P 500 jumped +5.54% and the Nasdaq +7.35%). The Fed, despite the sharp rises in 2022, should sometime in the first quarter begin to set the exit point of their very aggressive monetary policy. The Fed raised rates to 4.5% in December, and the so-called famous "pivot," should come between 5% and 5.5%.
In that scenario, with falling inflation, a softer Fed, and perhaps a weaker Dollar, we could see a recovery in all major asset classes, especially equities and bonds.
In particular, the same tech companies that were so penalized in 2022, could recover, as they have much better valuations today after declines of 50%, 60%, and even 70% in some cases. This is true even in the case of a recessionary scenario, a possibility many market participants are worrying about because historically such a situation would favor big tech companies anyway. So, I expect a good recovery if not for all of them, then at least for a good part of them.
As far as Europe is concerned, the banking sector, asset management, and the financial sector, in general, could be favored by a situation of higher interest rates which gives banks more margin to work with, as well as a market rebound in prices which could bring investors back into the markets and thus improve revenues and assets under management.
I close with the countries theme, where in my opinion China has been the big loser this 2022 because of the only recently ended stringent policies on COVID and the possible theme on Taiwan. The confirmation of Leader Xi Jinping has also generated several tensions. However, I think the Asian markets as a whole have been overly penalized, and therefore deserve consideration.
Finally, on the bond side, investment-grade bonds have become attractive again, especially if inflation does indeed return to lower levels and spreads tighten.
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