2023 Outlook and Game Plan

2023 for Investors : Fed vs. Market | Defilation vs. GDP | Debt celling - yet again ! | War & Politics

Dated : Feb - 3 - 2023

If you refer my blog from Q4 2021 , I had a clear prediction that statistically  , the high return from 2019 to 2021 cannot be sustained against the macro backdrop. 2022 was one of the toughest years for many investors be it veterans ( Ask Cathy Woods) or newbies alike. Now that 2022 is behind is , what are the main observations/lessons and themes I believe  will work in 2023 

• I believe that clearly Market is way ahead of the Fed and predicts the Fed play book . Its clearly showing a 9 month lead ahead of earnings and FED's anticipated move and you can almost get wrapped in the cause and effect. Is it Fed giving us a surprise or market asking the Fed to raise or cut rates based on data which it anticpates ?  So get ready for rally when data does start showing some damage ( so negative GDP, weak spending, higher unemployment - should in general lead to rally's or buy the dip mentality for 2024 cuts and Fed pivot to ease)

• Debt celling matters. US now has a multi decade post war Debt/GDP ratio and though politicians may agree on some compromise, deleveraging wont be easy. It may not happen for years but when we  it does happen , get ready to sell fast . Sectors impacted - DEFENSE .   Debt limit compromise  - more rally in Defense stocks - I think this is likely short term outcome in 2023.  Stocks I like - Northrup  ( buy below 425 if it gets there) and Boeing ( at levels around 170 or below)

• Its an expected white collar recession - Markets expect a soft landing in 2023 and I am in the same camp. Data shows job openings in services sector remains strong with modest wage growth. The folks with Corporate jobs from tech should be able to find employment soon to keep spending at modest neutral pace.

• 2023 Technicals -  After a strong Jan start , moderately decent Q4 earnings and lower guidance from many CEO's , I think opportunity to buy bottom's may present itself.  Growth names should outpace value names in later half of the year . The Tug of water between extreme bears and hard recession vs. the moderate and soft landing camp will keep the market sideways ( much like 2015). 

• Down days vs. Up Days - 2022 had the most down days in last 5 years with -1.5% avg. loss. If we remove the covid data , that's above the average loss days seen in last 5 years. Can we see worse ?  Or should be buy high loss days to average ?  

• GTI recommends you buy the large above average loss days on both index and growth companies . Sell on high days or hold and average more based on your time horizon and risk preference . 

• Stay away from Fixed Income unless 10year yields reach 4% . Buy REITs and Agg. Index and High Yield once the yield curve starts showing signs of getting steeper ( meaning the 10y - 2y rate continues to > 0 ) 

• Lock inn High yield 1year CD rates now as they will be gone in 2024 ( 4.25% risk free rate is not bad)

• S&P should be able to end the year in green with a 10% return as a likely scenario

SPY Down and Up days by Month ( count and returns)

Key Risks in 2023

• Debt Celling Impasse - this will impact defense , telecom and capex heavy sectors ( Utility's)

• Readings in CPI which show spikes and hence cause Fed to act more aggressively - these are opportunity's to buy

• Uptick in "unexpected credit defaults"  - this means don't panic if Bed Bath or AMC default. That's expected.

• Excessive widening of Credit spreads - raise more cash in this scenario - however it seems unlikely

• Effects of Quantitative tightening in money market and repo liquidity.  Watch for spikes on commerical paper spreads and short term borrowing/lending rates . This can cause sharp selloffs in markets with bond yield rising and force to Fed to stop QT. Again , might be opportunity's to buy - in particular keep a list of REITs ( apartments, Medical- such as MPW )

• Russia/Ukraine War and Covid remain low risk . Bank of Japan QT risk remains low

Conclusion 

As I stated in my last blog, the world now resembles the Volcker world of early 1980s, and also shows similiarity's to post dot come crash where extreme valuations have moderated . Prudent way to manage risk is to use ample volatility the market will throw in 2023 to buy Stocks, REITs , Bonds and stay long Cash to earn higher overnight rates.  remember - risk free rate is 4.5% - a rate which half of American's haven't seen in their lifetime !