Stock Market Outlook 2023

At the beginning of the year, everyone demands to know what the next twelve months will be like. While we certainly ran into some surprises, the partners at Wall Street Alliance Group have some ideas about the economic outlook for the year and what sectors to watch when making allocation decisions.

1. different course

After the past decade of low interest rates and low inflation, we’re looking at a very different decade now. Persistent inflation and Federal Fund rates hovering around 5% seem to be the story of the current cycle. The economy will face challenges from the employment sector, as the labor market adjusts to shifts in immigration policy and other factors that constrain the labor supply and raise employer costs as they provide more incentives and higher wages to obtain and retain workers. Gone are the days of cheaper manufacturing, with notable companies moving production out of China as the region experiences some turmoil.

What does this mean in the financial arena? Large banks benefit from higher net interest margins with higher interest rates coming from the Federal Reserve. Dividend-paying companies are also finding their footing in this type of economy, while on the other end of the spectrum, companies deemed high-growth are losing ground, as their lack of dividends can no longer support the trading activity that once supported them.

1. Inflation concerns continue from the geopolitical environment

It’s not just the situation in China that is prompting foreign companies like Apple to move their facilities out of the country, which ends cheaper production time. The ongoing war in Europe, which has had a negative impact on energy supplies and prompted inflation fears, is another example of the kind of turmoil that is fueling concern about inflation. The low worker participation rate in the United States, which as mentioned earlier has forced employers to offer higher wages, is another factor leading to these higher prices. All this created a prolonged period of inflation and fear of inflation.

1. Equity value and opportunities

This kind of financial environment is bringing back interest in Warren Buffett’s style of value investing. As large banks benefit from higher interest margins, portfolios holding relevant positions are able to thrive. While there has been some interest in moving away from dependence on fossil fuels, the transition is slow, and we believe that OPEC cuts plus other international tensions will mean a drop in oil supplies. However, the global economy is expected to double by 2045, which will not come without an increase in energy demand. As expected, Buffet is also buying into major oil companies. This is not the time to miss opportunities. Many experienced buyers are taking the impulse to buy stocks over the past year, particularly in these sectors and those that pay dividends.

1. Time to spend revenge

It’s impossible for people to go through the past few years without wanting to fall apart now. We see this trend strong throughout 2023, as people spend in areas they were not previously able to, especially for travel, as many have been denied enjoyment during the pandemic. Even with this drive to get out and see the world, especially with international travel, airlines haven’t made friends. Rising fuel costs also drove up airline ticket prices, and airlines were hit with a number of other problems, including staff retention. However, travel will continue to rise, and there may be some benefits to credit card companies who will make a huge amount from international transactions.

1. Change in market leadership

The past five years have seen the technology lead the market, however, we feel this is about to change. Over the next five years, he looked forward to seeing leadership come from the energy, pharmaceutical and financial sectors. As we wrote earlier, demand for oil will remain high in a growing economy and will increase, and supply constraints will drive up prices, benefiting the oil majors with the largest holdings. More access to health care and a booming global population mean a broader market for drug companies, and major drug manufacturers will benefit from both. Finally, while a recession seems inevitable, we don’t think it will be long or severe, given the current stable state of banks (as opposed to their weakness in 2008). The Fed’s 2022 stress test has not been a challenge for the larger banks, and they are expected to benefit greatly from those Fed rate hikes we’ve discussed before. These three sectors will lead the way in the coming years.

1. Market scope bound

When talk of a recession creeps in, the specter of 2008 looms large. However, we do not believe that the country is in the same situation as it was then at all. Consumer spending remains strong, even as inflation is rising, and while there have been layoffs in tech, other industries, including hospitality and entertainment, are hiring workers at a brisk pace. The housing market has slowed but not completely stopped, even as mortgage rates have more than doubled over the course of a year. The Fed is aware of the path it is plotting during a controlled recession, which means a range bound market. This suggests that there are areas of weakness as well as opportunities, and while a passive strategy focusing on sectors such as technology has worked in the past, this is unlikely to be the best move in the new market era. Active management with rebalancing as a recurring activity would be more appropriate for the market to ensure exposure is provided on the dips and a bit of removal of positions on the upside. The key aspect of this is acknowledging that there is some sort of waiting pattern, and seizing opportunities while waiting.

1. The bull case for fixed income

It’s no secret that the big banks will start raising their rates as inflation continues at a level not seen in years. These higher rates also lead to an increase in interest rates on domestic and international bonds. While existing bond investors are feeling the pressure, we believe the next decade will have a better outlook than others did a year ago. We believe that there will be a yield on US bonds of 4.1-5.1% annually, in contrast to other forecasts that set the yield at 1.4%-2.4%. International bonds will not be left out in the cold either. We believe the next decade will yield returns at roughly the same rate it was previously projected to be lower when forecasts were made last year.

1. Alternative and real assets as a hedge against inflation

Fighting inflation is not the same game as it was twenty years ago. Another inflation hedge strategy is to choose to invest in real and alternative assets. Real assets have a stable historical value in times of high inflation, so while they may not be the first things you think of in periods like these, it may be time to invest in commodities like precious metals and oil, or even real assets like antique paintings or items. other valuables. These assets are non-cyclical in nature and can provide alternative stability to the portfolio.

1. It’s time for Roth remittances and tax harvests

Although this advice goes against the usual advice not to sell during a market downturn, not all stocks have the potential to recover even as the market rebounds. By selling the underperforming stock now, we believe these losses are necessary to lower taxable profits and save investors from taxes. To benefit further, the cash from sales can be used to purchase stock from companies like Amazon that are likely to rebound quickly in a bull market. It’s also a good time for Roth Conversions, as IRA values ​​have plummeted along with the massive losses in the stock market. Making a Roth conversion now means that the account holder will be able to pay less taxes at the time of the conversion while benefiting from tax-free growth and tax-free withdrawals at a later date.

1. Gifting spent stocks to children

It’s the fact that stock gifts to children mean that the child, who has little or no income, will pay much less capital gains taxes. If gifting stocks was part of your old planning, the depreciating value that stocks make now is an ideal time to put this in its place. Starting in 2023, you can gift up to $17,000 in stock without paying gift taxes or even reporting the gift. Another way to move these depreciated stocks out of quality companies out of real estate is to open a SLAT (Spouse for Life Access Fund). Once the assets are transferred to the trust, they can continue to grow estate tax free.

While there is no way to very accurately predict what the economy will do over the next year, five years, or decade, we believe that trends can be identified that give us a good idea of ​​what we will see in the coming years. By incorporating these guidelines into your financial planning and keeping these expectations in mind as you reallocate your financial portfolios, you may be able to make the most of a challenging year.

Syed Neshat, BFAAnd & Adel Zaman They are partners and fiduciary financial advisors of the Wall Street Alliance Group.

The securities are offered by Securities America, Inc. , member FINRA/SIPC. Advisory services provided through Securities America Advisors, Inc. The Wall Street Alliance Group and Securities America are two separate companies. Securities America and its representatives do not provide tax or legal advice; Therefore, it is important to coordinate with your tax or legal advisor regarding your specific situation.