Ten Themes for 2023: The Evolution of Markets - Scarier Than Jurassic Park?

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Featuring: Lawrence V. Adam III, CFA, CIMA®, CFP® - Raymond James Chief Investment Officer

What can investors expect this year? A mild recession, fixed income strength and emerging market growth, says Raymond James CIO Larry Adam.

Steven Spielberg’s sci-fi thriller Jurassic Park celebrates its 30th anniversary this year. To articulate our outlook for 2023, we focus on the theme of evolution: the ebb and flow, contraction and expansion that breeds stronger economies and financial markets over time.

1. US Economy | A Recession Months In The Making

INSIGHT: Economists, CEOs, consumers, and the media have been calling for a recession for months. Therefore, this could be the most telegraphed recession in history.

BOTTOM LINE: The US economy will likely face a mild contraction, with various industries rolling into recession at varying times. However, the depth of the decline will be contained by still strong consumer fundamentals. Over time, dwindling savings and weakening labor market conditions will stall the economy’s momentum.

2. Monetary Policy | Fed The Predator, Inflation The Prey, But The Hunt Is Coming To An End

INSIGHT: The Federal Reserve’s (Fed) 425 basis points of tightening has been the most aggressive cycle since 1980 as it vows to tame inflation. But with prices for commodities, goods, and services already easing, and the stickier areas of inflation (e.g., housing) soon to follow, the end of this cycle could be near.

BOTTOM LINE: Despite economic momentum slowing, that does not mean that the Fed will be quick to pivot or implement interest rate cuts. Instead, the Fed is more likely to pause rather than reverse its aggressive pursuits by year end.

3. Market Volatility | Reduced Volatility After 2022’s Asteroid Impact

INSIGHT: The markets were inundated with risks in 2022: supply chain challenges from the pandemic, the Russia-Ukraine war, COVID lockdowns in China, etc. As a result, many asset classes experienced elevated volatility and the weakest performance in several years.

BOTTOM LINE: With more positive developments for many of the aforementioned risks, the headwinds of 2022 could shape up to be the tailwinds of 2023

4. Globalization or Deglobalization | Globalization Won’t Go The Way Of The Dinosaurs

INSIGHT: The supply chain disruptions throughout the worst of the pandemic had many market pundits predicting that globalization would come to an end. Surprisingly, this call has made been over the last few decades.

BOTTOM LINE: The headlines overestimate the economic impact of shifting supply chains, and ultimately the competitive advantages (e.g., cost and production efficiencies) that are still intact. As such, we have a bias toward large, domestic multinational companies.

5. Fixed Income | Bonds Worth Sinking Your Teeth Into

INSIGHT: Bond investors are taking advantage of the highest yields available in years. Even though rates seem to have reached their peak, yields are still attractive and now have less risk than a year ago.

BOTTOM LINE: Throughout the year, economic struggles and easing inflation will lead to a lower 10-year Treasury yield. With many subsets of the yield curve inverted, investors should opt for quality rather than chase yield.

6. Equities | Corporate Fundamentals Won’t Fossilize

INSIGHT: With a heightened probability for a recession, some speculate that equities are headed for another challenging year. However, the equity market is a forward-looking indicator.

BOTTOM LINE: Consecutive years of P/E contraction are atypical for the S&P 500, and with businesses already moving to cut costs, margins (and earnings) should hold in better than expected. Continued shareholder-friendly activities should also be a tailwind for equities.

7. Industry Perspectives | Carbon Dating The Security Era

INSIGHT: After a pandemic and war, governments and corporations have learned many lessons about securing critical resources and inputs. As such, enhanced security across a multitude of industries will be at the forefront of 2023 and beyond.

BOTTOM LINE: Whether it be securing oil and natural gas sources, ensuring that key intellectual property (e.g., chips) and healthcare supplies are readily available, or protecting the power and internet grids from hackers—security will be a top priority for leaders of nations and businesses across the globe.

8. International | Excavating Opportunities In The Emerging Markets

INSIGHT: Between the stronger dollar, Fed tightening, and weaker global growth, emerging market opportunities were few and far between in 2022.

BOTTOM LINE: As many of last year’s headwinds reverse, and with many emerging economies in a stronger position on a relative basis (e.g., China reopening, India’s resiliency), opportunities will develop for both equities and bonds in the emerging market space this year.

9. Investment Principles |Back to Basics: Dispersion & Diversion To Keep Your Portfolio From Erupting

INSIGHT: As more speculative investments gain traction and interest (e.g., meme stocks), investors may lose sight of their time horizon or investment goals.

BOTTOM LINE: Investors should let fundamentals drive portfolio decisions. Active managers could have superior performance due to the expectation for elevated dispersion across regions, sectors, industries, and even at the company-specific level.

10. Psychological Dynamics| Don’t Follow The Herd’s Footprints

INSIGHT: Investors may find comfort in following consensus expectations, but recent history shows that the most popular call is not always correct (e.g., the expectation for the new age Roaring 20s).

BOTTOM LINE: Some of the best opportunities in 2023 may require moving in isolation. A few of the more out of favor investments such as REITs and the Tech sector have more favorable valuations and fundamentals and may prove to be areas of opportunity in the year ahead.