It’s been a wild and unpredictable year in the markets, with plenty of uncertainty and volatility to go around. In this 12-24-22 issue, while Wall Street continues to have a bullish outlook for next year, its blindspot could be a disinflation risk. The Fed's decision to keep interest rates near zero and its asset purchase program has distorted the cost of capital and is slowly but surely crushing productivity and stopping capitalism from flourishing.
Nevertheless, despite the uncertainty, there are still plenty of opportunities out there for investors who know how to manage their portfolios. This week, FedEx and Nike rallied Wednesday as their earnings reports were well received. That said, both are under-performing the S&P 500 year to date. The Fed's road map for 2023 is quite a ways off from the more rosy scenario the Fed Funds futures market implies, so investors should be cautious in their expectations.
Managing your portfolio has more to do with gardening than you might imagine. Over the last decade, behavioral finance has studied investor behavior and the idea of “pruning” your portfolio has become popular. Pruning is the process of trimming away dead wood and excess stocks in your portfolio to make room for new, more promising investments.
The accurate financial foghorn, Treasury bond yield curves, is warning investors that rough seas lie straight ahead. After the Fed meeting, investors are finally understanding that the Fed wants bad economic news to help tame inflation. In 2023, the math of valuations suggests returns will likely be challenging as markets remain difficult to navigate.
investors should be aware of the risk of over-investing in any one asset class, such as stocks, especially when interest rates are so low. Diversification is key for managing your portfolio in 2023, with a focus on quality, not quantity.
For example, investors should look for investments that provide stability and income, such as bonds and dividend paying stocks. These investments typically have lower risk, but can still provide growth potential. investors should also look for investments with a good mix of both growth and income potential.
In the current environment, investors should also be aware of the risk of inflation. inflation can erode the value of investments, so investors should look for investments that can protect against inflation pressures. These include inflation-protected bonds, gold, and commodities.
In this 12-09-22 issue, as we wrap up 2022, we estimate potential price targets for 2023 based on valuations and potential recession risk. We believe that the S&P 500 could reach 4,500 points in 2023, while the Dow could reach 40,000 points.
