Economic Outlook February 2023

And just like that … the market volatility from 2022 seems to have disappeared. At the end of January, the Dow, S&P 500 and NASDAQ 100 were up 2.93%, 6.28% and 10.62% respectively – a perfect illustration of how difficult it is to time the market. Some allocations aimed at achieving long-term investment goals felt very uncomfortable last year. Suddenly, these same “uncomfortable” allocations are some of the best-performing options so far this year.

In short-term investment markets, nothing is linear. What has changed in the weeks since the end of 2022? Was it China relaxing its COVID policy? Was it short covering? Was it the belief that inflation has peaked? Was it something the Fed said? Or was it just a hit-and-run market? In reality, nobody knows why the market is doing what it is doing or where it is going. If someone claims to know, then they are unaware of their own lack of knowledge. How do I know? Because if anybody really knew what the future of the market was going to be, they wouldn’t tell anyone. Call it selfish, but it’s true.

PIMCO, a large investment management firm, was early to the gate in labeling the low fed fund and quantitative easing environment of the last 14 years our “New Normal.” From this point forward, it appears the New Normal is transitioning into the “Great Reset,” with the economy returning to a time before the zero interest rate environment that had emerged as a response to the Great Recession of 2008-2009. In the Great Reset, we expect to see interest rates settling at a level above the longer-term inflation rate, stock market returns closer to their long-term average of 9.5%, dividends as a larger portion of total returns and real estate cap rates adjusting to new interest rate levels.

Although we expect to see slowing gross domestic product (GDP) sometime in the last half of this year, I believe it will be more of a headline than a problem. In times of economic transition, it’s hard to remain patient. Things develop slowly, until all at once something noticeable occurs. “Gradually at first and then suddenly” is the theme I expect to characterize the economy in 2023.

As investors, it is important to look beyond the news and market movements on a day-to-day basis. There is no shortage of research documenting the success of long-term investing. The key thesis of this research is to stick to the plan. It can get scary at times – but it works!