2023: A new beginning or more of the same?

January 12, 2023 | Brad Davidson


Happy new year.

We are looking forward to some good things in 2023, if only the resolution of some not-so-good things from 2022.

We will be distributing our beginning of year information message containing facts and figures relating to RRSP and TFSA contributions for 2023 in a matter of days. Please confirm with us that you would like us to proceed with these contributions for you.

Now, down to business …

When bad news becomes good news

The U.S. Non-farm Payroll numbers for December 2022 were released on the first Friday of January and provided a mixed outlook, but some good news on the inflation front as wage growth slowed to 4.6% over the previous year (5% was the expectation). The other side of the coin is that employment in December rose by 223,000 vs 200,000 expected (a weakening job market would be an important signal to the central bank to reconsider further interest rate hikes, but that didn’t materialize in the December numbers).

The chart below illustrates the monthly payroll additions for approx. 80% of jobs in the U.S. and is a widely followed indicator. It is important that those monthly numbers be positive, which they are


Source: https://fred.stlouisfed.org/graph/?g=8eiB

Naturally, employment represents one of many variables that influence central banks’ interest rate policies. Two other releases that same day: December US ISM Services and December New Orders both came in materially weaker than expected further supporting the belief that the U.S. economy is indeed slowing.

Something else of note … the price of a barrel of oil completed a round-trip in 2022.


Source: Factset

The price of oil feeds into the prices and costs of so many things across the economy, and carries a lot of weight when it comes to inflation.

Predicting the future is hard …

Of 19 equity strategists on Wall Street, their 2023 year end forecasts for the S&P 500 range from a low of 3,400 to a high of 4,500, and an average of 4,009. The S&P 500 is currently 3,870, so, based on the average, still room to run.

Tom Lee, our friend at Fundstrat, whose forecast is not included in the numbers above, has built a pretty elaborate and detailed case as to why 2023 could be a surprisingly good year for equity markets. Everything from inflation falling precipitously, accompanied by continued strength for the U.S. economy, to the fact that the years following a big down for the S&P 500 tend to be positive and often a big positive. All this would be welcome, of course, but we are not positioning for it necessarily to be the case (sooo much can happen between now and then).

A few things we do know …

  1. Investor sentiment is definitely not bullish, and is somewhere between bearish and neutral. As we repeatedly point out, going against the crowd is the profitable trade, going with the crowd simply means you have lots of company as you lose money.
  2. Interest rates have moved dramatically higher this past year (which is a big part of the problem for equities), and that means the fixed income allocation in a portfolio is going to start pulling its weight more than any time since 2008.
  3. Unlike 2008 – 2009, we are not mired in a financial crisis of global proportions. What we are experiencing is a regime adjustment from ultra-low interest rates and easy money to something more reminiscent of the 1960’s. Adjustments take time, and can be painful, but they don’t last forever.

During years like we experienced in 2022, we appreciate our clients’ patience with us and with the markets, and their willingness to look to the longer term, rather than the shorter term. Investment professionals have quite a list of sayings for any number of situations. One that comes to mind is that the definition of a market correction is when long-term investors suddenly and unexpectedly become short-term investors. We’ve been around the block enough times to know that things will resolve in unexpected ways and that the market will eventually return to its upward trajectory. If we want any consolation, we know it could be worse, and are thankful that it isn’t.

Happy New Year, Brad