Investors looking ahead at 2023 could take some solace in the fact that successive negative years are uncommon for the S&P 500, which has posted two consecutive down years less than 10% of the time since 1928. In the select instances that the index has been down more than one year in a row, it always coincided with major economic or geopolitical events (such as recessions and oil shocks). Stated differently, for the S&P 500 to be down again in 2023, there would likely need to be such an adverse “event”.

As for what could help stabilize the U.S. stock market and catalyst a rebound after a challenging year, the key ingredients would likely include some combination of monetary stimulus and fiscal support in the form of lower interest rates and government spending (e.g., 2009 and 2019). With inflation on a descending path, the Fed could be in a position to take a pause on rate hikes some time in the first half of this year, potentially alleviating upward pressures on bond yields. The prospect of fiscal support seems more uncertain, as a divided Congress probably means a relatively lower likelihood of a substantial federal government spending package in the absence of a severe economic downturn.

On balance, we believe a relatively defensive stance in equities remains warranted for now. The risk of the U.S. economy entering a recession is quite high over the coming year. For equity portfolio positioning, we would continue to lean more heavily toward quality and sustainable dividends and away from individual company risks that may come home to roost in a recession.

Should you have any questions or concerns, please feel free to reach out.

Portfolio Notes

(+) indicates a positive development, (-) indicates negative, and (~) indicates neutral

(+) Costco Wholesale (COST-US) Shares of the big-box retailer jumped more than 6% after it reported solid sales numbers for December. Costco posted net sales of $23.8 billion in December 2022, marking an increase of 7% year-over-year. Evercore ISI also added Costco to its “fab five” list, saying it’s a defensive stalwart. Owned in Core Portfolio.

(-) Linde (LIN-US) Shares fell following a Reuters report that said Russia froze almost $500 million in the German gas company’s assets. Linde suspended work on a contract with Russian companies after the European Union imposed sanctions following the invasion of Ukraine.We view this as a negotiation tactic tied to LIN's suspension of the project and the eventual settlement of accounts. As a reminder, LIN holds $1.8B of cash/payments from Gazprom and its partners for the Ust-Luga gas complex. LIN lists this as a liability on its balance sheet. Owned in Opportunity Portfolio.

(-) Constellation Brands (STZ-US) The alcoholic beverage maker’s shares fell sharply after quarterly earnings came in slightly lower than analysts expected, according to FactSet. The company reported wine and spirits sales slipped for the quarter and shipments slipped by 14.8%. This is a buying opportunity. Owned in Core Portfolio.

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