Above the Noise: Signs of a brighter year ahead?

Goodbye and good riddance to 2022. I think we all need a break from what was a very challenging year. I’ll keep it short and run through a few of our usual categories with a level of brevity that is not typically my forte.

‘Tis the season

It’s beginning to look a lot like …

… a recovery? Stocks have been rallying¹, bond yields have been falling², the U.S. dollar has been weakening³. The risk-on trade has been a nice reprieve from the “everything bear market”. What’s driving it?

Toys in every store …

… are a testament to how much supply chain challenges have eased and retail inventories have surged.⁴ The goods inflation story is now largely in the rearview mirror.

But the prettiest sight to see …

… is inflation expectation plunging. As I type this, the bond market’s expectation of inflation over the next year is now at 2.1%, well within the U.S. Federal Reserve’s “comfort zone.”⁵

And the thing that’ll make (risk assets) ring is the …

… pause in monetary policy tightening that may be coming. The market expects the Fed to complete the most aggressive period of policy tightening on record by Q1 2023.⁶

Let’s not get too far ahead of ourselves. The rebound in market sentiment should be likely viewed as a positive repricing of recession risks. In other words, as inflation moderates, the likelihood that the Fed would be forced to drive the economy into a deep and long-lasting recession is receding. The lagged effects of interest rate hikes, however, are still left to be felt by the economy. While the path to a sustained recovery and a new business cycle won’t be a straight one, I take solace in the belief that we are now finally on that path.

Potential New Year’s resolutions for investors

1.       Save! It’s estimated that fully 18% of American household income is wasted on items such as unused gym memberships, lottery tickets, gambling, wasted food, wasted energy, interest expenses on credit cards, and more.⁷

2.       Assess each purchase not on its actual cost but on its opportunity cost. Every dollar spent is one that cannot work for you.

3.       Automate your investments. If you pay yourself first, you take emotion out of the equation.

4.       Stop trying to time the markets. Investors often tend to make bad decisions at inopportune times. Case in point: Stock and bond funds experienced significant outflows in September, only for the stock and bond markets to surge in October.⁸

5.       Steel your nerves. It was a tough year. But if history is a guide, then I expect U.S. markets to recover and reach ever-higher highs over time.⁹

Since you asked

Have bonds lost their usefulness? No. Yields are as attractive today as they have been in years.¹⁰ Further, long-term rates tend to rally once the yield curve becomes deeply inverted.¹¹ Currently, the yield curve is as inverted as it has been in decades. If anything, I would expect bonds, in 2023, to reaffirm their usefulness.

It may be confirmation bias, but …

… inflation may come down more rapidly than many believe. Nobel Prize-winning economist Milton Friedman said that “inflation is always and everywhere a monetary phenomenon.” The growth in money supply is plunging.¹² Inflation tends to follow.

Latest episode of Market Conversations with Talley Léger

Talley Léger, Equity Strategist at Invesco, joined the latest episode of Market Conversations to declare that he is becoming increasingly bullish after spending much of the year concerned about equities. Talley’s reasoning:

• Stocks have already priced in a mild recession.¹³
• Inflation appears to have peaked in June.¹⁴
• The U.S. dollar and U.S. Treasury yields may have peaked in October.¹⁵
• The Fed is poised to slow its rate of interest rate hikes.¹⁶

Talley added, “I’m more concerned about missing the long-term recovery and the best few days in the market than I am about an additional 10% downside if I’m wrong.”

Talley is a man after my own heart.

On the road again

My travels in December took me to Cleveland, Ohio, to a conference where I was on an agenda with Eddie George, the former Tennessee Titans running back and Heisman Trophy winner at Ohio State University. (I resisted mentioning that my Michigan Wolverines bested his Buckeyes for the second consecutive year.)

George talked about the power of goal setting. As an underclassman, he visited the Downtown Athletic Club where the Heisman Trophy is awarded. He stayed in the room and mapped out his plan to one day receive the award. If the team worked out once a day, he worked out twice. It wasn’t easy. George was even benched for over a year and considered transferring. Instead, he treated every practice as a game and every play as if the championship were on the line. On Dec. 9, 1995, Eddie George returned to the Downtown Athletic Club to receive his Heisman Trophy.

Goal setting. Perseverance. Consistency. It was a great message after a very difficult year.

Happy holidays to everyone. I’ll see you in 2023.