Guessing Games

As we enter the third month of the first quarter, I thought it may be helpful to share with you our base thesis (best guess) for 2023 as it pertains to your investments.

First, based on where we have been, where we are now, and years of history I am hopeful we will see a better year this year vs. last. But I think it will still be challenging. My best guess is we will experience an earnings recession, economic recession, or both sometime later this year or early next year. I'm not in the currently popular "no-landing" camp that believes the Federal Reserve has perfectly orchestrated a scenario that completely avoids a slowdown. But I do think the recession should not be awful as employment is strong and given our domestic demographics labor should stay tight for a long time keeping some upward pressure on wages and keeping the consumer in ok shape.

Based on the first part of my best guess, the second part is inflation is going to remain above the Federal Reserve’s 2% target for an extended period of time meaning interest rates will remain higher for longer than some currently think. It's taken me a year, but I actually have come to believe the Federal Reserve actually means what it says! Barring some sort of black swan event driven crisis I don't think the Federal Reserve will be really quick to let its foot off the economic brakes and lower interest rates. Longer term there will be a lot of political pressure on the Federal Reserve to lower rates so our debt addicted government leaders can afford to service the mounting debt. But that is a story for another day.

Contingent upon the above thesis I believe the outperformance we began to see of value stocks vs growth stocks that began last year may continue for an extended period. I think bonds should play a greater role in many portfolios. I consider the risk vs. reward bonds offer now to be better than they have presented in many years.

I'm also recommending for some investors an increased exposure to alternative investments like real estate and commodities as an inflation hedge and a way to attempt to reduce overall long-term portfolio volatility.

With all this said I am assuming income from bonds, real estate, and dividend producing value stocks (both domestic and international) will make up more of a portfolios total return over the next few years than we saw during the low interest rate, cheap money, go go growth stock years of 2009-2021.

I do believe with all my heart and backed up by my 28 years of real life industry experience, as well as a ton of historical data if we continue to follow the recipe of focusing on sound investments with an emphasis on predictable income production through bonds and dividend paying stocks put together in a diversified well allocated portfolio with some exposure to growth stocks and alternative investments we should be able to keep inflation from eroding our purchasing power over the long haul.

I agree with Yogi Berra who said, "it’s tough to make predictions, especially about the future". But just like Nostradamus I figure if I throw enough vague guesses out there some of them are bound to hit their mark. And even if none of my best guesses come to fruition, by focusing on what we have some control over: fees, taxes, diversification, and asset allocation, we should be able to expect a positive outcome over time.

And that is my Best Guess for the remainder of 2023....

For now. Peace, cw