After the last, historically bad, year for investors, 2023 can only get better. However, we believe that 2023 will be even more challenging than 2021 and 2022, as the direction of the markets has been clearer in recent years. But there is also good news: Bond yields have risen to levels where we are now earning 4.6% on a relatively short-dated investment grade bond portfolio. Given the expected decline in inflation to below 3% by the end of the year, this is an attractive starting point.
For equities to continue to rise, there needs to be a soft landing with falling inflation and interest rate cuts by the Fed. This should allow price-to-earnings ratios to rise and mitigate a further decline in earnings. We believe this scenario is the most likely, however, there are other scenarios where equity markets will continue to fall. 2023 will be characterized by a back-and-forth between optimism and pessimism. Until the macroeconomic parameters provide a clear answer, we will have to live with these uncertainties.