2023 Outlook: What kind of journey will the year bring?

2023 Outlook: What kind of journey will the year bring?

The economy and markets have taken investors for a rough ride. Darrell Cronk offers his thoughts on what the months ahead may hold.

Darrell Cronk
Darrell Cronk,
CFA; President, Wells Fargo Investment Institute;
Chief Investment Officer, Wealth & Investment Management

2022 was the kind of year investors are happy to see in their rearview mirrors.

Inflation has been at decades-long highs, and the Federal Reserve (Fed) has been aggressively increasing interest rates to help combat it. And you’ve probably witnessed the effect on your portfolio as both equity and bond benchmark indexes posted negative returns — a double dose of disappointment unmatched for over 50 years.

Turning from what’s behind us to what may be down the road, Wells Fargo Investment Institute expects a U.S. recession in the first half of 2023 as well as a continued global economic slowdown. That should drive down corporate earnings and create important inflection points for investors over the next nine to 12 months.

From a market perspective, we expect 2023 to be volatile and challenging; however, we also believe it may create strong opportunities for investors to reposition for growth as the next economic recovery and bull market emerge.

For help determining what action you may want to take with your investment portfolio, I recommend Wells Fargo Investment Institute’s “2023 Outlook: Recession, Recovery, and Rebound.” This report offers a road map of specific guidance for the coming year with a focus on:

Fixed income

We expect U.S. Treasury yields to decline in 2023 as we go through the economic recession and in anticipation of Fed policy rate cuts as a result of slowing inflation. We believe increasing exposure in long-term fixed income and extending duration (a measure of a bond’s sensitivity to interest-rate changes) may provide an advantage before considering lower credit exposure.

Equities

We anticipate a contraction in earnings in 2023 but see equity market gains as investors anticipate the late-2023 to 2024 recovery. We favor U.S. large- and mid-cap equities over international equities and remain tilted toward quality and defensive sectors. Our positioning likely will shift to more cyclical in 2023 in anticipation of what could be an eventual recovery.

Real assets

We expect commodities to perform well in 2023, especially energy-related commodities and equities and high-quality master limited partnerships (MLPs). We anticipate that real estate investment trusts (REITs) should underperform equity markets but see some value in the Self-Storage, Retail, and Data Centers sub-sectors.

Alternative investments

For qualified investors, we believe Relative Value and Macro hedge funds can provide solutions for equity and credit market diversification, as well as real yield, for the near future. Anticipating recession and financial stress, opportunities in Distressed Credit should expand. Finally, we expect selective opportunities in Private Equity.

For more on these recommendations and our top five portfolio ideas for the coming year, download the report.

Wells Fargo Investment Institute, Inc. is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.

Alternative investments, such as hedge funds, funds of hedge funds, managed futures, private capital, real assets, and real estate funds, are not appropriate for all investors. They are speculative, highly illiquid, and are designed for long-term investment, and not as trading vehicle. These funds carry specific investor qualifications which can include high income and net-worth requirements as well as relatively high investment minimums. The high expenses associated with alternative investments must be offset by trading profits and other income which may not be realized. Unlike mutual funds, alternative investments are not subject to some of the regulations designed to protect investors and are not required to provide the same level of disclosure as would be received from a mutual fund. They trade in diverse complex strategies that are affected in different ways and at different times by changing market conditions. Strategies may, at times, be out of market favor for considerable periods with adverse consequences for the fund and the investor. An investment in these funds involve the risks inherent in an investment in securities and can include losses associated with speculative investment practices, including hedging and leveraging through derivatives, such as futures, options, swaps, short selling, investments in non-U.S. securities, “junk” bonds and illiquid investments. The use of leverage in a portfolio varies by strategy. Leverage can significantly increase return potential but create greater risk of loss. At times, a fund may be unable to sell certain of its illiquid investments without a substantial drop in price, if at all. Other risks can include those associated with potential lack of diversification, restrictions on transferring interests, no available secondary market, complex tax structures, delays in tax reporting, valuation of securities and pricing. An investment in a fund of funds carries additional risks including asset-based fees and expenses at the fund level and indirect fees, expenses, and asset-based compensation of investment funds in which these funds invest. An investor should review the private placement memorandum, subscription agreement and other related offering materials for complete information regarding terms, including all applicable fees, as well as the specific risks associated with a fund before investing.

There are special risks associated with an investment in real estate, including the possible illiquidity of the underlying properties, credit risk, interest rate fluctuations and the impact of varied economic conditions.

Investment in Master Limited Partnerships (MLPs) involves certain risks which differ from an investment in the securities of a corporation. MLPs may be sensitive to price changes in oil, natural gas, etc., regulatory risk, and rising interest rates. A change in the current tax law regarding MLPs could result in the MLP being treated as a corporation for federal income tax purposes which would reduce the amount of cash flows distributed by the MLP. Other risks include the volatility associated with the use of leverage; volatility of the commodities markets; market risks; supply and demand; natural and man-made catastrophes; competition; liquidity; market price discount from Net Asset Value and other material risks.