This is my first official post for 2023. A little slower off the mark than I had expected, so here we are. And here's whats on my mind.
2023 started with a bang. Catching all market prognosticators off guard - yet again. Here's how major asset classes have performed during the month of January when comapred to the full calendar year of 2022. Insane.
The rally in stocks really started around 1 October 2022. Most investors have been happy with the uplift in stok prices recently. But what I don't think most investors realise is the divergence in the rally of different stock markets. The US stock market is up around 5.90% during this time, the Australian market up around 3 times the US, up 14.46%, and the European stock market has surprised everyone, up 21.88% - almost 4 times that of the US stock market, all in a matter of 4 months.
It was inflation and interest rates that broke the back of the stock market during 2022. What is clear is that inflation has peaked. We all know this, right? Well, if you didn't, here it is. Reporting 8.636% in March of 2022, we're now at 6.50%. What's even more insightful is not the 12 month change in inflation, rather, the 3 month change in inflation, sitting at 0.367%. Annualise that and see what it gives you. Was it transitory in the end?
With this as the backdrop, professional money managers have not been as bearish as they are right now. Stock are hated with a greater passion than they were during the GFC and the pandemic. I see this as a contrarian signal. How does the famous saying go? Be Fearful When Others Are Greedy and Greedy When Others Are Fearful'.
Bank of America Merryl Lynch go on to say that "Investors are most underweight on US stocks since 2005". In the absence of readily available data, I'll use this chart as a proxy for allocation to equities, not just the US. Just as investors are underweight stocks, guess what stocks do? It's not perfect, but when you see investors running for the hills as this rate and pace, you really gotta wonder how bad can things really be.
But what about company earnings? I hear you ask. Yes, they are falling. What did you expect of them following their peak in March of 2022? In fact, the stock market started falling right at the beginning of the year, from the 3rd of January 2022, well and truly before earnings peaked 3 months later.
What we are now seeing, is the stock market trying to find some resistance and higher bottoms. And so if the stock market is in fact forward looking, could it be at all possible that the declines we saw during 2022 were predicting the decline in earnings we are seeing today? Is the market now looking further ahead?
We're seeing record levels of unemployment both in Australia and in the US. Yes there are job cuts being announced, but these are coming off some of the lowest levels we've ever seen.
Australian's are still cashed up. This is also true for both the US consumer and US corporates. Although higher rates have been eating into these buffers. Consumers and corporates have never been better placed to weather a storm.
Will there be a recession? Yes, of course there will. Will it be during 2023? I have no idea. What I do know is that more money is lost anticipating a crisis than the crisis itself. Spend less time on trying to anticipate a crisis and spend more time on getting your portfolio allocation right.
There are and will always be smart sounding reasons to sell stocks. You just need to remind yourself of the reason you began investing in the first place. For whatever it's worth, my prediction for 2023, the market will prove the headlines wrong.