Investors’ Outlook: Easing the sails

Markets roared into 2023, with investors feeling more confident about signs of slowing inflation in the US, indicating that the US Federal Reserve has likely completed most of its heavy lifting when it comes to interest-rate increases. Markets also benefited enormously on optimism that China’s reopening will support the global economy.

Inflation levels and central banks’ actions to fight it are still center stage, but the prospects for the global economy have improved from just a month ago, with inflationary pressures easing. Take the US labor market, for example, which has proven extraordinarily resilient, or consumer sentiment, which has been improving. While we still expect a recession and the Fed to cut rates by the end of the year, this backdrop increases the odds of a so-called “soft landing”—and, in turn, means that any easing of monetary policy by central banks is likely to start later than previously anticipated.

Two camps have formed. The bulls see a soft landing with low inflation, while the bears see a recession and persistently high inflation. The truth will probably lie somewhere in the middle. In any case, stock markets now price in a short and soft landing and may have gotten ahead of themselves somewhat. We now see more downside risks, fewer opportunities, and higher valuations and have reduced our equity positioning to neutral from overweight. Thus, we locked in some of the gains we’ve enjoyed since moving overweight at the end of September, and reinvested the proceeds into cash until we see an attractive entry point.

In this Investors’ Outlook, you will read our take on the most recent developments in the markets and economy. You can also find the details on our asset allocation, including our decision to trim our exposure to US stocks, stay neutral on fixed income overall and why we continue to prefer gold as geopolitical risks abound, as emphasized by the recent balloon incidents.

I invite you to read our deep dive into the role of unions and a review of current labor risks.

As February has shown, even a short month can be eventful. We are ready to navigate the markets as we head toward the end of the first quarter of 2023.