2023 Outlook: Return of Gravity

We are delighted to turn the calendar on a year that served investors a double whammy as both equities and fixed income investments suffered double digit losses. Markets are expected to now enter a new-found regime characterized by lower growth, higher interest rates, and higher inflation than investors have grown accustomed to.

We enter the 2023 investment arena on unstable footing as central banks around the world continue their synchronized global tightening cycle. This dynamic is paramount as interest rates provide a gravitational force, anchoring asset prices to fundamentals. As famed investor Warren Buffet puts it, interest rates are to asset prices as gravity is to the apple. This “gravity” will persistently weigh on valuations and inject volatility as the world works toward recovery in both the economy and markets in the years ahead. The last decade of central bank policy has embedded an expectation in investors that central banks will have their back and aggressively step in with a safety net. However, this current coordination in tightening conditions suggests that investors cannot count on intervention if conditions worsen. We believe the year ahead will reflect more of a reset in financial markets, not a V-shaped recovery.

To learn more about how we combine our macroeconomic, fundamental, and proprietary Newton AI research to construct portfolios that thrive in all market environments contact our investment team at 512-777-5900 or jchatmas@waterloocap.com