Like most years, 2023 is faced with a number of challenges that threaten the outlook for both the economy and markets. Regional wars and the potential of their expansion, aggressive interest rate increases by central banks to fight inflation and the contagion fallout we are seeing in banking, real estate and corporate profits are certainly dominating the headlines

As a result, pessimism about markets and the economy seems to be the norm these days. But markets have a way of doing the opposite of what most people expect. Here is a more positive outlook based on what happened in previous market cycles.

If history is any guide, the likelihood of investment markets experiencing negative returns for two consecutive calendar years is not very high. In the last 85 years, two consecutive negative return years has only happened 3 times – in 1940/1941, 1973/1974 and 2000/2001.

Most of the time, however, strong positive years followed negative return years. In examining the positive years following a negative return year, 12 out of 15 of those years had returns exceeding 20%.

Even if a widely anticipated recession does occur in 2023, it’s worth noting that the stock market has shown remarkable resilience during years of negative GDP growth. Historically speaking, the year before a recession occurs tends to show weakness and negative returns, whereas returns have averaged double digit positive gains in the actual year a recession occurs. The stock market is, after-all, a leading indicator and is generally anticipatory.

Based on all of this, it seems reasonable to think that markets may already have factored in many of the challenges above. It is very possible the stock market can look beyond the valley of a weaker economy, and also look beyond short-term declining earnings estimates.

We are cautiously optimistic about the outlook for stock markets in 2023. There will undoubtedly be some volatility in the short term as the US Fed continues its tightening program. However, at some point, the Fed will pivot and their policies will no longer cause such distress for the markets. In the meantime, we continue to hold good companies for the long-term and use options, and lower risk strategies that focus on income, to mitigate the volatility for those clients who are more risk averse.

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Michael Holden

Portfolio Manager

Q Wealth Partners

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