By Chief Investment Officer Tom Kelly, CFA.
If you looked at economic and market forecasts at the beginning of the year, you may have expected a lot of volatility and negative returns in stock and bond markets for 2023. For example, the headline for J.P. Morgan’s 2023 Market Outlook is, "Stocks Set to Fall Near-Term as Economic Growth Slows".[1] Additionally, on the first page of UBS' 2023 US Equities Outlook, UBS writes, "With pressure on corporate profits for the next few quarters, equity markets could slip in the near term. However, the outlook should improve later in the year and into 2024."[2]
Contrary to these headlines, most global stock and bond markets are up to start 2023. While some markets (like U.S. bonds) are modestly positive based on their increased yields, others (such as U.S. stocks) are up significantly more than even we could have reasonably optimistically expected. We have experienced a lot of events to start 2023 (persisting core inflation, U.S. debt ceiling negotiations, the expansion of artificial intelligence, corporate job layoffs, etc.), and it would have been difficult for us to predict this market performance given these events. While it is easy to look back at the headlines from the beginning of 2023 and point toward their inaccuracies, it’s important to recognize how difficult it is to predict what will happen in the short-term for investment markets, and how much margin for error there should be for any prediction.
Source: Morningstar, as of June 30, 2023. The asset classes are represented by the following indices: U.S. Stocks - Russell 3000 Index (measures performance of the 3,000 largest U.S. companies representing roughly 96% of the investable U.S. stock market); International Stocks - MSCI All Country World Ex USA IMI Index (Gross Div.) (measures performance of approximately 99% of the global stock opportunity set outside of the U.S.); U.S. Bonds - Bloomberg U.S. Aggregate Bond Index (tracks performance of the U.S. investment-grade bond market); International Bonds - Bloomberg Global Aggregate Ex-USD Bond Index (Hedged To USD) (measures the performance of international investment grade bonds, with currency exposure hedged to the U.S. dollar); Global Real Estate - S&P Global REIT Index (Gross Div.) (tracks performance of publicly traded equity REITS globally). The index performance figures assume the reinvestment of all income, including dividends and capital gains. See Important Disclosure Information.
When it comes to investment markets, it’s easy to look back positively on the past and worry about the future. This is part of human nature, written about extensively through research on biases such as the availability bias (over-emphasizing news that is readily available to us) and negativity bias (focusing on negative aspects of a situation). This makes sense, because most people are more negatively impacted by losses than they are positively impacted by gains.[3] But we’re always here to help take the worry away!
Over the long-term, we expect positive returns from global stock, bond, and alternative markets. Positive returns will not occur every year, but over a long enough time period, we expect these asset classes to continue to have positive returns.[4] We don’t know what will happen for the rest of 2023 or even in the coming years, but we remain optimistic about investment returns over the long term for the future. Staying invested and remaining disciplined in your investment allocation is often the best way to avoid psychological pitfalls and achieve your desired outcomes.
Important Disclosure Information & Sources:
[1] “2023 Market Outlook: Stocks Set to Fall Near-Term as Economic Growth Slows”. J.P. Morgan, 05-Jan-2023, jpmorgan.com.
[2] “US equities 2023 outlook: From inflation to growth“. UBS, 16-Dec-2022, ubs.com.
[3] Thinking, Fast and Slow. Daniel Kahneman, 2011, Farrar, Straus and Giroux.
[4] "Historical Returns on Stocks, Bonds and Bills: 1928-2022". Aswath Damodaran, January 2023, stern.nyu.edu.
There is no guarantee investment strategies will be successful. Past performance is no guarantee of future results. Diversification neither assures a profit nor guarantees against a loss in a declining market.
Statements contained in this report that are not statements of historical fact are intended to be and are forward looking statements. Forward looking statements include expressed expectations of future events and the assumptions on which the expressed expectations are based. All forward looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties which could cause actual events or results to differ materially from those projected.
Indices are not available for direct investment. Index performance does not reflect the expenses associated with management of an actual portfolio. Index performance is measured in US dollars. The index performance figures assume the reinvestment of all income, including dividends and capital gains.
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