When looking ahead to 2023, advisors should keep an eagle eye on a range of investing trends and market factors.
Nobody has a crystal ball, but after a whiplash-inducing 2022, investing experts are considering the forces that will shape 2023.
For more insights into the market trends that advisors and investors should watch for in the coming year, SmartAsset spoke with Connor Spiro, a certified financial planner and senior financial consultant to John Hancock’s Advice Team. Here are the top three on his list.
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Look for Bonds to Make a Comeback
First, Spiro says, his team expects bonds to make a comeback for income investors.
Bonds have had an unusual profile over the past several years. In the decade-plus since the Great Recession, bond yields have consistently underperformed relative to equity dividends. That streak continued in 2022, with the Bloomberg U.S. Aggregate Bond Index posting its worst year since 1976, according to Spiro. That has been particularly unusual, given the weak stock market, since bonds tend to move countercyclically to equities.
But Spiro expects that to change in 2023.
Fixed-interest funds and bonds, he said, “have their ear to the ground more than the equity side of things” in the context of inflation and interest rates. This tends to mean that those sectors respond earlier than equities do to changing monetary environments.
With Federal Reserve rate hikes and cooling inflation, Spiro expects that bonds will start delivering strong yields and overall returns early in 2023.
That may be the case given two seemingly contradictory factors. First, in a weak stock market, investors will seek safety from volatility, driving up the value of bonds. Second, however, is that with most analysts expecting a strong back half of 2023, companies may feel good about offering more aggressive interest rates on corporate borrowing.
Expect Early Market Opportunities
Heading into 2023, Spiro says, investments have been so “beaten-up” and “discounted,” that it’s a great time for people to take advantage of the market lows and a longer-term strategy.
But, he emphasizes, you need to have that longer-term strategy.
Spiro’s team doesn’t expect an early rush out of the gates for 2023. The stock market will probably take continued losses at first, especially with signs of an imminent (if not current) recession. He recommends, however, that financial advisors remember that bonds and stocks “are forward thinking.” The market tends to recover its value in advance of an economic recovery as investors buy back into undervalued assets.
And right now, his team sees equities as discounted across almost every market sector.
What does that mean for 2023? Most analysts expect a coming recession to be relatively short-lived. That suggests to Spiro that markets, especially equities, will continue to lose value before they bounce back as investors prepare for a third- and fourth-quarter recovery.
Spiro does have a warning for those following 2023 market trends. In the first couple of months, perhaps the first quarter, his team is focusing on “quality, value and defense.” But, he notes, it’s going to be a key year to stay on top of things “because I don’t necessarily believe, and our team doesn’t necessarily believe, that that will be the story throughout the year.”
The Overcapitalization of Tech Stocks
The big sector where Spiro advises caution is technology. This isn’t necessarily true across the board. His team is particularly interested in biotechnology and medical developments as potential value investments. But when it comes to information technology, the companies that made money delivering software to your smartphone, caution is in order.
In part, this is because those companies depend on the unique economic environment of the 2010s, he says.
Many, if not most, of the huge tech success stories rely on hiring gig workers for low-cost, just-in-time services. That was a viable strategy during the persistently weak job market of the 2010s, when underemployed workers were plentiful. But many tech companies have already begun to struggle in today’s tight job market.
At the same time, that weak employment sector led to an era of historically cheap money. With interest rates at or near 0%, investors funneled huge amounts of capital into app and software companies. That, too, has come to an end. And tech investors may be faced with an industry built to access both money and labor below cost.
“The tech boom, I think, is making those large megacap companies show their true colors,” Spiro says. “I think tech may have difficulty getting back to those highs that we saw in 2016 (and) 2017.
He adds, “The way I would put it is, it’s maybe not the traditional tech sector that we’re used to, given the low unemployment. They were overcapitalized, with money-hand-over-fist, and now it’s not really like that.”
When it comes time to advise your clients, what trends should you look for in 2023? While markets are subject to change, there are some trends experts are eyeing. According to Spiro, look for a return to bonds for income investors and a market bounce around the middle of the year. Investors may want to avoid tech stocks for now though.
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