How to Invest in 2023

Transcript

Hi, this is Antwone Harris with Platinum Bridge Wealth Strategies, and we had a pretty challenging 2022. I wanted to give you an update on my thoughts from the previous year, and also talk a little bit about what I expect for 2023.

Now 2022 happened to be the worst year for bonds in modern history and not by a small margin. So in 2022, the aggregate bond market was down 13%. The next worst year was 1994, where we were down 2.9%. It was the seventh worst year for stocks. Going back to 1926. But what was different and what was an aberration actually, is that stocks and bonds were down simultaneously.

So this is an old slide from September, but the dynamic is the same. So, there's only been three years since 2026 where both stocks and bonds were down. So 1931, 1969, and 2022, where the bonds were down 13%; the stocks are down about 18%. Now, typically, the bonds act as support when stocks are down and that didn't happen.

So, there was really no place to hide in 2022. Now, Morningstar tracks 112 different asset classes. So, they look at large company US and small company US and small company international and international bonds. All these different asset classes. 94% of the 112 asset classes lost money in 2022. This is highly unusual.

The last time we saw that happen to this degree was 2008 during the financial crisis. But what I think is encouraging is that as you look at these red lines across here, the ensuing years tend to be much more favorable. So in 1994, 80% of the asset classes lost money. The next year, only 4% lost money, and you could either have relatively favorable experiences for the next several years.

Same thing- 2008, 94% lost money, but the next year, only 2% of the asset classes lost money. So I'm hoping that trend persists here. We don't have a crystal ball, but I'm encouraged that trend persists after this calendar year.

Now we entered a bear market June 2022. So, bear market is defined by 20% down from the market peak. On average, and it may be hard to see this. A bear market lasts 327 days. So basically a year. We entered a bear market last June. I'm hopeful that the headwinds that we're seeing can be resolved by the middle part of this year.

The Federal Reserve has raised interest rates aggressively. We all know this. From everything that I'm reading and everything that I'm seeing, it seems that they may be able to hold off and pause here during the first or second quarter 2023 which sets up for a potentially more favorable backend toward the latter part of 2023.

To give you some additional historical perspective, going back to 1926, the overall stock market, the S&P 500, has lost money by the end of the calendar year 26 times. So, there have been 97 years since 1926; 26 times the S&P 500 ended in negative territory. That means 71 times we ended in positive territory.

So 73% of the time, the stock market is up. The stock market has a very strong upward bias, so it's not normal for us to lose money. It's also highly unusual for us to lose money more than one year in a row. So it has happened. It happened back at during the Great Depression, 1929/ 1930. All these gray bars, these gray highlights here, show years where the market was down multiple years in a row. So it happened during the Great Depression. It happened during the early part of the 1940s. It happened during the oil crisis in the early seventies, and it happened after the tech bubble of 2000 where we were down for actually three years in a row. 

Now the backdrop here is much different which is encouraging.

So we don't have an oil crisis or a depression in the backdrop which is causing this market downturn. We don't have a tech bubble. This was intentional at the behest of the federal reserve that we're in the current market environment. It was done intentionally. It was done to help stem inflation. But the actual base of the overall economy actually is not so bad.

 We have very low unemployment. Consumer balance sheets are actually pretty favorable with the money that came in after Covid and the fact that there's such low unemployment, people have been able to work. So you don't have a high number of people looking for jobs where they simply can't spend money.

So the consumer's been very resilient and very strong. And the consumer makes up 70% of our economy. Also, the banking system is in much better shape than it was back during the financial crisis of 2008. So the banks are flushed with cash. They continue to lend money. The credit system has not dried up like we saw back in 2008.

So that presents a much more favorable backdrop. Once the Federal Reserve is able to pivot and stop raising rates, I think we're going to enter in a better situation going forward.

Now, again, we anticipate the Fed may be able to stop raising rates sometime in the first or second quarter. Historically, in recent history, what happens once we stop raising rates? Once the Fed stops hiking? On average since 1994, the US stock market's been up almost 20%, 19.9%, and US bonds have been up over 11% on average.

Once the Fed does its last rate hike. Now people ask me all the time, are we entering into a recession? We may already be in a recession. You don't know you're in a recession until after the fact because they define a recession looking at historical data. So we could already be in a recession, but whether we're in a recession or whether we enter a recession, which is likely, from all the data that I'm looking at, I don't think we're going to end up in a particularly bad recession.

So I think it's going to be rather benign. For the reasons that I stated. We have pretty decent unemployment numbers. There's money flowing through the system still, but what actually also may help out quite a bit, is the fact that China may come back online in 2023. China has been on the sideline because they've had people cooped up in their homes due to Covid and some of these draconian Covid restrictions that they've enacted. 

They realize they're really undermining their economy by doing this, and it seems that they're lightening up on those requirements and that may bode well for the global economy here in 2023 and help mitigate some of the headwinds that we're seeing at the behest of the Fed.

Now this one of the more important slides. I always recommend for anyone that has any kind of stock exposure, for that part of the portfolio, you should have at least a seven year time horizon. So any money that you need within seven years, you should not have exposed to the stock market. Going back to 1937, when we look at the S&P 500, the broad US stock market, any given five year period, there's a 92.6% probability of positive returns when you expand your time horizon to at least five years.

So any five year period that we've seen since 1937, if you've waited five years, 92% of the time you've made money. When you expanded the 10 years, there's a 97% probability of success and as you go forward, when we look historically, again, this is no guarantee for what happens in the future, but there's actually a hundred percent probability of returns when you expand your time horizon up to the 12, 15, 20 year time horizon ;when you look at the S&P 500 specifically.

From that perspective, I think it bodes well for people that are looking longer term and going, and they're gonna use a disciplined long term process here for their overall investments.

One of the things that I found encouraging is again, we may enter a recession, on average, going back through the 1950s, the year after a recession, on average, the S&P 500 is up 43%. So this is why I'm encouraging clients to stay invested. I think it's important to have some dividend paying companies in the portfolio to generate some income to act as a buffer as we go through the particular headwinds that I'm anticipating in 2023. But as long as we stay invested, as we come out of a recession, come out of a downturn, the market dynamics are actually very favorable. 

My name is Antwone Harris. If you have any questions, please feel free to reach out and I'm happy to chat. I'll talk to you soon.