A Promising Year for Investors
For nearly all investors, 2022 was a challenging year. Equity and fixed-income markets saw double-digit losses due to the Federal Reserve’s rapid rate hiking cycle, which caused shockwaves throughout the financial system. However, 2023 looks much more promising, with several factors pointing towards a better investment climate than we saw in the past year. Let’s take a closer look at some of these factors.
In March of 2022, the Federal Reserve embarked on a fast rate hiking cycle, with the Fed Funds Rate rising from 0.25% to 4.75% in just 11 months. After this market shock, the Federal Reserve is slowing their rate hikes to let the economy digest the higher rates. With this pause comes some stability to equity and fixed-income markets, which have both been volatile over the last year.
Inflation is rolling over, allowing the Federal Reserve to slow and eventually pause hiking rates. This will provide additional stability and confidence in investments moving forward into 2023.
To understand how markets could react when the Federal Reserve pauses its rate hiking cycle, we went back to 1995, the last fast hiking cycle. As you can see, once the pause began, the equity markets took off. 
We believe anticipation of a Federal Reserve pause drove the strong equity market in January. Indeed, the Federal Reserve moving from a 75-basis point hike in November to a 50-basis point hike in December and down to a 25-basis point hike on February 1st would give credence to the market’s interpretation of a Fed pause incoming.
Another tailwind for the market is that we are entering the third year of a Presidential term which is historically a strong year for investments as markets tend to benefit from policies designed to improve economic conditions during election cycles. This means that investors can anticipate gains over this period if there are no major unforeseen events or shifts in policy that could disrupt investments within this timeframe.
While 2023 is not without its risks—
- From a battle over the debt ceiling;
- To the U.S. entering into a recession;
- To further decline in earnings expectations;
- To an uptick in inflation; or
- An unexpected geopolitical event.
We are cognizant of the risks. But as we enter the year, all signs point towards 2023 being a better year for investors who have been through challenging times over the past 12 months. With several factors working together—a slowing/pause in rate hikes, rolling over of inflation, and a government intent on supporting the economy before the Presidential election cycle—the outlook looks positive for returns on investments this year. While the road ahead will still have potholes and bumps, we believe 2023 should provide investors with good reward to risk opportunities. In the weeks ahead, we will look at the areas of the market that are providing opportunities for investors and some of the risks, but in the meantime, 2023 is off to a promising start.