Heading into 2023, the Investment Advisory Committee believes we are beginning to return to a more historically normal, rational economic environment.
The Committee has identified four key themes for 2023 and the years ahead:
1. Fundamentals Matter Again:
- From 2009 to 2021, expansive government and monetary policies kept interest rates and inflation near record lows.
- This environment favored US and growth stocks, whose stock prices are driven primarily by future growth prospects, as opposed to things like profitability and earnings.
- The unwinding of these accommodative policies is leading us back to an environment where strong company fundamentals will likely again be vital when building investment portfolios.
2. Dividends Back in Focus:
- Dividends represented a historically small amount (16%) of the S&P 500’s return during the 2010’s and early 2020’s.
- Going back to 1926, dividends have contributed 38% of the market’s annualized return.
- As we return to a more normalized environment, we believe dividends will likely become a larger portion of total return.
3. “Income” is Back in Fixed Income:
- The rise of inflation was a key catalyst for pushing interest rates back to historical levels.
- While difficult in some ways, the new interest rate environment means investors can likely rely on bonds again for income.
4. Asset Allocation Works Again:
- In 2022, value stocks performed better than growth stocks and international stocks beat US stocks. This was in contrast to the past decade where returns have been concentrated primarily in US Growth stocks.
- We believe the shifting environment could result in continued normalization, benefitting diversified portfolios.
- For the first time in over a decade, bonds will likely play a meaningful role in portfolio composition.
The future is impossible to predict, and nobody has a crystal ball. However, we believe that the four themes listed above will likely have a major impact on investor outcomes over the next year and beyond.
If you would like to talk through how these themes may impact your portfolio, please give us a call.