2023: What We Got Right and Wrong
’Tis the season for Wall Street outlooks. Most that we have seen are lukewarm on global markets and the economy. To summarize them: Inflation is coming down and central banks should be able to start lowering interest rates, but growth won’t be great. Stocks could have a decent year, while bonds seem like a reasonable place to be. Many risks, from regional bank balance sheets to elections, to geopolitics, will simmer. Ho-hum.
What we missed this year
We believed a U.S. recession was more likely than not. We were too pessimistic. On November 29, the final release of the third-quarter GDP report showed the U.S. economy grew at a 5.2% annualized pace, the best mark since the fourth quarter of 2021. In nominal terms, the economy has grown by 25% since the pre-Covid peak.
We were even more negative on Europe one year ago. The continent was heading into its first winter without access to Russian natural gas, and inflation was soaring. However, warm winter weather and a resilient services sector helped the European economy avoid the worst, and the euro is back to around $1.10 per dollar after breaking below parity last fall.
So where were we right?
We urged investors to see the potential for stronger markets in 2023, and that view has been validated. The total return for the S&P 500 is nearly 20% year-to-date, and a global 60/40 portfolio has returned over 10%. For what it’s worth, rolling Treasury bills have returned 4.6%. The simplest explanation for the strong performance from markets is that inflation came down (as we expected), but growth did not. One year ago, developed world inflation was between 7% and 7.5%. It has dropped to between 3% and 3.5% as of Dec. 1. Spot energy prices have dropped 30% from year-ago levels, and other problematic areas such as used cars are likewise seeing outright declines. The risk of a wage-price spiral (which we never thought was particularly high) has receded even further.
Last year, we rightly argued that there was a substantial degree of risk already embedded in equity market valuations. Further, we thought several opportunities would present themselves that would best be expressed through private investments. While the full performance of these types of funds won’t be known for several years, secondary private equity and stressed real estate have both had very promising starts.
Rick Barragan is the Managing Director,
Los Angeles Market Manager, for J.P. Morgan Private Bank.
[email protected] | (310) 860-3658
privatebank.jpmorgan.com/los-angeles
Source: J.P. Morgan Private Bank, December 1, 2023. “A 2023 lookback: What we got right and wrong” By Jake Manoukian, U.S. Head of Investment Strategy, J.P. Morgan Private Bank
