If you read the 2022 In Review series on this blog, you got a feel for how we managed to outperform the stock market in 2022. Much of that strategy will apply to 2023, but I wanted to give you a broadened look at the Macroeconomic issues I believe we are facing and some of the investment strategies I intend to utilize.
Macroeconomic Influences
As we head into 2023, I think it is important to think about the Macroeconomic issues that potentially could impact the markets during the year. 2023 looks to be another year where the Macro will knee-jerk the markets no matter what earnings and valuations are doing. As such, below is a list of some of those things that could impact how we manage client money (hat tip to Jim Jubak’s blog for the language used in a few of the below – they were on my list, but his thoughts were more clear and well written, so they are included here):
- The Federal Reserve: 2022 saw the most aggressive monetary tightening in history, and with the Fed already having stated that they are not done, they will again play a major role in market returns in 2023. The February 1st meeting will be very important and has the potential to send the market on a bull run within this bear market or send the market down toward the 2022 lows, depending on whether they raise 50bp or 25 bps and make a statement about when rate increases will come to an end.
- Inflation/Recession/Stagflation: Inflation will likely be stickier than Wall Street is predicting, and the Fed is hoping. Wages and Rent have already moved appreciably higher, and even if energy and food prices crater (not likely in my opinion) and supply chain issues are fixed, core inflation will have a difficult time dropping below a level much higher than the Fed’s 2% target (let’s say 5% for arguments sake). So if the Fed indicates that it will keep raising rates until we see inflation at their target, the economy will go into a recession the severity of which will depend upon how high rates move. In any event, we are not likely to see strong GDP growth so the higher for longer inflation and low GDP growth will likely result in a period of stagflation.
- European Natural Gas: By early Spring, the world will see that Europe survived the end of shipments of Russian Natural Gas by severely depleting their emergency reserves. However, they will be forced to replenish those reserves ahead of next winter so there will be massive upward pressure on the price of Natural Gas when that replenishment effort is undertaken.
- Uranium: The world will begin to realize that modern nuclear reactors are very safe and produce less than a five-gallon bucket of nuclear waste per year. This will mean shuttered nuclear reactors will be brought back online and new ones will be built.
- China: China has recently reopened from its Covid closure, and we should expect to see extreme levels of stimulus to bring their GDP back to pre-covid levels of 5.50%. That stimulus will mean their stock market should experience large returns in 2023 and that the providers of materials they need to ramp up manufacturing will have heavy demand. Look for producers of coal, industrial metals, and energy to move higher in price as worldwide demand and supply imbalances come about.
- Russia and Ukraine: The war will likely continue, and the impact will see pressure on Putin to end it decisively in Russia’s favor. The hardliners will be pushing for tactical nuclear weapons to be used and Putin will push back against it. Western governments will continue to pour money into Ukrainian arms, giving defense contractors windfall profits as Western stockpiles of weapons will need to be replenished.
- OPEC: With Saudi Arabia likely not able to increase production in a material way, pressure will be on the fringe members to ramp up production to fill the gap. However, with restrictions on Russian exports and members like Nigeria and Libya in tenuous positions politically, OPEC will not likely be able to abate any global supply/demand imbalance. This means that European and USA oil companies will be looking wherever possible to increase production. We have already seen this with Chevron beginning to import Venezuelan oil, but watch for Iranian oil to be the next target. Neither of these will fill the gap, so production of shale oil in the US and deep-sea oil production will be required to fill the gap. This means that upward pressure on crude production company prices and drilling equipment and shipping companies is nearly inevitable.
- World Economic Forum: This week is the annual meeting in Davos for this group of politicians and business leaders. They are focused on reducing carbon emissions (unless you are one of the hundreds of private jets flying there) and changing what and how you eat, among other things. This will lead to increased government regulation of business and agriculture, and consumers and businesses changing preferences, operations and strategy to get ahead of the government legislation. The large cap companies focused on this will likely see their earnings under pressure while mid and small cap companies will mainly do the minimum to comply. This will probably lead to out-performance of mid and small caps compared to large caps as this process unfolds.
- Green Energy: The revolution of electric vehicles, batteries, and charging stations will continue to move forward in 2023 (but probably will slow in coming years as the infrastructure to upgrade the country’s electric grid to handle this is far from certain). Rare Earth metals, lithium, and cobalt producers will continue to see demand for their products increase and their profits will move up accordingly.
- Aging Baby Boomers: The demographics are not in favor of the younger generation as baby boomers continue to suck resources out of the system far beyond their inputs during their working lives. Social Security and Medicare will increasingly become an issue as the number of workers to baby boomers is not enough to support the benefits being paid. This will continue to put pressure on the governments budget deficit and growing national debt. It will also put upward pressure on stock prices of pharmaceutical companies, biotech companies, medical device companies, and Medicare supplement providers to keep the baby boomers living their best lives.
There are obviously many other Macro influences that will rear their heads during 2023 – this is not an exhaustive list. It does, however, give us various focus areas for investment:
- Oil producers, pipelines and refiners – Investment Strategy: Devon Energy, Pioneer Natural Resources
- Deep-sea drillers and shippers – Investment Strategy: Valeris, Ltd, Noble Corp.
- Natural gas producers, pipelines and shipping – Investment Strategy: Ranger Oil, Oneok.
- Gold, Silver and Commodities Investment Strategy: Newmont Industries, Vanguard Commodity Strategy Fund
- Aerospace and defense companies – Investment Strategy: Lockheed Martin, Raytheon
- Healthcare, biotech, medical device, and health insurance companies: Investment Strategy: Thermo Fisher, Merck
- Industrial metal miners – Investment Strategy: BHP Group, Ltd, Rio Tinto
- Coal producers – Investment Strategy: Arch Resources
- China Funds: Investment Strategy: Vanguard Emerging Markets, Fidelity China Region Fund
- Small and Mid Cap companies – Investment Strategy: Parr Pacific Holdings, PBF Energy.
- Agriculture companies: Investment Strategy: CF Industries, Nutrien
- EV battery sources: rare earths, lithium, and cobalt producers – Investment Strategy: Lithium Americas, Carpenter Technologies
- Uranium producers and nuclear power station construction companies – Investment Strategy: Cameco, Energy Fuels.
Our investment strategy for 2023 will emphasize these and many other companies in client accounts in the best way possible – easy to accomplish for individual stock portfolios, less so for mutual fund portfolios, but still achievable.
Mutual Fund Clients
Given that many mutual funds are managed to be very close to index funds so that their performance tracks its benchmark, the only way to achieve outperformance by including industries that are in our focus list above is to utilize Exchange Traded Funds and Mutual Funds that follow industry specific indices – Investment Strategy: include allocations to the Aerospace and Defense ETF, the Agriculture ETF, China Index ETF, Vanguard Commodity Strategy Fund, Fidelity Gold Fund, Energy ETF, Uranium ETF, Healthcare and Biotechnology ETFs.
In Summary
2023 will be a volatile year as the bear market plays out. We are currently in a bullish move within the context of the larger bear market – historically those can be as large a 30% moves higher before the next leg to a new lower low. Picking the right industries that have tailwinds behind them and minimizing exposure to those that are vulnerable will be key to success in 2023 portfolio management
Many thanks to our current clients reading this blog and to others who have found this through social media. If you are not a client and would like us to mange investments for you, feel free to contact me through the Info link on this website.
–Mark
