Economic Outlook Strategy

Following part 1 where we covered outlook, this week we dive into some strategies we can use for the markets in 2023. Join us as we discuss what you can do to potentially benefit from what we are set to see in the markets in 2023.

Bonds

2022 saw a drop in equities, but the strange thing was it was the first time we have seen both bonds and equities fall by 10%. Host Andrew BAxter notes that they typically perform in opposite fashions, so this is a very strange occurrence. Last year, we relied on TBT, which follows bond yields and rises as bond prices drop. The opposite side of the coin for 2023 is the opposite which is getting long bond prices using an ETF with the code TLT. A possible move towards lower risk debt like government bonds may see demand increase which ultimately would push bond prices higher and thus bond yields lower. It may not be smooth sailing, however we are looking to see bond prices go on a run higher throughout the year to come. 

Equities

As we have highlighted in previous podcasts, the upcoming earnings of companies may be weak as the economy continues to slow. Host Andrew Baxter notes factors like higher input costs, higher labour and material costs as well as weaker consumer activity is a formula for weaker earnings for a lot of companies. The result of this may be poor earnings, with a lot of companies confessing to underperforming their expectations which would ultimately lead to prices coming down in the market. Looking at the S&P 500 in the US, we may be looking at a range of about 3500 to 4100 throughout 2023 for the S&P 500 Index throughout the first half of the year or so. From an investment perspective, this is not ideal, but it does bring some trading opportunities into play – but you may need to be more nimble. 

Metals vs. Energy

There is a lot of talk heading into this year about whether metals or energy will be the stronger performer. In Host Andrew Baxter’s view – energy may be a bit safer in a slowing economy given metals tend to be quite cyclical. Energy is more responsive to news in the market compared to the more lagged reactions from metal commodities in the market. Supply shocks like what we saw in Ukraine have an immediate impact, whereas metals can be trickier to navigate. As such, we are looking for long energy plays with some timing worked in while we may be making moves in the opposite fashion on metals.

Emerging Markets

Emerging markets encompass developing economies such as India or Brazil. While the major economies of the world have seen some turbulence recently, the emerging markets space has been quietly moving higher. Andrew Baxter notes the main reason for this is the same economic headwinds faced in developed countries being high inflation and increasing interest rates have not been faced, allowing them to continue growing. One country, in particular, you may see perform strongly is India with a range of businesses taking their manufacturing out of China as prices have continued to increase. Mexico is another country to potential benefit as a large number of American countries may be attracted to moving operations just over the border. Overall – a long play on a generic emerging markets ETF could be a great core holding.

Earnings Season Plays

Though our prediction looks bleak for earnings, there are ways to profit from it. Host Andrew Baxter uses strategies with derivatives like straddles around earnings in order to benefit from large moves in stock prices around earnings. Though it may be something you are not familiar with, equipping yourself with the skill to trade in volatile times can help you move the needle on your trading account when perhaps some of your long-term holds are not doing too well.