Compared with the turmoil global markets experienced in the past year, 2023 should be less threatening and more opportunistic, says Michael Hartnett, Chief Investment Strategist for BofA Global Research. A recession during the first half of 2023 may favor bonds, with stocks and corporate bonds rising later as economic conditions improve.
Here, Hartnett discusses his market outlook for 2023, what history may tell us and why asset classes battered by recent market conditions could rebound in the year ahead.
This interview took place on: December 1, 2022
Generally, what’s your global market outlook for 2023?
In 2022, financial markets sustained a number of shocks, particularly from inflation and interest rates, which were very destructive for bond and equity prices. But we’re a lot of the way through those challenges now, and for 2023, we’re bullish on bonds in the first half of the year and on stocks in the second half.
We forecast a recession in the first half, which is why we favor bonds over equities. But the most important factors in determining asset prices are interest rates and corporate earnings—and by the middle of 2023 it should be clear that we’re past the peak in interest rates and the trough in corporate profits. Then, markets should be on a much more solid footing.
In 2022, even a balanced portfolio of 60% stocks and 40% bonds had its worst performance in a century. Do you expect that to change in 2023?
It’s rare for lightning to strike twice. Going into 2022, markets clearly weren’t prepared for inflation or for a very aggressive response from the Federal Reserve. That’s why bond markets fell so far and then took equity markets with them.
Even if inflation continues in 2023, it will be expected, and much less likely to have the negative impact it had in 2022. That just leaves questions about the size and length of the recession. The expectation is that it will last through the first six to nine months but won’t be deep or scarring. If that’s the case, bonds certainly should do better than in 2022, and eventually the stock market will follow. If you look at the overall expected returns for those asset classes, a 60/40 portfolio should generate a positive return in 2023.