Summary 2023 Outlook: A Market in Transition

Market Bottoming is a process, not an event; messy first half of ’23, stronger finish, in our view


Transitions we are anticipating for 2023:

  • From inflation to recession
  • From the pandemic to geopolitics
  • From a Bear Market to a potential Bull, once depth of recession is known

RiverFront is proud to release our 2023 Outlook, entitled ‘A Market in Transition’. Our Outlook is a visual chart pack designed to walk investors through our investment views and predictions for the upcoming year. In today’s Weekly View, we created a concise synopsis of the Outlook’s conclusions, along with a few selected visuals that encapsulate a number of key takeaways.


In our view, 2023 will be a year of important ‘transitions’. We believe the first transition will be away from a bear market to a potential bull. History suggests attractive forward returns for stocks after the type of drawdowns we witnessed in 2022, but the timing of the market bottom is unclear and the process will be bumpy, in our view. Longer-term, returns for balanced stock and bond portfolios look attractive to us again, with valuations more reasonable and bond yields above long-term inflation expectations.

We believe the next two major transitions involve an evolution of investors’ concerns: away from inflation and towards recession, as well as away from pandemic-related disruptions towards geopolitical ones. In this world, the US remains a more attractive investment destination than international in our view. A Fed ‘pivot’ towards less restrictive policy is likely later in the year, with the magnitude of earnings declines determining whether the market has already seen its ultimate lows or not.

The last major transition we see for ’23 involves the end of ‘growth’ stock dominance and an increased focus on consistent cash flow, dividend, and coupon generators – what RiverFront calls the ‘P.A.T.T.Y.’ (Pay Attention to the Yield) theme. Under these circumstances, we see modest upside for stocks and bonds in our base case scenario, with preferences for consistent cash flow generators, cyclicals, smaller-cap companies, and traditional ‘value’ plays like energy and financials.


The table above depicts RiverFront’s predictions for 2023 using three scenarios (Pessimistic (Bear), Base, and Optimistic (Bull)). Our assessment of each scenario’s probability (“RiverFront Investment Group Probability”) is also shown. The assessment is based on RiverFront’s Investment team’s views and opinions as of 12.13.2022. Each case is hypothetical and is not based on actual investor experience. These views are subject to change and are not intended as investment recommendations. There is no representation that an investor will or is likely to achieve positive returns, avoid losses or experience returns as discussed for various market classes. See end of document for definitions.
Source: Refinitiv Datastream, RiverFront; data monthly as of 10.31.2022. Chart shown for illustrative purposes only. See Definitions & Disclosures section for index definitions.

Worst Market for Balanced Portfolios on Record: Brighter Days Ahead, in Our View

Thus far, 2022 is the worst year on record (going back to 1942) for a balanced portfolio of 60% Large Cap US stocks and 40% 10-year US treasury bonds.

Stocks dropped around -25% peak-to-trough by the end of Q3, and bonds more than -23%, before both stocks and bonds rebounded in Q4.

Source: Goldman Sachs Asset Management, Strategic Advisory Solutions, 10.07.22, Chart of the Week: Don’t Dread the Drawdown. Chart shown for illustrative purposes only. Past results are no guarantee of future returns.

History Suggests Positive Returns Likely After > (-25%) Drawdowns

History suggests that big drawdowns often lead to positive results in the next year, and especially in the longer-term.

While our base case in 2023 is for a transition year with muted returns, this bodes well for 3–5 year returns, in our view.

Anatomy of A Market Bottom: Typically, False Starts

During bear markets, stocks often experience short, sharp rallies that eventually fail. We may be in another one as we speak. Extreme market volatility in both directions compounds the difficulty of making tactical risk management decisions. Current volatility reminds us of 2000-03 or 2008-09, when a number of double-digit false dawn rallies emerged (green shaded areas), only to eventually fail, with markets making new lows before bottoming for good.

Source: Refinitiv Datastream. (Chart Left) data as of 01.01.04. (Chart Right) data as of 01.01.10. Chart shown for illustrative purposes only. The 200-day moving average is a popular technical indicator that investors use to analyze price trends. It is simply a security’s average closing price over the last 200 days. Past results are no guarantee of future results.


Modest Upside for Stocks and Bonds in Base Case Scenario

  • Stocks in a bottoming process, magnitude of earnings decline will determine if there is a lower low; Bonds are increasingly attractive to us, as yields are above long-term inflation expectations and real yields (TIPS) are positive
  • Stocks no longer expensive: Earnings and margins vulnerable but we see only mild erosion
  • 1970’s/80’s Playbook: Focus on consistent cash flow and dividends/coupons
  • ‘Silver Lining’: Longer-term returns for balanced portfolios now appear attractive to us again

Selection: Neutral Fixed Income & Cash; Prefer US stocks to International

  • US Stocks: We favor the US over international, given geographic and demographic advantages, stronger margins
    • We favor consistent cash flow generators, cyclicals, small-cap and traditional ‘value’ plays like energy and financials
  • International Equities: Tactically underweight, with potential opportunities in 2023
  • Developed Markets: Underweight - Europe and Japan historically cheap but fundamentally challenged; focus on value
  • Emerging Markets: Underweight - Still skeptical on China economy

Fixed Income: Neutral – interest rate volatility remains, but we believe yields now attractive and should act as a recession hedge

Risk Discussion: All investments in securities, including the strategies discussed above, include a risk of loss of principal (invested amount) and any profits that have not been realized. Markets fluctuate substantially over time, and have experienced increased volatility in recent years due to global and domestic economic events. Performance of any investment is not guaranteed. In a rising interest rate environment, the value of fixed-income securities generally declines. Diversification does not guarantee a profit or protect against a loss. Investments in international and emerging markets securities include exposure to risks such as currency fluctuations, foreign taxes and regulations, and the potential for illiquid markets and political instability. Please see the end of this publication for more disclosures.