The 10 Charts to Watch in 2023
The key macro/market charts for navigating risk vs opportunity this year...
A couple of weeks ago I shared with you some of my Best Charts of 2022 (as well as my Worst Charts of 2022 and then also my favorites!
This week it's time for perhaps one of the most important blogs of the year - the charts to watch in 2023! This has become an annual tradition for me, and FYI: I will be checking-in quarterly to see how things are going. It adds in a nice little element of accountability and helps keep you up to date with how I'm thinking — check out last year's post for an example.
These charts were featured in my recently released 2022 End of Year Special Report.
That report and those posts were useful to look at, but as interesting and sometimes amusing as it is to look back, as investors we get paid for looking forward, for understanding and anticipating the evolving risk vs return outlook.
For me there’s a few existing trends and themes that will remain front of mind and be key to keep on the radar in 2023. Following is a selection of the key charts and indicators I will be watching this year.
Enjoy, and feel free to share the link or charts as you see fit! Also be sure to let me know what you think in the comments...
1. Global Recession 2023: One of the most interesting pieces of work I undertook in 2022 was to perform a sort of meta-analysis on all the leading indicators I’ve developed over the years. The key takeaway from that is whether you group leading indicators by type/factor, geography, or forecast window — they are all unanimous in pointing to a sharp downturn heading into early-2023.
In many ways it’s a coming full circle of the massive stimulus that was unleashed in 2020. Or as I call it: “a strange but familiar cycle”.
2. Double Trouble: I include this one because it goes to show how financing conditions have tightened — banks are becoming more stringent and stingy in their lending decisions, and the interest rate on those loans is now a lot higher. So it's a situation of even if you can get a loan, you might not be able to afford it!
If we do get a recession this year it could be the last straw for some of the more unsustainable business models that arose in the world of zero interest rates, and credit stress could become a key issue.
3. Property At Risk: Housing market valuations reached a record high across developed markets last year. That’s going to be a problem if rates stay high or head higher (and if real incomes continue to squeeze). Key risk to monitor.
4. Unflation: The downward drift in commodity prices is already going to dampen headline inflation, but a recession will seal the deal (the fastest way to free up tight capacity is demand destruction: central banks understand this).
5. Bond Yield Go Down: Weaker growth, credit stress, housing market issues, lower inflation… it’s all a recipe for lower bond yields. If we take my macro models literally then US 10-year bond yields could head back below 2.0% (even as low as 1%?!) by the middle of this year. Sure, there’s a lot of if’s and but’s around that, but an interesting forecast being suggested by the data, and it fits with the macro (and valuations).
6. Bonds Beat Stocks: On valuations, treasuries are cheap, and stocks are not. By itself that means bonds have the advantage, but bonds also disproportionately benefit in the event that global recession does indeed set in. The leading indicator affirms this notion in the chart below.
7. Monetary Risk to Macro Risk: Arguably much of the pain in equities last year was down to the rates/inflation/monetary shock. Recession risk means slowing growth is set to become the bigger concern this year.
8. Tech Unwind: Definitely different from the dot com bubble, but definitely also some excesses that needed to be unwound. My sense is we are still just over midway through this process, and ultimately: growth stocks can’t outgrow the macro.
9. EM Stocks & Bonds: When it comes to emerging markets, the equities are looking somewhat cheap, but what’s really interesting is where the bonds got to. There is what appears to be a major once-in-a-decade value setup for emerging market sovereign bonds (I am talking at the asset class level, equal-weighted). I think this could be one of those moments in time for asset allocation, but a few things do need to go right for this one to work.
10. China Policy Map: With China transitioning away from zero covid to zero cares about covid, the door is opening wider and wider for more forceful stimulus. The property market downturn, global growth risks, and clear disinflation trend makes for a classic and compelling case for monetary easing. Amid an otherwise gloomy outlook for 2023, this could be a key bright spot for macro and markets if they do step up stimulus. So keep an eye on China macro.
Summary and Key Takeaways:
-All leading indicators point to (global) recession in 2023
-As a result (and a long with tighter funding conditions), credit stress and housing market risks are likely to become a hot topic this year
-Weaker growth likely leads to lower pricing pressure, maybe even deflation risk
-All of this supports the idea the bonds rally, 10yr yields could move sharply lower
-For stocks it’s a situation of moving from the monetary/inflation risk of last year into macro risk this year, and stocks likely underperform vs bonds as bonds rally and stocks continue through the bear market process
-EM assets (stocks, but especially: bonds) look promising, but a few things need to go right, such as a peak in EM policy rates
Overall: I would repeat my quip of this being a “strange but familiar cycle”, particularly in that a lot of the usual macro/asset allocation sign posts that we usually follow continue to work and are pointing fairly clearly to the next steps. Hence from an asset allocation standpoint I would be overweight defense (cash and government bonds) vs underweight growth assets (equities, commodities, credit) given how things sit at the moment.
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“Unflation” is a better term than “disinflation.”
China's (self) injuries just needs some first aid. I'm betting bandages are on the way.