What One Popular Strategist Sees For 2023

I’ve said it before, and there’s no telling how many more times I’ll say it before year-end: 2023 will almost surely be kinder to investors than 2022.

That’s not (necessarily) a constructive assessment, and it’s certainly not a bullish forecast. It’s just to say that this year was singularly terrible for almost every asset class, which means the bar to clear for a better year has almost never been lower.

With the (almost sole) exception of commodities, 2022 was a veritable bloodbath. The losses in Treasurys and IG credit are mostly unheard of, and certainly when considered in conjunction with the simultaneous drawdown in equities which, at the lows (so, notwithstanding the rebound in October and November), was consistent with the median bear market.

The figure (below) is an updated version of what, by now, is a familiar chart. A standard 60/40 portfolio is on track for the largest decline in at least a century. Not even Charlie Munger has seen a stock-bond drawdown of this magnitude.

That chart is current (or, I guess, was current) through November 22. This year is wholly anomalous. There’s just no other way to describe it. An index of global government bonds is on pace for the sixth worst year since 1700.

For BofA, the outlook for stocks isn’t especially favorable. Or at least not in the near-term. But the bank likes 30-year Treasurys on recession risk and the likelihood of higher unemployment. “US Treasury returns have never fallen for three consecutive years,” the bank’s Michael Hartnett wrote, summarizing his top 10 trades for 2023.

In Hartnett’s view, the Fed pivot will likely occur in June or July, around the time the rate shock that rocked Wall Street in 2022 begins to hit Main Street. Whatever happens with the Fed, it’s “very unlikely” that central banks the world over will hike rates 280 times next year like they did this year, Hartnett remarked, somewhat dryly.

Below, for those who might’ve missed it late last month when I imagine it first made the proverbial rounds, are Hartnett’s top 10 trades for the new year.

1. Long 30-year US Treasury: On recession, unemployment, Fed cuts late ’23, history.
2. Yield curve steepeners: US yield curve always steepens as recession begins and markets anticipate Fed flipping from hikes to cuts.
3. Short US$, long EM assets: Long EM distressed bonds, Korea won on China reopening, Mexican peso on “nearshoring.”
4. Long China stocks: COVID reopening was very bullish for US/EAFE stocks, China has high “excess savings” and China stocks remain a very contrarian long trade.
5. Long gold & copper: US$ peak, China reopening, metal inventory shortages, energy transition acceleration, need in 2020s for inflation hedges.
6. Barbell credit: Long credit too consensus in ’23, we barbell long IG tech bonds (>5% yield + strong balance sheets) with distressed HY debt in Asia (17% yield).
7. Long global industrials and small cap stocks: Secular leadership shift in 2020s from deflation to inflation assets, driven by globalization to localization, monetary to fiscal excess, inequality to inclusion and so on is just beginning; capex set to be new macro bull story.
8. Short US tech: The old leadership, still over-owned, era of QE is no longer, era of globalization no longer, plus peak penetration and regulation risks.
9. Short US private equity: The old leadership, redemption risks given shadow banking exposures to housing & credit risks.
10. Long EU banks, short Canada/Aussie/NZ/Sweden banks: EU fiscal stimulus to wean Eurozone off Russian energy dependence, Chinese export dependence, US military dependence vs real estate market busts in Canada/Australia/NZ/Sweden.