2023 Outlook Commentary

Robert Vogel & Ian Butler - Jan 16, 2023
Shifting Investment Thinking

2022 was a rough year for investors, with the dubious distinction of seeing the most severe market declines since the “Great” Financial Crisis of 2008. For the year, the S&P TSX composite index had a -8.7% price return (return before dividends), and the US S&P 500 and MSCI Global stock indices negative price returns of approximately 13% in $Canadian.

To make matters worse, bonds, which typically provide portfolio stability during periods of stock market declines, experienced a horrible year as well. Due to the significant rise in inflation and interest rates, main bond indices fell by more than 10%. Therefore in 2022 the “balanced portfolio” strategy combining bonds and stocks did not provide the expected protection in a down-market year, with the balanced investor index down 12%.

As we start 2023, the outlook remains uncertain, and a recession has become more likely. Headlines for global political problems and economic outlook remain quite gloomy and investors can be forgiven for being nervous about sticking with their investments and strategies. However, one of the paradoxes of investing is, after years of significant declines like what we saw in 2022, the odds of seeing higher returns over the subsequent multi year period improve. The logic of this is quite simple and, in the heat of market downturns, is easy to overlook.

If we look at the 5-to-10-year outlook for any company, stock market or economy, we can make reasonable assumptions about corporate earnings growth or GDP expansion, including the reality that recession and recovery are natural occurrences in a repeating market cycle.

As an example, let’s look at TD Bank, with a long track record of being a well-run company that’s delivered its shareholders steady earnings and dividend growth through good and bad economic periods. In fact, TD has increased its dividend by over 8% annually for the past 5 years. We can be reasonably confident that TD and companies with similar attributes, will continue their steady growth into the future, even though there will be shorter periods of recession or slower earnings growth along the way. Assuming we’re right in our call that TD and its contemporaries will stay the course, would you rather be buying after they and markets have had a good run, or after they’ve had a year like 2022 when they’re down significantly? Taking that longer view, history tells us that now is a good time to invest in or add to these good companies given they are “on sale”. And if your portfolio is already in an appropriate balance, then be confident that holding on to what you currently have has always been the right decision.

Our message to investors? Try not to get too worried by the gloomy news and remember that despite the near-term uncertainty and drop in markets, the return outlook, and odds of generating better returns over the next 10 years are far more favourable than they were twelve months ago.