As investors, we gladly close the books on 2022. Equity and bond benchmark indexes posted deeply negative returns this past year, a double dose of disappointment unmatched over the past 50 years.

While not unusual for equities to routinely post difficult years, the bond market inked its second year in a row of negative returns, a feat not seen since 1958-59. Ironically, U.S. bonds have never posted three consecutive years of negative returns, setting up for what we believe will be an exciting 2023 as interest rates peak– and one we have already begun positioning for within our current guidance.

A fitting symmetry of a bull market that began during the pandemic with a huge liquidity surge now reconciles itself to a bear market grappling with a massive liquidity drain, as many factors coalesce simultaneously to tighten financial conditions. High inflation and the end of pandemic-related transfer payments reduced real disposable income in 2022; however, real spending growth remained more resilient as consumers unleashed pent-up demand and shifted focus from goods spending to services spending.

2023 may actually see this situation reverse as the drivers of inflation—oil prices, food prices, wage gains, and productivity— give way and the pace of inflation drops. We expect a U.S. recession in the first half of 2023, as well as a continued global economic slowdown, as last year’s hawkish monetary policy and money growth slowdown works with a lag. That should drive down corporate earnings growth and create important inflection points for investors over the next 9 to 12 months.

From a market perspective, we prefer to step deliberately through this kind of turbulence as the U.S. economy weathers the fastest pace of real rate tightening in modern history. Bear markets are ultimately a function of price and time. We believe both will run their course in 2023. While we expect 2023 to be a volatile and challenging year as we make this transition, paradoxically we believe it may create strong opportunities for investors to reposition for growth and back into a more pro-risk stance as the next economic recovery and bull market emerge.

This outlook offers a road map of specific advice and guidance for the coming year. As I regularly impress on our strategy team, advice is only as good as what can be understood and applied. It is our job to make these words on the following pages have shape, meaning, and impact for you as an investor. We take that role extremely seriously and exercise it with the utmost care. On behalf of my Wells Fargo Investment Institute colleagues and all our advisors, I want to thank you for the trust you extend to us as our clients.

Source: Wells Fargo Investment Institute - 29 Dec 2022