2023 holds a lot of promise.
After surviving the volatility of 2022, investors are ready for positive change.
Unfortunately, most financial media outlets are focused on day-to-day noise. They aren’t great at delivering clarity.
Here at the Financial Star, we focus on the largest trends driving the market. Our hope is that these articles add value to you and your understanding of where the markets will go next.
Below, we will outline the three trends that could shape the investment landscape of 2023.
Trend #1: Energy Transition
This is one of the largest trends of this decade and potentially of this century.
The world is switching from fossil fuels to clean energy: renewables, nuclear power, and alternative sources of energy such as hydrogen.
The United States has passed one of the largest bills supporting clean energy in 2022: the Inflation Reduction Act.
Shortly after, investors put clean energy ETFs on their radar. Morningstar reports that after the legislation was passed, these thematic funds saw significant net inflows of capital.
Over $1.4 trillion was invested in clean energy in 2022, according to the World Economic Forum.
Private investment in clean energy was also significant. Investors committed about $10 billion to clean technologies, attracted by the US government’s tax credits.
PitchBook, a market data provider, forecasts that clean technology alone will become a $1.4-trillion market with an impressive 8.8% annual growth.
Trend #2: High Inflation
Inflation set multi-decade records across the world.
In June 2022, the US Consumer Price Index soared 9.1% compared to its level one year prior. It reached a 40-year high.
In Europe, annual inflation was 10.6% in October.
To deal with the effects of inflation, investors purchased commodities.
Vanguard, an asset manager, says that “commodities’ inflation-hedging power has been strong and consistent.”
In 2023, inflation remains high. And it will likely stay above 2% this year, according to a Survey of Professional Forecasters.
This trend could continue delivering blows to the broad market indexes.
But niche markets such as commodities might be helpful in dealing with the effects of rising prices.
In 2022, the iShares S&P GSCI Commodity-Indexed Trust gained 24%. This is over three times higher than the expected annual inflation of 6.6%, according to the Federal Reserve Bank of Cleveland’s estimate.
High inflation is here to stay. This year, our focus will be on commodities again as one of the historically best ways to deal with it from an investment perspective.
Trend #3: A Possible Recession
Financial media is filled with recession forecasts.
Consensus estimates point at a 65% probability of a recession in the US. In the eurozone and the United Kingdom, the probability of a recession stands at about 80%.
What will the stock market do?
Historically, and surprisingly, the stock markets rose during a recession. Data going back to 1945 says that, on average, the S&P 500 index rose by 1% in recessionary periods.
The reason for this is that stock markets tend to “deal” with the effects of a recession earlier than the economy would do. By the time the real economy was going through difficult times, the market had already processed the bad news and started recovering.
Given how much volatility we saw in 2022, our hope is that the market is right again.
However, investors should take a hard look at their portfolios while the possible recession hasn’t arrived yet and ensure that the assets they hold have a certain margin of safety that will protect them against any potential problems in the real economy.
Thank you for your loyal readership,
The Financial Star team