How will the markets play out in 2023? Is cash still king?

Professional investors hate holding cash. After all, why keep your money in cash when the S&P 500 has returned ~9% annualized over the past 50 years?

Unless you’re Heisenberg.

Cash is historically one of the worst-performing asset classes. But cash was king in 2022.

• Cash was the second best-performing asset class behind commodities (i.e., energy, gold).
• The last time cash topped the market (2018), it turned into the worst-performing major asset class the year after.

Is 2023 the year to move out of cash? Depends which part of 2023 you’re talking about. First or second?

2023 first half: JPOW rampage continues

The story for the start of 2023 will continue to be rising rates. After Fed Chair Jerome Powell’s comments this week, don’t hold your breath. The main thing on his mind is price stability — which he said will require making unpopular decisions (raising rates).

Is it just us, or does JPow look like he’s having a little too much fun?

Investment management firm Richard Bernstein Advisors (RBA) thinks investors should start 2023 playing defense. They believe the markets favor the Fed tightening too much instead of too little.

Few hope for much positive action in the year’s first half.

Market sentiment is still largely bearish for the start of 2023.

• Morgan Stanley Chief Investment Officer Mike Wilson thinks there’s room for the S&P 500 to fall another 23% — sending it to 3,000 (CNBC).
• Earnings season kicks off this Friday, but he’s worried results will come in far below expectations.

RBA also thinks that investors are ignoring a potential decline in corporate profits.

2023 second half: JPOW cools it

This is where the fun (hopefully) starts.

The major driver will again likely be interest rates (e.g. any surprises) — but this time, in the other direction.

• The market consensus is that the Fed will cut rates near the end of 2023 or the start of 2024.
• There’s the possibility that the Fed leaves rates flat for some time — but if the economy enters a recession, they’d be incentivized to lower rates.

Remember that forward-looking concept we always talk about? Rates don’t have to go up for markets to rise. All we need is a sign.

Any signs of the Fed planning to lower rates could act as a trigger for upward market moves.

In the coming months, we’ll take a look at some plays for a potential market bottom. Stick around like burnt food on a non-stick pan.