S&P 500 +10% to 4600
As we enter the 2nd quarter of 2023, investors are keeping a close eye on the markets and providing guidance on how to navigate the uncertain economic landscape. While there are headwinds that are impacting the market, there are also tailwinds that offer opportunities for patient investors.
One thing that is clear is that the 2023 recession has not been fully priced into stocks. This was a prediction made last year, and it has proven to be true. Analysts are also lowering their earnings forecasts, which is causing some concern for investors. Inflation remains too high for the Fed to respond with lower rates, and there is a decline in the money supply due to quantitative tightening by the US Treasury. Additionally, there is a moderate housing correction that has been worsened by the US Treasury selling its mortgage-backed securities into a rising rate environment, causing higher mortgage rates. These are all factors that are weighing on the market.
However, there are also tailwinds that investors should consider. Despite the bearish sentiment on Wall Street, the market was up 7% in the first quarter, which suggests that there is room for growth. NATO's patient containment of Putin is allowing energy prices to decline, and China's not-quite-zero tolerance policy is easing the worldwide chip shortage. Additionally, there are 1.4 billion Chinese consumers who are spending like they've been in lockdown for 26 months, which is expected to boost demand.
Harvest is advising our clients, in the face of these headwinds and tailwinds, that defensive equities are the way to go early in 2023, with mid-cap growth stocks being added in the second half of the year. Lengthening bond maturities from 3 months to 3 years is also recommended. And when weakness presents itself in mid-2023, we are prepared to buy.
It's important to keep in mind that risk management is key to success in the early part of 2023. However, there is an opportunity to earn a 20% return during the next year ending March 31, 2024. By staying invested in high-quality equities from Europe and well-diversified, defensive U.S. equities, investors can position themselves to benefit from the positive 10% addition to the S&P 500, reaching 4600, while being mindful of the expected decline to 3700 in the second half of 2023.
As Warren Buffet famously said, "Be fearful when others are greedy, and greedy when others are fearful." By staying the course and remaining disciplined, we will find opportunities in this volatile market.