Market Update February 10, 2023

February 10, 2023

Tread Carefully

As we enter a new era characterized by structurally higher interest rates, higher average inflation and discounts across major global asset classes, investors may need to watch their actions. We are venturing into new territory. In other words, tread carefully. January may have given investors a renewed sense of confidence, we are by no means on the other side of the economic challenges that caused our markets to experience the worst decline in a decade.

What does “Treading carefully” mean to you? Will you fight to stay afloat in murky waters in 2023, or do you think it implies that those who are bold enough to persevere through the volatility may be rewarded?

We believe wise investors recognize that both interpretations apply. In our view, 1) Volatility will continue, and 2) that volatility presents a silver lining for those who are bold enough to forge ahead, albeit with a different allocation structure than the last cycle.

We believe investors have the potential to help their portfolios thrive by navigating the key themes we see prevailing this year, but that it will take a proactive approach.


A few things to consider first with equities:

  • Small- and mid-cap companies are typically levered to the economic cycle and historically outperform large caps during the early stages of recoveries, as large companies are generally slower to respond to a changing economic environment.
  • The excesses of the last several years have been shed in the small- and mid-cap universes, with absolute valuations now well below historical averages and relative valuations (vs. large caps) nearing the lows of the early 2000s.
  • Small- and mid-cap companies tend to be more U.S.-centric, potentially benefiting from long-term themes of reshoring/deglobalization, while also being less sensitive to U.S. dollar fluctuations

One of 2022’s many mindbenders were the historic magnitude and speed of Fed rate hikes which drove losses for the S&P 500® Index in 2022. But there is a silver lining , the selloff brought valuations down in line with historical averages. In other words, valuations in our opinion have come down to more reasonable (and sustainable) levels. Nonetheless, the focus for U.S. large-cap investors now shifts from the “P” (price) to the “E” (earnings): finding resilient earnings amid an economic slowdown could be a greater challenge for those not attentively managing their portfolios.

Meanwhile, U.S. small- and mid-cap stocks historically outperform large caps during the early stages of recoveries, which means its time to look at your asset classes more carefully.

International Equities:

  • Europe is likely to enter a recession earlier than other developed markets – a scenario that appears to be increasingly factored into relative market valuations.
  • While impossible to predict the point of recovery, there are strong indications that suggest a recession in the region should be relatively shallow compared to previous experiences. Therefore, we believe it makes sense to look for opportunities to position portfolios for the eventual economic recovery.
  • Irrespective of the timing of a recovery, European equities are paying dividends that are nearly double that of the U.S., thus providing an attractive income opportunity.
  • In our view, the more cyclical nature (i.e., greater exposure to consumers, energy, financials, and materials) of European equities versus the U.S. and their lower relative valuations present strong upside potential

While many investors are looking backwards waiting for the market to recover, we are looking abroad. Unlike U.S. stocks, ex-U.S. developed market equities carry a far more attractive valuation discount, potentially offering a better “margin of safety” to help absorb some earnings weakness. Couple this discount with their more cyclical, higher-yielding characteristics, and we believe ex-U.S. equities present strong upside potential.


Looking across all global equity sectors, healthcare was the second-best performer in 2022, trailing only the energy sector. While we are looking to healthcare as a whole for its resiliency, we also see biotech as an important subsector that is offering attractive discounts as it potentially recovers from a severe drawdown.


Healthcare Sector

  • For the past two decades, the healthcare sector has proved resilient during market downturns, exhibiting lower average volatility and downside than global equities.
  • At the same time, the sector continues to trade at a discount to longer-term averages, with many biotech companies in particular trading below levels of cash on their balance sheets, providing the potential for growth regardless of the recession outlook.
  • In biotech, the ability to understand the science behind pending drug approvals, as well as the business impact of those approvals in the market, is critical to finding winners that can take advantage of the speed of innovation happening in the sector.

We believe taking a balanced approach to assessing both the defensive and growth characteristics of different sectors an help investors navigate the volatility ahead. For example, healthcare and the narrower biotech sub-sector have outperformed the broader market through the drawdown and recovery phases of the past five sell-offs. Since paying close attention to near-term cash flows, valuations, and revenue generation is increasingly important in an environment where inflation may persist, an active and nimble approach incorporating sector and portfolio construction expertise can help investors take advantage of the many long-term tailwinds specific niche sectors can offer.

Fixed income

It remains uncertain how far the Fed will raise rates and when/if they will pivot. We therefore still foresee elevated interest rate volatility in the first half of the year. However, we believe rates could remain higher throughout the year as the economy slows, thus we think investors may benefit from taking advantage of yield opportunities while increasing the credit quality within their portfolios.

The magnitude and speed of rate increases resulted in fixed income asset class’s worst year in a generation. Fortunately, “bonds are math,” as they say, and for us, this historic sell-off creates obvious opportunities. This reset in higher rates has created a level of yield cushion not seen in many years and that may help buffer bond returns during any further rate increases.  

Yields soar past historical levels

We think asset allocation matters. We also believe in active management. And in an environment where the outlook for both markets and the economy is murky, being nimble and flexible may help investors maintain stability in an uncertain world.

If you want to take a closer look at how your portfolio compares to our model and see what gaps you may have in your investments as it relates to your specific goals, please contact us today to discuss our PASS program: Plan, Analyze, Strategize and Strengthen your retirement.

The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

Bonds are subject to credit, market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

Stock investing includes risks, including fluctuating prices and loss of principal.

International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.

Content in this material is for general use only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.