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Three Keys to 2023
OSCARLYN ELDER: Hello, and welcome to Truist Wealth economic and market insights client call brought to you from our Truist Studios in Charlotte. We're so glad to be with you today. We want to take the time to thank you and let you know that we appreciate you taking time out of your day to join us. Today our goal is to provide our perspective on 2023, and offer guidance on the most pressing issues and questions you have asked us as you registered for this event.
I'm Oscarlyn Elder, co-chief investment officer for Truist Wealth. My team is responsible for selecting and analyzing the investment solutions and strategies that your Truist advisor may use in creating your portfolio. These include mutual funds and ETFs, private equity and hedge funds, as well as our diverse asset manager solutions. Joining me today is Keith Lerner, our co chief investment officer and chief market strategist. Keith and his team guide our Truist advisors and our clients through all types of market environments. They provide timely advice to help clients achieve their long term goals. Keith leads our portfolio and market strategy, equity, and fixed income groups. His work is frequently highlighted in the Financial Press, and you'll often catch him on CNBC or Bloomberg TV.
For today's discussion, we're going to be joined by Mike Skordeles our senior US macro strategist, and Chip Hughey, our managing director of fixed income. Both are seasoned investment strategists. They publish frequently. They're cited in the media, and most importantly, they help drive our investment guidance with Keith. What I'd like to do now is take a few seconds to set the stage for our conversation.
2022 will be remembered as one of the most complex and challenging market environments in decades. Global markets have been under pressure, inflation has surged, and global central banks have embarked on an aggressive historic tightening cycle. Russia launched a full scale invasion into Ukraine. The S&P 500 recorded its worst year since 2008, and US core bonds declined 13%. Really the worst year for bonds since the mid '70s.
The one two punch of declining stocks and bonds posed a significant headwind for most of our investors, those who are invested in a balanced portfolio. The decline for most balanced portfolios was somewhere around 16%. We know it was a painful experience for essentially all investors. As a frame of reference, for our guidance, for most of 2020 and 2021, we hold a positive view of markets and adopted a risk on stance within our guidance. But beginning in February of last year, 2022, we started to reduce risk in portfolios and we made multiple tactical moves in 2022 to reduce risk even further.
So with that backdrop, let's turn and discuss our outlook for 2023, and what's needed, we think, to be successful this year from an investing perspective. So with that, Keith, I'm going to turn to you. Can you please summarize for us what we believe the keys are for 2023?
KEITH LERNER: Sure. And first it's exciting to be here with you, Oscarlyn, and the rest of the team in doing this live from Truist Studio. It's a great moment for us. As you mentioned it was a very difficult year last year. And as we entered 2023, there's three keys to success in our view. The first one is to remain defensive. The second one is to remain tactical. And the third one is to keep an open mind.
So let me give a little bit more color around that. The reason why we're remaining defensive after the moves you discussed is, we still think that recession risk is relatively elevated this year, which Mike will talk more about. And even though we had a nice reset in assets last year, I mean as far as prices coming down to more reasonable levels, we still don't think they have come down enough relative to those macro risks. So that means we want to be somewhat more defensive, and we want to focus more at this point on high quality fixed income as far as a tilt.
The next part is to be tactical. If you recall last year, we had six moves of at least 10%. Three moves in the stock market that went up 10% at different times, and three moves that went down 10%. So I think this year, as the debate rages on about the economy, whether we'll have a soft landing or a hard landing, we'll have those tactical opportunities again.
And the third one, which I think is very important, is keep an open mind. We have to recognize we are still in a post-pandemic environment. The historical playbook may be somewhat different than the past. So be open minded.
The other thing is there are things that we're going to talk about today, and there'll be new things that come out tomorrow. No one had on their outlook last year the Russian invasion and as a high probability factor, or the Fed raising rates instead of last year at this time, the market expected the Fed to raise rates to about 1%. They raised them to 4%. So keep an open mind. What we pride ourselves on is adjusting as the data changes. So you often hear us say, we follow the weight of the evidence. And we'll continue to do that this year as well.
OSCARLYN ELDER: Great. Thank you, Keith. And we're going to come back and revisit some of those themes, but right now we're going to turn to Mike to talk about the US economy specifically. So Mike, the key theme for the US economy from our perspective is fading growth, easing inflation. So let's start with the fading growth side of that story, if you will. What do you expect from the economy in 2023?
MIKE SKORDELES: Yeah, so that's a great place to start. The fading growth is certainly the thing that everyone was asking, and certainly the questions that we got with the registrations for this event. A lot of the questions centered around recession. So let's tackle that one right up front.
We had very strong growth, that v-shaped recovery, starting in 2020, into 2021, and carried forward into-- call it the first part of 2022. But then we've got a lot of crosscurrents that were challenging, not just individuals, but also businesses. And so we've seen this step down in growth that's really, really come forward. And if you look at the first slide, you'll see annual growth. These are year over year numbers. And that you could see that you had this tremendous move up in those early couple of years of the recovery, and that as we've moved down and certainly as we view things coming into 2023, that growth is going to step down. That's the fading part of it.
But again, things haven't really fallen off a cliff. And we don't expect them to fall off a cliff. We do expect them to slow, but don't expect it to be like the prior two recessions. Those had very unique aspects. So again, important to keep that part in a broader perspective, that we're not going to get that same sort of fall off a cliff feeling that we had in 2008, and certainly during 2020 with the pandemic, which was a literal shutdown. This recession, it's going to be more like a gradual kind of process, and it's likely to be a more gradual sort of improvement on the way out.
OSCARLYN ELDER: So the message there is, growth is fading, our base case is.. MIKE SKORDELES: a recession OSCARLYN ELDER: in 2023. However expectation is-- our expectation is that it will not be steep, steep and long.
MIKE SKORDELES: Correct. It does appear that it's going to be more shallow and brief in duration, at least where things are at. Look, the weight of the evidence-- we don't have a crystal ball. But the weight of the evidence of where things are and all the typical flags of what happens during or prior to a recession, many of those have already tripped. And so that informs our why we think it's going to be a recession.
That said, I think it's really important to say just as we've had all these flags that typically happen, we've also had things like monetary support from the Federal Reserve, but also the fiscal support that happened whether we're talking about PPP, and stimi checks that people got, that's a very different sort of situation. So there are some offsets that I think, again, help us come to that. We think it's going to be shorter in duration, and shallower as far as how bad it gets.
OSCARLYN ELDER: OK. So, you know, obviously the state of the economy is tied to the Federal Reserve, and how they are raising rates. So my question there is, how does the Fed overall play into this? Can you kind of unpack that? We know there's the connection between the Fed and the economy, so can you unpack that for folks so that they understand the connection points better?
MIKE SKORDELES: Absolutely. And as this slide shows, we've had a very aggressive increase in rates by the Federal Reserve, but it also highlights the fact that it wasn't just the Federal Reserve. The inflation that we experienced here in the US wasn't just a US phenomenon. It was more of a global phenomenon. And we've seen all these other central banks follow suit.
That said, the Federal Reserve was a little bit more aggressive. We can have the discussion of whether they might have been a little bit slow on the way up. But they're not slow anymore. They certainly have been quite aggressive. It does appear that they've done most of what's going to happen. We think there's going to be more. I'll let Chip talk to that in a second.
But for the person on the street, whether we're talking about mortgages, buying an automobile, credit card rates, financing pretty much anything, any sort of borrowing, those costs all just dramatically increased. And that's a pretty significant headwind as we move here into 2023. And that's one of those reasons why we think it's going to hold back growth as we move forward. Again, we think that they've done the bulk of the increase as far as rates that they're going to do for this cycle. That said, it's still a big holdback or impact to the economy.
The other thing too that's important to remember, there is a lag from when they do it-- it's probably a little faster than it was in prior cycles, but there's still a lag. So even some of the rate increases that happened late in 2022, I would argue they're probably not really being felt fully throughout the economy, and all supply chains in those sort of things.
OSCARLYN ELDER: So let's turn-- Mike, you noted Chip would talk to us about-- Chip, how high does the Fed go? What's the terminal rate? How do we see this playing out at this juncture in 2023, and I think we're very openly saying it's a complex environment. It could change. But right now what do we see?
CHIP HUGHEY: Right, so the Fed funds rate right now is at a setting of four and a quarter to 4 and 1/2%. And that's coming from 0% this time last year. So an incredibly rapid pace of tightening that we've seen. And I think it's fair to say that the Fed doesn't like this. The Fed is looking for an opportunity to continue to downshift the pace of these rate hikes, and we've seen some cooling in wage pressures, we've seen some cooling in inflation data. And that's really encouraging. They're going to need to continue to see that continue.
I think ultimately our thinking is that the Fed is headed towards an endgame of around 5%. So a few more hikes, potentially downshifting again on February 1 to a 25 basis point rate hike right after we've had these large rate hikes. But ultimately working towards something close to the 5% range before hitting the pause button.
I think two things that I would I think are important to kind of keep in context, if that framework is true, if it works out that way, if we get to that 5% range, that means that literally 85% to 90% of the rate hikes in this cycle have already played out, right now. They do work with a lag, it's a great point. That it's going to continue to seep into the system. But a lot of the rate hikes have already unfolded.
The one thing that we think the market may be under appreciating is that the Fed is likely to be a little bit more hesitant than the market is currently pricing in or expecting about rate cuts, right? The other side of this coin. So we do think it's a pretty high bar for the Fed to start lowering rates in response to the economy after what we've just experienced through this inflation experience.
OSCARLYN ELDER: Yeah, great, thank you, Chip. I like to turn to inflation. Because I would say the other question that we got a lot of was, what's happening with inflation? What's going to happen with inflation? We did see some wage inflation come out last Friday, and there was some cooling there. Mike, if you can just walk us through how do we think the inflation story is going to play out in 2023.
MIKE SKORDELES: Yeah, so the first thing right up front on this slide showing the path of consumer inflation, essentially the basket of goods that most people spend on, the biggest chunk of this is housing. Additionally there's things like food and energy, obviously we know what's been going on with food and energy. That said, it's certainly been inflation price increases have been a lot stickier this cycle than in prior cycles. And certainly than what we've seen the last 20 years. So a very different regime that the Fed needed to address.
That said, we think that it's peaked, and it's on its way down. But spoiler alert, we don't think that inflation goes all the way back down to where it was. So it's not going back down to pre-pandemic levels. One of the things that it does show on this slide, though, is the red line, red part of the line, is where we think things go. This is also not predicated on having a recession.
We think that it's naturally going to be working its way lower as we work our way through 2022. We're going to get the 2022 numbers here in a couple of days. But 2023, and into 2024. So it's going to naturally continue to slide downward without a whole lot of other things that need to happen. And if we have a recession, we think that that probably accelerates things a little bit. But that's a big if. So again.
OSCARLYN ELDER: It is our base case.
MIKE SKORDELES: But it is our base case that we think that inflation is going to ease. That said, wage pressures and other things are going to continue, and we're also seeing one of the other zig instead of zag things is that food prices are staying a lot more stickier or elevated than they were prior. But we're already seeing housing down, used car prices. A lot of things, including energy, that were pushing inflation have already really done that round trip, particularly like in the case of gasoline prices. It's come down more than 35% since the summertime. So that's a big giveback that most people really aren't giving it enough credit.
And that works into the recession isn't inevitable sort of mindset. So again, we have to see how this all plays out. But we think inflation fades as we move through the year.
OSCARLYN ELDER: And recessionary. Recession, if our base case as we hit it, possibly puts more downward pressure on that inflation number with wages, right? Recession creates-- should create job loss which begins to help temper the wage pressure, even.
MIKE SKORDELES: At least from the growth of wages. From where we were. That's correct. Yeah.
OSCARLYN ELDER: All right, thank you. Next I'm going to turn to Keith. Keith, let's talk about the equity market. Our major theme there is choppy waters to continue. Right? So the choppiness, the volatility regime was intense in '22, our expectation is that it's going to continue into '23. So when we look at it, the S&P 500, it's still down I think 18% from its peak in early '22, the NASDAQ is down I think around 30, 33% from its peak and in late '21. So a lot has been realized already. So what I'd like to do is get into our thoughts with this sell off. How is that impacted our long term view around asset classes, and long term performance?
KEITH LERNER: Sure. And I think it's an important place to start, because most of our clients, people on the call today, aren't just investing for the next three months and next year. They're investing for the next three, five, 10 years.
OSCARLYN ELDER: That's right.
KEITH LERNER: So when we start with our process, we start with a long term outlook, and the good news is, the silver lining is that asset prices have come down. Our long term return assumptions have actually gone up. That's kind of our structural view. And part of the challenge was, we came into this year with-- sorry, last year with very high valuations. So we've corrected. We've corrected to more like average valuations.
So, we, we, I think that's encouraging especially. Chip we'll talk about this later about the fixed income markets, and equity markets. Long term returns are going higher. Right? Naturally as prices correct. Now as we're thinking more short term, more tactically, more focused on 2023, part of our process is where are we in the business cycle.
And the reason why we're still somewhat more defensive shorter term, and we think it's going to be somewhat of a lumpier process or choppy process to get those higher long term returns is, as Mike discussed, we think recession risk is relatively high. And the chart that you're looking at right now just is a stylized version of how we think about markets on this kind of putting risk on, taking risk off. And this is not all in one. This is around your asset allocation within that asset allocation framework, but what you'll see is there's a line here that kind of illustrates the economy. And you have to remember the stock market leads. That leads ahead of a downturn, and it leads, coming out of an economic recovery.
And as you mentioned early on, coming out of the 2020 pandemic we had all this stimulus. Valuations were really cheap. We went more towards a risk on process. As the cycle matures, the risk reward becomes a little bit less favorable. Our process is to start reining in risk. That's what we did over the last year.
If you look at the number one circle, that basically shows kind of how we're positioned today. If our base case is recession, we want to be somewhat-- have somewhat less risk within the context of an asset allocation. So that's kind of the back and forth. We hope at some point this year we'll be able to go on more offense, but that's how where things stand today.
OSCARLYN ELDER: So today our recommendation is maintain your defensive positioning.
KEITH LERNER: Correct. Correct, and we can talk a little bit more about the tactical side later.
OSCARLYN ELDER: Well, let's go there now. Right? Because that's another key theme for this year, is to remain tactical. And I know that we think about markets and ranges, not targets, but ranges, and I think our target-- sorry, I said that wrong-- our range, if you will, for 2023 is 3,400 to 4,300. So can you talk about that range and how our clients and advisors are thinking about that range relative to portfolios?
KEITH LERNER: Sure, and the first thing this time of year there's all these price targets of year end where the market's going to end. The reality is most people don't do that very well. I think what we think we do relatively well is saying, OK, this is our expected range for the year, and these are areas where we would either be more aggressive on adding risk or adding equities or risky parts of the fixed income market, or this is a part where we think the risk reward is less favorable and paring down some of that.
So when we say a range of 3,400 to 4,300, people are like, wow, that is a wide range. Because you have to realize that from the low to the high, that's about a 27% range. That's the average range in any given year when we look back at market history. So where are we today? We're kind of in the middle of that range right now. So you're in a little bit of no man's land on a short term basis. We would remain defensive.
On a short term basis, if we got up like we have a CPI inflation report that the market's waiting on, if we're around 3,900 to 4,000, if we get a run above 4,100, we probably would say, hey, that's a place to take a little bit of risk off. If you get to the low end of this range back to where we were in October-- you know, 3,500, 3,400, somewhere in the neighborhood-- we probably would say, be a little bit more aggressive on adding in equities. And right now, like I said, you're kind of in the middle of that range. But that give you some guidance. And then during the year as we get more economic data, more earnings number, we'll adjust that range as well.
OSCARLYN ELDER: Great. Within equities, where do you see the opportunities?
KEITH LERNER: Yeah, and if I can just before we go on there, just one other slide, the question that also has come up within that range is, we're on defense. Right? And what are we looking for to go on offense? Right? And the one thing that we know from market history is, eventually we will get passed it. If we get a recession we'll get to the other side of this. And we know is that once you find the low in the economic cycle, the stock market finds the low, that first year snapback is really strong and hard to time. So almost like a 40% move up.
So at some point if we go into a recession before the recession is over, that's important, before the recession is over, we would be looking at adding risk, especially if we saw more value created by the market pulling back more. So that's what we're looking for. And the other thing is if data starts to come in that that says like, hey, this is looking more like a soft landing, not our base case, then we would have to shift our view. So those are the things that we're looking for to become on offense.
We just don't think at today's valuations where you're trading around average valuations relative to all these risks you're being compensated to be on offense at this point. And I think you mentioned, sorry--
OSCARLYN ELDER: No, no, it's all good. It's good. I think that's really important because what you're giving our audience, our listeners, is really a framework for how we think about the market and how we're making the risk on, risk off call. And so we've put the range out there, you've given them some insight into how we're dissecting it, and really the key message is, this is where we are today. Today we're defensive. We're going to look at the data. We're going to continue to look at the data, and you may see us become more offen---- that's not the right way to say it-- but you may see us move from defense to offense as we move through '23, and so given how fast developments are occurring, we just want to make sure people stay plugged in to how the message may evolve as we move through '23.
KEITH LERNER: Yeah, and just a quick example, last year before the invasion from the Russian invasion, our view was somewhat more positive. The data changed, we changed as well. So just keep that in mind.
And then maybe go into a specific question about relative opportunities. We still think those are opportunities if we move to the next slide. If we still-- big picture on the equity market, we still like the US relative to international markets. But within the US, it's not as simple as just buying the S&P 500 as an example. A lot of the popular stocks are the big cap tech stocks that have been up last year. We still have a more negative view of those asset classes. Because if you zoom out, they've had such big returns over the last decade, they really benefited from this low return environment.
So we're seeing more relative value is below the market surface. And so one area we like is something called the equal weighted S&P. And the main difference with that is it's a proxy for the average stock. So it's not just-- it doesn't have-- it's not being pulled either way by just these big mega-cap tech stocks. We also like value. The value side of the market has underperformed for over a decade, it had a good year last year. We think that has further to go. We like areas like industrials, which are benefiting from the increased defense spending. Even a China reopening. We like energy.
But we also like some of the defensive sectors like staples and health care, given we expect the economy to be somewhat challenged. So the message also is that there are opportunities. This isn't an all or none call -- but again, we've been more selective as we approach markets this year.
OSCARLYN ELDER: Yeah. Thank you Keith.
KEITH LERNER: Sure.
OSCARLYN ELDER: Thank you. All right, we're going to move to Chip next. We're going to talk about bonds, and the message is bonds are back. Right? For a really long time right after 2008. The bond discussion was not front and center.
CHIP HUGHEY: True.
OSCARLYN ELDER: And 2022 changed all of that. Bonds are back. We noted in our introduction that last year was a really difficult year for bonds overall. And we know that that's been painful for a number of our investors. Many of our investors have balanced portfolios. They have a holding on the fixed income side. So we've now shifted to a more favorable view of bonds relative to stocks, and that's the first time that's happened in years, many, many years. So Chip, with that kind of background, will you help our listeners understand why we should expect bonds to do better in 2023, versus how they performed in 2022?
CHIP HUGHEY: Yeah, that's great. It's great setup for the discussion. Thank you very much. I think we'll start maybe on the more negative side of the ledger, right? Let's start with what we've kind of seen over the course of the past two years. So for the first time, the largest US bond index, the US Agg is how it's referred to, posted back to back negative total return years for the first time since its inception in 1976. And last year in particular was historically bad. It was the worst since the inception of that index by far. And that was that was very painful. Largely as a result of what we saw from inflation becoming so hot, and then the aggressive action that the Fed had to take to start addressing that. So that's on the negative side of the ledger.
If we move to the why this is a positive. So what does that mean? Why are bonds back in our view? Why are they more attractive and compelling? And the reason for that is that the total return in fixed income is so closely tied and highly correlated with the income that they generate, and the reality is for quite some time now they have not been able to generate much income. Right? Especially in the highest quality spaces of fixed income. And that's frankly no longer the case.
So that same index now, because of that really kind of meteoric rise that we saw in yields, has moved that index to yielding roughly 4.6, 4.7% now. So if we go back over the history of that index from when it started in 1976 through today, and we take that as a starting point -- so, okay, this is where yields are starting today, what we have tended to see over history is that on an annualized basis, over the course of the next five years, the returns have averaged in the 4% to 6% range. Call it 5.6% is the is the average. But in that 4% to 6% range.
Obviously that is a far cry from the experience that we've just gone through. Right? So while that feeds into our view of why we are more favorable on bonds, our outlook is more favorable. And we say bonds are back. But that does not without acknowledging that it was a painful process to get into this more productive state.
OSCARLYN ELDER: Yeah. Where do we see the most opportunity? CHIP HUGHEY: Yeah OSCARLYN ELDER: Given really this transition to a different fixed income environment, where's the opportunity?
CHIP HUGHEY: Yeah, I think really to me, there's sort of two ways to tackle or ask the question, what do I do about it? I think there's two ways that you can approach what we've seen in fixed income markets. So for one is sort of the passive strategy, right? And the Fed's rate hikes, plus the expectations that they still have a little bit more to go, right -- that has, that has taken short yields. Yields on maturities that are in the first call it two to three years of the yield curve, and has risen-- and they have risen very, very quickly to levels we haven't seen in about 15 years. So those yields are very productive again.
And so for those investors who are buying individual securities, right? and therefore there's a purchase made, and they roll to maturity. There's several things to think about that are really compelling about that strategy, starting in the short maturity. So first off you're capturing the highest yields that we've seen in a very long time, right? So call it 4 and 1/2%, 4 and 3/4%, and that's and that's US Treasury yields in that part of the yield curve.
One thing we also like about individual security purchases there is it gives the investor flexibility. It gives them optionality, that as those securities reach maturity, we fully acknowledge that we are in a very difficult, challenging, uncertain economic time that we're working through. This gives the investor the opportunity to have reinvestment opportunities on a routine basis. Every three months, six months. So.
OSCARLYN ELDER: You can make a different decision.
CHIP HUGHEY: Absolutely. And Keith summed up we've really well that once that risk reward becomes more compelling, well, that's an opportunity then to maybe make a different reinvestment decision, and that strategy allows you to do that.
OSCARLYN ELDER: Yeah. Great. Are there any other opportunities? So you talked about passive, buy and hold. Are there any other strategies that you would highlight?
CHIP HUGHEY: Yeah, so the second side of the equation. So this is more of the tactical or active way to approach fixed income. If you go back through history, what we typically see as the economy slows, and then especially as if the economy does enter a recession, longer term or higher-- longer duration fixed income tends to outperform. Particularly-- specifically, I should say in high quality fixed income.
So for those that have-- that are-- that's typically accomplished through the use of things like mutual funds, ETFs, et cetera. Something that's a bit more liquid, a bit more nimble. So for those kind of strategies, there is an increased value in duration. Yields have risen out in the longer portion of the curve as well where duration is longer, so it is also productive. Right? It's higher in the front end, but they have risen out there as well, which is a net positive. But what we typically see then is that as the economy slows, demand for high quality fixed income in the longer duration segments of the curve, they tend to outperform as that occurs. So it provides portfolio ballast and protection in the event that that unfolds.
OSCARLYN ELDER: Thank you. So you've talked about where we see opportunity and how to approach that. What would you avoid right now?
CHIP HUGHEY: Right. I think it relates very closely to Keith's approach on the equity side. And we think that starting 2023 is the time to keep fixed income simple. To keep it high quality. To that there may be opportunities where the riskier corners of fixed income do become more compelling, and we will certainly be watching that extremely, extremely closely. But right now, actually, the riskier corners of the fixed income market have actually held up relatively well relative to some of the slower economic activity that we have seen. So we do expect that to see some pressure in those areas.
Maybe high yield corporates are a good example. Leverage loans, also called senior loans and spaces like that. Potentially emerging markets. We would be more patient there in fixed income and take advantage of, again, the higher quality opportunities. And again, some of the most compelling we've seen in far more than a decade.
OSCARLYN ELDER: So to tie this to our base case around recession. What I'm hearing you say is that right now, we are not leaning in ---right --- to credit product, if you will, to credit strategies. We're anticipating base cases recession. We're expecting that. There likely will be increase in spreads at some point because of that, and you would look for that type of opportunity to become more constructive on that type of credit strategy. Is that fair?
CHIP HUGHEY: That's totally fair. Exactly right.
OSCARLYN ELDER: Good. All right, Keith, I'm going to come back to you one more time, and then I think we've got we've got enough time to do some Q&A to make sure that we address some questions that came in from our clients. Before we do that, will you summarize our perspective, from a tactical positioning point of view?
KEITH LERNER: Sure, and since we have a little extra time, maybe when I'm done with this, I sent in a slide about our asset allocation position, and maybe we can go back to that, and we can-- we just went over a lot of information, maybe we can have a graphical representation since we have a little bit of time. But I guess the first thing, I mean just kind of keep it simple. The we go back to the three key themes. Right?
First, remaining defensive to start out the year. We don't think we think recession risk is elevated, and we just don't think the markets have corrected enough to account for that. Remain tactical. Again, we think there's going to be swings in the market that we're looking to take advantage of. And then three, I think you've heard over and over from you, from Mike, from Chip, keep an open mind. We're going to watch the data and watch the way the evidence.
So look at this today as a starting point, and expect us to adjust just like we did last year. And if we're able to move back, I think maybe in the appendix a graphical on the asset allocation slide on here, but it's kind of summarized the positioning in overall. Big picture is, first of all, everyone's going to be a little bit different, right? It's going to be based on individual.
OSCARLYN ELDER: Unique circumstances.
KEITH LERNER: That's why you have an advisor that translated everything we're talking and says what does this mean for you. But from a big picture perspective, you think asset allocation, stocks, bonds, cash. Right now we have a tilt to fixed income relative to stocks, and we're neutral cash. Within an asset allocation framework, we are overweight the US and that's thank you so much for bringing this up. We have an overweight to US. We're focused on large cap companies because if you go to a downturn, you want companies that have some sustainability. Small and mid-caps are really cheap, and we think that over time longer term that's compelling, but at this point they're going to be hit by the business cycle, because the smaller companies and typically have more debt.
We're underweight the international markets. We are looking at those markets closely. They've had a little bit of a better run here towards the end of the year. But in a global recession typically they have tended to underperform. But that's an area we're watching closely.
We're overweight value relative to growth. And then Chip just mentioned we're really again in the fixed income side keeping it simple. Focus on high quality fixed income and underweighted areas that are more exposed to the economic cycle.
OSCARLYN ELDER: OK. That's great. Thank you. Thank you very much for that. It is a lot of information to take in. We know that. As we close today, we're going to be making sure that folks know where to go to get our market navigator and other publications. So if you're out there listening, just know we're going to direct you in the right place in a few minutes to help you find the materials that will allow you to dive deeper.
So with that, we do have a few minutes where we can have some Q&A, if you will, additional Q&A, because that's what we've been doing. But we specifically had questions from clients that came in that we wanted to try to address today. And Keith, I'm going to start off with you on this. And so how often have we seen back to back negative years in the S&P 500?
KEITH LERNER: Not often. Actually a study close to that is we looked at times when the market was down at least 10%. And it's only really happened back about seven times. The good news is the next year the market was up five of those seven times, but the two times it wasn't up was related around recession. So the most common people may be familiar with after the technology bubble we had three years down in a row, and then before that is in the mid '70s.
But when you look at that that's a starting point, you say OK, and those periods where it didn't move up. I mean there was an economic situation there. So that's why we keep it in the back of our mind. But if our base case is recession, we would say there's a possibility for us to have a positive year. But we think that might be a little bit back end loaded if that's the case.
OSCARLYN ELDER: The timing of the recession.
KEITH LERNER: The time of the recession matters, and then if we correct, and then, like I said, the rebound. One last thing, what was also interesting is when we looked at that data, is the next year every single one of them was either 20% to the upside, or 20% to the downside. So some pretty wide swings. That's going back to being tactical.
OSCARLYN ELDER: Being tactical. I like to go to Mike next. So one of the other questions that kept popping up was about housing. And in essence, it's what's the state of housing, what's the state of new housing, housing prices. Let's just call it the housing ecosystem, if you will. So can you quickly for us kind of address our views on housing?
MIKE SKORDELES: Well, I can boil it down to one word, particularly in 2022. It's been crushed. The dramatic increase in mortgage rates because of what the fed has done to address inflation has really thrown the housing market under the bus. Both on the existing side, but really on the new side. So single family new homes, really pulling back to essentially what the building sort of levels, construction levels that we saw during the pandemic. So essentially it was down to cash buyers. There wasn't a whole lot of people that are particularly on the larger side. So there's some obvious dislocations that are happening. OSCARLYN ELDER: Right.
MIKE SKORDELES: But here's the weird part. Because of the pandemic, and coming into the pandemic, we didn't have enough housing. OSCARLYN ELDER: Find the supply. So we've been under-- on the supply side. We've been under building for about 14 or 15 years since the great financial crisis. So we didn't have enough supply. We exacerbated that with the pandemic. So we had another period of time where we weren't building at all, particularly depending on what part of the country, and then we had low interest rates again, right after the pandemic, when the fed lowered interest rates, so there was this rush in to buy houses. But there wasn't enough. So that really pushed up price both for new and existing.
Now that we've seen it get crushed in 2022, there's still not enough supply. Both on the new and on the existing side. There's reasons for both. But I'll address the existing side, since it is the larger part of housing. And there's just people saying, hey, I'm not going to give my house away, or I thought it was worth X a little while ago, so I'm not even going to put it up for sale. So there aren't--
OSCARLYN ELDER: Anchoring. We call that anchoring.
MIKE SKORDELES: That's anchoring. Anchoring.
OSCARLYN ELDER: Anchored on.
MIKE SKORDELES: yeah, on, a higher price. So they don't want to give up the house. The other thing that's feeding into it, I already mentioned, which is higher mortgage rates. So they say I don't want to go down the street and then finance the new house at a much, much higher mortgage rate. So that's, if you will whatever, we're going to-- trapped or anchoring people, keeping people in their existing home, means there isn't enough supply there on the existing side.
The perverse sort of effect there is that if there's not enough supply, there are still some buyers, but that's propping prices up. It's very regional, so very much matters. If you're in South Florida, you're still seeing that prices haven't come down very much. We live in the Atlanta area. Still haven't seen very much. There's been a little bit of price declines, but if you're on the west coast, places like Los Angeles or San Francisco and other places, they've seen a dramatic pullback of price. OSCARLYN ELDER: Yeah.
MIKE SKORDELES: So again, where you sit is where you stand on this issue. There's very much a regionality in play. Unfortunately we think that this-- because of the high mortgage rates, this is going to continue through 2023. So this isn't just a 2022 story. It's really a 2023 story. And it tends to-- not always-- but tends to take until you're through a recession to really start getting the gears moving again, building enough, and then maybe seeing people start on the existing side listing their home. So it's all going to need to come together. It may even spill into 2024.
OSCARLYN ELDER: So kind of our view is the freeze, if you will, will probably last through '23. Some potential for thawing possibly in '24.
MIKE SKORDELES: Yeah, yes.
OSCARLYN ELDER: Very good. All right, I think I've got time. Chip, very quickly. Most of the folks in the audience are going to be municipal investors on the bond side. So where are you seeing value in the municipal market?
CHIP HUGHEY: Yeah, we like municipal bonds in the year ahead. US treasury yields, as they moved higher they pulled municipal bond yields higher along with them. So municipals had-- struggled last year as well. They did outperform, but they did have they had a difficult year. And as we've laid out, we think that the case for that is changing in the year ahead.
But municipal yields were moved higher for reasons that were separate from municipal fundamentals. When we look at municipal issuers by and large, their underlying fundamentals are very, very healthy, very strong, and also because yields have risen so much higher, we're we expect to see municipal supply fall. Municipal issuers will not issue quite as much because it doesn't make economic sense. So the demand will be there, and supply will actually be a bit lower. That's a constructive outlook for municipals. And they're also still benefiting from the $350 billion federal stimulus that was received across the United States. So in the year ahead we expect a better outcome for '23.
OSCARLYN ELDER: Well, before I wrap it up I want to say thank you to each of you. You're an incredible team. I'm really blessed to be able to work with you all. And I know that our clients really benefited from hearing your perspective today. So thank you.
KEITH LERNER: Likewise.
MIKE SKORDELES: Absolutely.
OSCARLYN ELDER: And with that in closing, we understand that last year's markets were really painful and challenging for all of you, for our clients. Negative markets can be very frustrating and drive pessimism. But when we take that longer term view, as Keith, you talked about earlier, when you discussed our capital markets assumptions and our asset allocation, we expect that a blend of complementary investments, stocks, bonds, and we didn't get to talk about it today, but hopefully we will in our next webcast. But private capital as well as alternative investments are really well situated to maximize returns for given levels of risk over the long term.
And it is especially important, that your portfolio the level of risk be based upon a very thorough understanding of your unique financial situation and goals. A Truist advisor can support you on this journey. They will absolutely listen to you, and seek to understand your goals. They can help you put stressful market environments into long term context, and together, you can make prudent adjustments to your strategy keeping that long term objective in mind, and not reacting too much to the short term.
So thank you for trusting our Truist team to be part of your financial journey. If you would like to view more information, like Keith, you discussed our tactical positioning, if you would like more of that, if you want to dive in deeper to it, we have a publication called The Market Navigator. It's published monthly. I would ask you reach out to your advisor, ask them for this publication or any others that they think may help you guide you through these truly challenging times, or visit www.truist.com/wealth/insights.
And lastly, I have one more request. So our aim with our quarterly webcast series is always to create the best virtual experience as possible for you, our clients. In a few seconds if everything works like it should, so my fingers are crossed, you're going to get a survey in your Webex screen. Please take 30 seconds to complete it and give us your feedback. We look at every feedback item, every sentence, every perspective that comes through that survey, and we use that information to shape our future events. Thank you again for joining us. We look forward to talking with you again in April.
January 11, 2023
We wanted to share our recent webcast. You’ll hear insightful analysis and perspectives on our 2023 annual outlook on the economy and capital markets. The discussion includes:
Please use the links below to access the slides from this presentation.