Rosey recession watch sets up the year of the balanced portfolio.

Here’s a very good post from David Rosenberg in the Globe & Mail. We know that the inverted yield curve has predicted 8 of the last 8 recessions. Yes, we are in the midst of the most drastic inverted yield curve(s). Mr. Rosenberg finds that the leading Conference Board Confidence Indicator is even better at predicting recessions. A stock market decline and recession would likely set up favourable conditions for the balanced portfolio in 2023. Will it be the year of the balanced portfolio?

From that Rosenberg (Rosey) post …

Conference Board’s leading economic indicator, which has now declined for eight consecutive months. The data go back to 1959 and I can tell you that at no time in the past have we seen such a string of weakness like this, alongside a 5.6 per cent annualized contraction over such a time frame, without a recession following within a quarter or two. Call it nine for nine back to ‘59 in terms of recession calls. 

And on the when …

To repeat, no fundamental market bottom has happened as the Fed was still tightening policy and no bottom has ever occurred until deep into a recession, an ensuing Fed easing cycle, and the re-establishment of a normally shaped yield curve.

And on bonds and recessions, they always do their thing.

What I know from studying all the past 11 recessions since 1950 is that the long bond makes you money in recessions in terms of total return, no matter where the inflation rate is, because inflation declines in all recessions, including the three we experienced in that horrible stagflation period from 1970 to 1980. Equities, on the other hand, always lose you money; the only question is magnitude. ‎But the asset mix, given what’s being discounted, augurs for being overweight bonds (at this point) and underweight equities.

The markets are not yet pricing in a recession or the 20% earnings decline that typically (and based on averages) accompanies a recession. Mr. Rosenberg sees the S&P 500 falling to 31oo or 2700. Heading into 2023 the S&P 500 sits at 3839. That would mean a near 24% decline to get to that 3100 level.

On the potential for bond returns.

In other words, we never see a recession bottom in stocks happen absent an initial decline in Treasury yields, and the mean and median decline from the Treasury yield peak is 160 basis points by the time equities find a low in a recession bear market; so, I am turning even more bullish on bonds now. (Bond prices and yields move inversely.)

The Balanced Portfolio to outperform stocks?

Lance Roberts suggests that the 60/40 portfolio might outperform over the next decade.

The post begins with …

Much ink has been spilled over the death of the 60/40 portfolio. However, declaring the demise of the 60/40 portfolio could be a mistake. Such is particularly the case as equity returns remain slated to be lower over the next decade due to high valuations.

We bet a 60/40 portfolio could outperform an all-stock index over that period.

Also from that post …

The model below assumes more volatility in equities over the next decade, providing a total real return of roughly 2% (not zero or negative). We also think that bonds deliver a relative performance gain, with yields dropping to 1% and bond prices rising.

What’s in store for 2023?

Here’s a good thread from Twitter friend Genevieve Roch-Decter.

I looked through the 2023 macro outlooks from the largest financial institutions including Goldman Sachs, JP Morgan, and BlackRock.

(Links to all reports at the end)

Here’s what they’re expecting next year:

— Genevieve Roch-Decter, CFA (@GRDecter) December 30, 2022

Banker on Wheels offered a very good look at the Vanguard projections.

Historical market returns and 2023 expectations.

Many market experts suggest there is the potential of a return to outperformance for international stocks vs U.S. stocks.

Four key factors drive it in Vanguard’s model: 

• Higher Dividends – are the biggest driver for ex-US Stocks that are expected to maintain a dividend yield of 3.3% (explaining 1.4% outperformance vs. the US). 
• Weakening US Dollar –  given recent USD rally, a reversion to fair value means that ex-U.S. Stocks will outperform (1.2% outperformance vs. the US). 
• Valuation Catch up – ex-US Stocks trade at significant discount to US  (0.9% outperformance vs. the US). 
• But Weaker Growth – US Earnings will still be stronger reducing the ex-US Outperformance (US to outperform by 0.7% year)

On Seeking Alpha I recently posted:

How to position your portfolio for 2023.

Real assets and real earnings win in 2022.

And here’s the race to kill inflation on Cut The Crap Investing.

There is the strong possibility that the balanced portfolio will have its moment in 2023 and perhaps beyond. If we do not get a recession, it will be an outlier. And remember, we will need to rebalance from bond (and cash) proceeds to stocks.

Readers will know that I’m a fan of adding dedicated infation protection as well, creating the all-weather balanced portfolio.

We can be ready for most anything.

Thanks for reading. Wishing you health and wealth and happiness in 2023.

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