Written by: Newday Investment Team

 

Looking back at 2022

Financial markets often bring the unexpected. In December 2021, the stock market was at record highs and the Federal Reserve was just beginning its hiking cycle. Most were sanguine about the outlook. Over the last year we’ve seen an aggressive sequence of rate hikes by central banks, major geopolitical and energy crises in Europe, a prolonged economic shutdown in China, and a political backlash against many ESG investment strategies. Stocks fell into a bear market and Treasury yields rose to levels not seen since before the global financial crisis. Despite all those factors, the current inflation rate of 7% is close to that of one year ago, the price of crude oil is up only marginally over that timeframe, and ESG investing continues to grow.

Predicting markets is never an easy task and what look like clear trends in hindsight, are never obvious amidst the day-to-day volatility of asset prices. Successful investors need a systematic approach to filter out the incessant noise and make sound decisions that will consistently generate alpha, compounding excess returns over time. We believe this applies to generating both ESG and financial impact. Over the course of 2022 we worked hard implementing our investment process to choose stocks that we believe will deliver superior risk-adjusted financial returns and contribute positively across a range of ESG themes.

We believe The Kroger Co. (KR) and Ball Corp. (BALL) are two stocks that could outperform in a more defensive environment as the global economy slows.  Likewise, these companies are also standouts from an ESG standpoint.  Kroger has very impressive corporate DEI policies and has also committed significant funding to charitable giving initiatives, including food security.  Ball’s focus on recyclable aluminum packaging is a more ocean-friendly alternative to plastics and the company also sponsors ocean clean-up work.  

Our thoughts going forward

Looking into 2023, we see the potential for a more favorable environment for markets in the first half of the year, barring any unexpected geopolitical events. We continue to believe the primary driver is likely to be expectations around inflation and interest rates. The Treasury yield curve indicates a strong likelihood of an impending recession[1] although key components of inflation are also slowing. Some recent data has shown that US rent prices are starting to fall on a month-over-month basis.[2] Shelter costs account for almost one third of the consumer price index. Supply chain challenges and shortages of many crucial components have abated. Moreover, on a year-over-year basis, oil and gasoline price comparisons may become significantly easier starting in January and throughout the first half of next year as we lap the spike in energy prices that occurred following the outbreak of war in Ukraine. Even if wage growth remains relatively robust, overall inflation could continue to move gradually lower, taking pressure off of central banks. This may create a scenario where there is less downside for markets and more upside for global growth expectations.

We think that key risks to monitor next year are geopolitical events in Europe, COVID trends globally as well as specifically in China, the potential for supply chain problems to re-emerge, as well as the outlook for monetary policy – all of which could exacerbate the potential for a global recession. Higher grain and food prices could also create material instability risks in certain countries that rely on imports. If the winter months are colder than expected in Europe, it could lead to rationing and shutdowns in some parts of the economy as well as ripple effects in other parts of the world. An acceleration of COVID cases and the potential for new variants could create risks, particularly in countries with lower vaccination rates. The recent possibility of a rail strike in the US as well as COVID-related factory shutdowns in China are reminders of threats to the global supply chain. We believe 2023 presents less obvious political risks than 2022, with the most noteworthy general election taking place in Spain, but not until the end of the year. Importantly, if inflation does not continue on a downward trajectory, this may be a negative catalyst for markets. We think that markets could potentially face more volatility in mid-2023 after the easier oil and inflation comps have been lapped, particularly if central banks have paused rate increases. If inflation slows down but then re-accelerates as it did in the early 1980s, this could be a renewed headwind for risks assets.

Adjustments for the new year

We began gradually taking up beta in our portfolios in November with a focus on adding some cyclical exposure that may perform well if rates and oil continue to rise along with value stocks. We expect to continue to gradually raise portfolio beta given our strategies have been defensively positioned. Like many of our peers, our portfolios are structurally short traditional energy given our ESG mandates. We have been working to creatively address this challenge using a basket of stocks that are positively correlated to energy equities but that are in other sectors, look attractive using our ESG and fundamental analysis frameworks, and do not contribute to GHG emissions. This will be important in the event that oil prices move back up again next year and the energy sector continues to trend positively. While financial markets can be unpredictable, we believe that our systematic, quantamental investment process has enabled us to construct portfolios that will both perform well through market cycles and make a positive impact across key UN sustainable development goals.

 

Footnotes:

[1] See https://www.marketwatch.com/story/most-deeply-negative-treasury-curve-in-more-than-four-decades-has-one-upbeat-takeaway-for-investors-11669750894 

[2] See https://www.bloomberg.com/news/articles/2022-11-30/us-rents-fall-for-third-straight-month-in-sharper-pullback 

 

Disclosure: This commentary is provided for information purposes only and is not an offer or solicitation of an offer to buy or sell any product or service. Unless otherwise stated, all information and opinion contained in this publication were produced by Newday Funds, Inc. (“Newday Impact”) and other sources believed by Newday Impact to be accurate and reliable. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and other sources may be required to make informed investment decisions based on your individual investment objectives and suitability specifications.

 

Investing in securities involves risks, and there is always the potential of losing money when you invest in securities. Past performance does not guarantee future performance.

 

Newday Funds, Inc. is a subsidiary of Newday Financial Technologies, Inc. and is an SEC registered investment adviser.

 

Newday Financial Technologies, Inc. | www.newdayimpact.com