The Story of 2023

Written by Paul Siluch
December 8th, 2022

The story of 2023 will be about the narrative shift from concerns about inflation to worry about recession. In some sectors, it is already happening.

People are switching from Whole Foods to Wal-Mart (NYSE WMT) for their grocery shopping, for example. Dollarama (TSX DOL), the dollar store chain, just had record earnings.

Here’s how we see 2023 playing out:

1. Bonds will recover first. In the summer of 2021, 1-year bank term deposit paid you 0.5% and you could get a mortgage for under 2%. Today, term deposits yield 5% and mortgages are in the 6-7% range.
   

   This is slowing the economy rapidly. At some point, interest rates will peak and start to fall. It happens in every recession.

   Investors can start extending term – moving from T-Bills to one-year term deposits, or one year to two-year terms – now. We are close to the peak in rates. How do we know this? The Bank of Canada raised T-Bill rates by 0.5% this week and longer-term bonds didn’t budge. They had already ‘baked in’ the increase, and they see the potential for cuts next year.

   It all depends how severe the recession is. Either way, we are near the peak in rates now. Start locking in.

2. Stocks are a trickier investment to time. Raymond James’ chief economist is rather sanguine about a recession in 2023, suggesting it will be mild. We – the Dividend Value team – think it could be deeper than mild, so are being cautious about new purchases. Earnings reports start in January and they won’t be pretty. 
   

   That said, history has taught us to embrace declines. This is when great companies go on sale. Too many people fear a depression-like period ahead. It isn’t going to happen. The banks are strong and unemployment will stay low – there just aren’t enough workers.

   Banks – are already cheap. They may drop more if home prices (and demand for mortgages) decline, but probably not much.

   Railways – these are the arteries of the nation. So far, they have refused to drop. We’d love them to drop so we can invest.

   Technology – the public has embraced technology stocks as the ultimate growth stocks, but they could be hurtin’ for longer than the rest of the market. China and Russia can’t buy our tech products anymore, and the whole cryptocurrency infrastructure used a lot of chips and data. That’s over.

   We’ll be watching valuations closely here, but there is no rush to buy.

3. Finally, commodities like fertilizer, metals, gold, silver, oil, and uranium have been written off and disparaged for a decade. It is possible we will see a resurgence in demand for all of them as China re-opens.
   
   Also, the “re-shoring” theme will create a great deal of demand for commodities and construction. Taiwan Semiconductor (NYSE TSM) is investing close to $40 billion in new chip plants in Arizona because Taiwan is no longer as safe as it once was. Many other manufacturers are heading back to North America for similar reasons.

Our conclusions? Bonds recover first in 2023. Stocks second. Depending on China’s appetite, commodities may dwarf them both.

Enjoy the holidays, everyone.