The 2023 market was full of surprises, but what lays ahead?

Expert believes market is going through a 'great reset'

The 2023 market was full of surprises, but what lays ahead?
Craig Basinger, chief market strategist, Purpose Investments

Last year ended up being a surprise for everyone, according to Craig Basinger, chief market strategist at Purpose Investments. Speaking to investment strategies and portfolio construction, he says coming into 2023, “recession talk abounded and was more or less the dominant story at that time, and for very good reasons. The yield curve had just inverted, there was a slowdown, economic growth was slowing down, and that had everybody going.

“2023 was full of surprises, however, and fortunately much more of the good kind. While some regions of the world flirted with recession, the US remained resilient. Canada had terrible GDP in the third quarter, Japan and Germany both had negative growth in the third quarter, and the UK was flat. The global economy may be slowing down, but there were some positive signs in global trade over the last couple of months.

“The preponderance of the data still points to more slowdown but, in our economic view, some of the markets have already priced that in.” Basinger says that a lot of the Canadian dividend companies, for example, have a high margin of safety in some of the valuations and price points.

Good news during the last two months

“From our perspective, this rally that we had for the last two months of last year – which coincidentally also came off three months of markets moving lower and August, September, and October – provided a lot of good news. Clearly inflation is not gone but, from a market concern, perspective clearly is fading pretty quickly. We think the central banks are also finally coming around saying that they’re probably done raising rates.

“NASDAQ was the star in 2023, and folks are wondering why they didn’t own more (or any in some cases). Throw Bitcoin into that bucket at +150 percent or so. Or they are wondering why they own the TSX or those boring dividend names that weren’t boring this year but only managed some high single-digit returns? Then there was oil, kind of the dog of the year. Regardless of the hits and misses, in 2023 there were more hits, and any year that a standard balanced mix does somewhere around 10 percent is a good year,” Basinger says.

Is it time for the “real recession?”

With all the hits in 2022, everyone expected the “real recession” to come in 2023.

“If you look at fund flows at of individual investors in North America, cash was king. Everybody wanted cas. Lo and behold, fast forward to the end of the year. It was the worst performing asset class so, once again, the herd got it backwards.

“What is perhaps more noteworthy,” he adds, “is that 2023 appears to be a mirror of 2022. Simply put, the biggest decliners in 2022 were generally the biggest gainers in 2023, and vice versa. In 2023, Bitcoin rose from $17,000 to $42,000, yet in 2022, it dropped from $50,000 to $17,000. Nasdaq, S&P, Europe, and Asia were some of the biggest drops in 2022. And, the TSX that was clearly at the back of the pack in 2023 was one of the smaller decliners of 2022.

Gravity will reset some of the chaos

So, what could 2024 look like? Basinger says we don’t have to worry that it will be a mirror of 2023. “Investing will never become that easy. However, gravity is not just a constant here on Earth; it is in the markets as well. Sooner or later, it drags down the moon shots and lifts up those that have fallen too far. Timing gravity is the hard part.

“This is the celebratory rally as more and more evidence points to inflation risk fading and now central banks are saying the same thing. Earnings revisions remain flat at best. Fun and profitable, yes, yet multiple expansion (and its less popular cousin, multiple contraction) is a zero-sum influence over time. It is earnings growth that drives the long-term of stocks. And earnings growth is driven by the economy.

“We are among the many who had thought we would have seen more economic weakness in 2023. Although perhaps we did in Canada, Germany, and Japan. Yet the US economy charges on. Sorting out how this desynchronized slowdown unfolds in 2024 will likely be at the core of market returns. Because the economy’s path will drive sales growth, the cost of capital, labour’s bargaining power, and the ability to raise prices will all go into driving earnings.

“The only trend we see from 2023 carrying over into 2024 is the number of surprises. We believe this market is going through a great reset – from a multi-year period with a very low cost and abundance of capital to a world with a higher cost of capital and less availability. This transition back to a more normal world has been going on for two years now and isn’t over. But, in the meantime, let’s see if the euphoric high from inflation’s demise and central banks admitting they are done can push the market multiples even higher into year-end.”