But bear markets do spell opportunity. And where valuations allow we are becoming more opportunistic. We titled our 2023 Investment Letter “Preparing for Opportunities to Knock”, as we expect buying opportunities to develop.
Actually opportunities have already started knocking, we just think more will come. As interest rates rose we added to interest rate risk by moving out duration and are now overweight duration – after a major sell off in fixed income we are finding attractive yields – something we haven’t seen in more than a decade.
Small and Mid-Cap stocks are the cheapest they have ever been on a P/E basis using the S&P indexes. We see plenty of opportunity there. And emerging markets, after a meaningful drop and with a lot of bad news coming out of China, they are looking much more attractive from a valuation perspective and now with China beginning to relax their zero COVID policy, we had the catalyst that we used to move to an overweight.
Now all that said we still have some rough roads ahead. The global economy is slowing and many countries are likely to fall into a recession including our own. Some parts of the market haven’t adjusted to this backdrop. The S&P 500 has moved down in price, but is nowhere near past bear market lows. We believe there can be more room for market dislocation where earnings expectations appear out of line with deteriorating economic growth. International developed equities look interesting on a valuation basis, but there is still a lot of fundamental risk as their central banks are in a bind trying to fight higher food and energy prices with higher interest rates. And then with regards to credit, below investment grade credit spreads remain below the historical average.
So we are seeing some opportunities right now, but believe more will come during 2023.
For more of our market thoughts, please look for our Investment Letter at touchstoneinvestments.com
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