Should investors stay invested in 2023?

Episode Summary

Executive Summary: Goldman Sachs ISG head Charmeen Masabar Rahmani says 2023 is defined by heavy uncertainty, so clients should stay invested rather than make big tactical moves. ISG sees a roughly 50/50 chance of U.S. recession, expects inflation to have peaked, sees modest earnings and market gains in U.S. equities, and remains cautious on emerging markets while acknowledging near-term support from China and Europe.

Main Topics: Recession risk and portfolio positioning (Priority: 5/5): ISG assigns a wide 45-55% recession probability, emphasizing that uncertainty is high enough that investors should not position as if a recession or soft landing is guaranteed. Inflation and Fed tightening (Priority: 5/5): The team believes inflation has peaked, with core goods and housing easing, but wage inflation remains the key uncertainty that could force additional Fed tightening. U.S. equity outlook and staying invested (Priority: 5/5): Despite volatility, ISG recommends staying invested in U.S. equities because long-run earnings growth and economic expansion tend to support returns. China, Europe, and global growth (Priority: 4/5): China’s reopening should boost growth above trend in the short term, but structural headwinds limit its long-term outlook; Europe appears less recession-prone thanks to milder weather and energy adaptation. Asset allocation and the 60/40 framework (Priority: 4/5): The classic stock-bond mix remains a useful starting point, but investors should emphasize diversification across bonds, regions, and alternatives rather than rely on a simple 60/40 rule. Key risks to monitor (Priority: 4/5): The biggest hazards are a deeper recession, inflation staying sticky, and geopolitical or policy shocks including Russia-Ukraine, U.S.-China tensions, North Korea, Iran, cybersecurity, terrorism, and the U.S. debt ceiling.

Key Arguments: A recession is plausible but far from certain; the right response is strategic allocation, not aggressive tactical de-risking. Recent strong labor data can be read both ways: it raises pressure on the Fed, but strong markets and easier financial conditions lower recession odds. Inflation has likely peaked because core goods and housing inflation are falling; wages are the main remaining risk. If the Fed reaches roughly 5.0%-5.25% and pauses, the tightening cycle may be near its end unless labor data stay very strong. The recession signal from the yield curve is useful for probability, not timing; if a recession comes, it is more likely later in 2023 or in 2024. U.S. equity markets should still do reasonably well because nominal growth supports nominal earnings; ISG expects 4%-6% earnings growth and about 13% total return in 2023. China’s reopening helps near-term growth, but secular headwinds such as demographics imply much slower long-run expansion. Europe looks more resilient than expected because of warm weather, faster gas storage build-up, and improved LNG infrastructure. Emerging markets and Europe can look cheap on headline valuation, but sector-adjusted comparisons reduce much of that apparent cheapness, especially for China. A simple 60/40 portfolio is still a useful benchmark, but diversified strategic asset allocation and alternatives are more appropriate for many clients. Geopolitical and policy risks matter, but they are hard to time; investors should remain vigilant without overreacting. The report’s central message is to avoid fast lane changes in a foggy environment: stay invested and avoid large tactical shifts.

Data Points: U.S. recession probability: 45% to 55% - ISG’s 2023 range; described as the widest in a decade and effectively a 50/50 view. January 2023 S&P 500 total return: about 6% - Used to illustrate why underweighting equities due to recession fears could have missed gains. Fed terminal rate view: 5.0% to 5.25% - ISG and Jan Hatzius expect the Fed to reach this range and then possibly pause. Expected 2023 S&P 500 earnings growth: 4% to 6% - ISG base case for earnings growth in a nominal-growth environment. Expected 2023 equity total return: about 13% - ISG base-case total return forecast for U.S. equities in 2023. China trend growth: 4.0% to 4.5% - ISG estimate of China’s long-run trend growth rate. China growth outlook: closer to 5% short term - Expected temporary boost from reopening and policy normalization. China 10-year growth comparison: 3.4% average going forward vs. about 7.5%-7.7% pre-COVID - ISG’s long-run forecast implies China grows at roughly half its pre-COVID pace. Historical frequency of stock and bond declines together: 2% of the time since 1926 - Used to contextualize how unusual 2022 was for the 60/40 portfolio. Recession frequency historically: roughly 15% to 17% of the time - Used to argue the U.S. is usually in expansion, which favors staying invested.

Pivotal Quotes: "We are recommending clients stay invested." — Charmeen Masabar Rahmani: Central portfolio recommendation amid high macro uncertainty. "We do not usually and never have had a 10 percentage point range in our probability of a recession." — Charmeen Masabar Rahmani: Explaining why ISG’s recession view is unusually wide and uncertain. "Don't make fast lane changes." — Charmeen Masabar Rahmani: The report’s fog-road-sign metaphor for avoiding reactive tactical portfolio shifts.

Implications: For investors, the message is to keep strategic allocations intact, favor U.S. equities over aggressive market timing, and treat recession, inflation, and geopolitics as risks to monitor rather than prompts for abrupt repositioning.