Q1 2023 Market and Economic Perspective

Q1 of 2023 is in the books and the global economy has seen some positive signs as inflation and energy prices ease from their peak levels. China’s ending of its zero-COVID policy also provides some growth impulses, though its full impact has not yet been unfolded. Nevertheless, the global macroeconomic environment remains challenging for economies, business and consumers in the year ahead.

The global economic outlook for 2023 is among the weakest in decades, with global real GDP growth forecast to increase by 2.3% in 2023, further down from 3.3% recorded in 2022. Though global inflation is expected to moderate from 9.1% in 2022 to 6.8% in 2023, it is still at historic highs. The high costs of living, rising interest rates and ongoing geopolitical uncertainties will continue to dent private consumption and investment in many parts of the world, undermining the global growth outlook.

The run in the Nasdaq during Q1 is similar to the period from November 1929 to March 1930, when the stock market retraced almost half of its steep losses in the crash that began in October 1929, and left the market down only about 20% from its previous peak. That recovery gave some people hope that years and years of speculation had ended with a brief crash and that all was back to normal. But as those who have studied that period know, the real pain was just getting started, and the market wouldn’t bottom until the summer of 1932, at a level 89% below its 1929 peak.

No time is the same. Central banks and governments get more involved in things these days—although they were plenty involved back then as well. The companies and industries in which people both invest and speculate during one era change in the next era. But people’s reactions to the ups and downs of making and losing money are generally the same. In a boom and bust cycle, greed turns to worry, which turns to hope, which turns to fear, which ultimately ends in despair.

We have no idea what the future holds. But we do observe that speculation still seems to be healthy. While many of the old stories that drove major parts of the speculative boom in 2021—like SPACs or non-technology companies pretending to be technology companies—have lost their luster, new things have taken their place. (Maybe you’ve noticed just a few articles on A.I. over the last few months?)

In other words, in the cycle above, we’ve progressed from greed to worry and are now in the hope stage—hope that the new stories will drive new returns, and hope that central bankers know what they’re doing.

Whether the investing public eventually turns to fear and despair if this cycle of high valuations ends like previous ones is anyone’s guess. But, as always, we encourage investors to know what they own and why they own it and make sure risk tolerances are in line with expected returns.

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