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Bonds Are Back

“It has been a long time coming, but 2023 looks to be the year that bonds will be back in fashion with investors. After years of low yields followed by a brutal drop in prices during 2022, returns in the fixed income markets appear poised to rebound. It's likely to be a bumpy ride due to the cross currents created by global central banks' tightening policies, a volatile global economy, and ongoing political uncertainty here and abroad. Despite these challenges, we see opportunities in 2023 for the bond market to provide investors with attractive yields at lower risk than we've seen for several years...

Our optimism about returns for 2023 is based on three factors:

1. Starting yields are the highest in years—in both nominal and real terms;
2. The bulk of the Fed tightening cycle is over; and
3. Inflation is likely to decline.

After a long drought, the bond market is awash in yields that are attractive relative to other income investments. A portfolio of high-quality bonds—such as Treasuries and other government-backed bonds, and investment-grade corporate bonds—can yield in the vicinity of 4% to 5% without excessively high duration. Tax-adjusted yields in municipal bonds are also attractive for investors in higher tax brackets. In addition to the relatively attractive yields, higher coupons for newly issued bonds should help dampen volatility.”

This 2023 fixed income outlook gets straight to the point. The starting yield of a bond portfolio can explain more than 80% of its following 3 years of investment returns with the remainder coming from interest rate movements, the credit/default environment, and various minor factors. Higher yields = higher outlook. Call it a comeback, because core bond returns have been missing for years.

The Breakout Tech Company Of 2022

“With no further ado, The Breakout Tech Company of 2022 is: OpenAI.

Now, is OpenAI technically a tech startup? Isn’t it a foundation, or a capped profit company? Didn’t they raise hundreds of millions of dollars? Frankly, I don’t know how to classify it. It is not a conventional pick (before you send me a text about that), but 2022 wasn’t a conventional year, either. 

OpenAI was originally formed a few years ago with the intention of investing in engineering and design talent, learning models, compute, and anything else that could help accelerate and usher in a new era of responsible use of artificial intelligence.

Earlier this week, OpenAI released ChatGPT, a dialogue-based AI chat interface for its GPT-3 family of large language models. This release again took over social media in tech circles and harkened back to the craze around bots 5-7 years ago…

The tech/startup sector has been dreaming about the arrival of AI for decades, with the chorus growing louder over the past few years. Like many technological advances, it feels like it’s happening very slowly, and then all of a sudden, it’s here. That’s what OpenAI and others have done to the field of artificial intelligence in 2022."

Full disclosure: I had OpenAI write most of the introductory paragraphs to this week's newsletter. I made a couple of smaller edits to insert my voice, but it is scary good. Former U.S. Treasury Secretary Larry Summers called its development on par with the printing press, electricity, the wheel, and fire!

If we can effectively harness the power of AI to increase productivity and efficiency, it will be a major breakthrough for the economy. I encourage you to try it out. OpenAI and ChatGPT are in a free beta version at the moment.

2023 Housing Forecasts

“New home sales in 2022 will probably be around 640 thousand, down from 771 thousand in 2021.

Total housing starts will be around 1.55 million in 2022, down slightly from 1.60 million in 2021.

Existing home sales will be around 5.1 million in 2022, down from 6.1 million in 2021.

As of September, Case-Shiller house prices were up 10.6% year-over-year, but the year-over-year change is slowing rapidly…

There is an especially wide range in the forecasts for house prices and shows the difficulties in modeling this housing cycle. My view is house prices will decline in 2023 and will fall 10% or more from peak-to-trough (see House Prices: 7 Years in Purgatory).

The real [inflation-adjusted] return following the 1979 peak was 6.5 years. It took 11 years for real prices to reach the previous peak following the peak in 1989. And it took 14.5 years to return to the real peak reached during the [2007] housing bubble…

It could take shorter or longer, especially since the next Housing and Demographics: The Next Big Shift will likely start at the end of this decade.”

Bleak, but expected forecasts on the housing front with mortgage rates settling into the 5.5% - 7% range. The combination of supply, demand, borrower quality and percentage of fixed-rate mortgages will likely not allow a repeat of the 2007 housing bubble and Great Financial Crisis. But, even a repeat of the housing correction of the early 1980s could take a 7-year recovery in inflation-adjusted terms.

After the downturn to start the week, the S&P 500 stock index (as measured by its most prolific fund vehicle - SPY) has now experienced more than 60 days of 1%+ down days this year. What are the only other years in the last 30 to top that level of negativity?

• 2002 during the end of the Tech Bubble and
• 2008 during the Great Financial Crisis

Here's to a better year in 2023!

Thanks for reading. Have a great weekend!

RBG Wealth Advisors LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.