Outlook 2023: Mamdouh Medhat (Dimensional Fund Advisors)

Outlook 2023: Mamdouh Medhat (Dimensional Fund Advisors)

January 18, 2023

Outlook
Mamdouh Medhat (photo archive Dimensional Fund Advisors)

By Mamdouh Medhat, PhD, Senior Researcher at Dimensional Fund Advisors

What is the economic outlook for 2023?

‘The past year has been challenging for investors. The steep losses in bonds have only increased the pain of the sell-off in equities. However, when experiencing difficult market conditions, it is important for investors to focus on the future rather than to dwell on the past.

Markets are forward-looking. As such, they have priced in current expectations of the economic conditions and opportunities in 2023. While this is not to say that we are past the rough patch, there are reasons to be optimistic about future returns.

Looking at US data since 1926, the average cumulative return for a typical 60/40 portfolio (60% S&P 500 index with 40% five-year notes) has been 37.1% over the five years that follow a decline of 10% or more in the portfolio’s value. Looking at the individual asset classes during the same time period is also reassuring. US equities have on average returned almost 72% over the five years following a decile of at least 20%, while US bonds have on average returned almost 35% over the five years following a slump of 2% or more. History makes a strong case for investors to accept and endure difficult markets because steep declines should not derail long-term investment plans.’

 

There are reasons to be optimistic about future returns.

 

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