Markets Rise in Year's First Week Despite Continuing Worries About Economy

Good evening:

Happy New Year! We hope your 2023 is off to a healthy and productive start. 

Adam Gould, Head of Quantitative Research, opened our Thursday meeting in New York the same week he published his stock-rating model’s 2022 performance. It was an excellent year for quant funds across the Street, and Gould’s model continued its outperformance: Last year, his basket of favored stocks beat the S&P 500 benchmark by 9.3%. 

Overall, Gould continues to view stocks as expensive relative to both investment-grade and high-yield corporate debt, though he noted there are small improvements on those fronts. 

The comparison charted here should not be used predictively in an attempt to time entry and exit points. But it might be useful for investors trying to adjust their stock and bond allocations or those trying to adjust weights between high-beta and low-beta sectors. 

Adam led a discussion about the current increase in idiosyncratic risk, which tends to favor stock-picking strategies. Historically, such increases have been accompanied by a market recovery, so the current situation is unusual. Adam’s work suggests stocks could retest the lows of October 2022 (3,5077.03) in the next few months, with idiosyncratic risk t...