The word “resolution” has multiple meanings. The most obvious, at this time of the year, is a decision to behave differently going forward. In many social sciences, resolution refers to a problem that is somehow mitigated or eliminated. Or, taken at its most literal, resolution could simply mean coming up with new answers to old questions—that is to say—“re-solving” them.

All of these meanings have relevance for investors today. Despite rampant pessimism, many of the problems that haunted the economy and markets in 2022 could be at least partially resolved in 2023. With significant changes in the economic backdrop and even more radical changes in asset prices, this is a time when many investors and their financial advisors should be “re-solving” their personal asset allocation puzzle and making appropriate adjustments. And it makes sense to resolve to do so now and not wait until gloom has dissipated and asset prices are higher. 

One resolution I’ve made, at the start of 2023, is to avoid unreasonable gloom. A new year, like a new baby, deserves to be greeted with optimism.

I realize that a positive view of the present and future state of the economy is at sharp variance with some confidence surveys. In particular, the University of Michigan’s Index of Consumer Sentiment came in at 59.7 for December. While this is up from its all-time low of 50.0 last June, it is still lower than it has been 96% of the time since 1978.

Economic variables themselves can only rationalize part of this gloom. A monthly econometric model, estimated over the past 45 years, can explain about 58% of the variation in consumer sentiment based on CPI inflation, the change in gasoline prices, the change in stock prices, the unemployment rate and payroll job growth. However, based on our estimates of these variables for December, the index should have been at 83.8, fairly close to its average reading since 1978 of 85.4, rather than down at 59.7.

A quick survey of the economic landscape leads to the same conclusion. We estimate December CPI inflation at a still elevated 6.5% year-over-year and we know that the S&P500 fell by 19.4% in 2022. However, gasoline prices are now essentially flat year-over-year. In addition, based on our forecasts for this Friday’s jobs report, payroll employment grew by a very strong 3.0% over the past year while the unemployment rate remains close to its lowest levels since the late 1960s.

So why the excessive gloom?

Three explanations come to mind:
First, the University of Michigan Index is designed in a way that downplays the positive aspects of a tight labor market. Specifically, it is calculated based on answers to five questions concerning current perceptions and expectations with regard to general business conditions and personal finances as well as a broad question on whether now is a good time to make a big-ticket purchase. These questions don’t explicitly ask for an assessment of the labor market.

Normally, this wouldn’t be an issue, as the state of the labor market tends to be highly correlated with general business conditions and personal finances. However, one of the unusual characteristics of the post-pandemic environment is that the labor market remains very tight even though the economy is clearly seeing a slowdown in momentum and distressingly high inflation.

By contrast, two of the five questions used in calculating the Conference Board Consumer Confidence Index explicitly concern employment conditions and, consequently, the Conference Board Index remains well above its 45-year average.

Second, the pandemic likely undermined the public mood in a way that is hard to capture statistically. The raw health numbers are stark enough: almost one million more Americans died in the two years ended June 30, 2022, than in the prior two years and the number of people calling in sick to work is consistently about 60% higher than in the years immediately prior to the pandemic. However, less tangibly, the pandemic led to isolation which has tended to sour the public mood in general.

Third, confidence in recent years has likely been further eroded by political polarization. Since 1980, the University of Michigan Survey of Consumers has occasionally asked respondents whether they consider themselves to be Republicans, Democrats or Independents. Almost always, supporters of the party controlling the White House have felt better about the economy than their opponents. However, while from 1980 to 2016, the absolute consumer sentiment gap between Democrats and Republicans averaged 17 index points, since then it has averaged 38 index points. In December 2022, the Consumer Sentiment Index was 79.8 for Democrats and just 40.0 for Republicans. 

This suggests that both sides are forming biased views of the economy, egged on by highly partisan cable news stations and amplified by an even more biased social media feed. This likely undermines confidence in general as well as leaving investors even less educated on the true state of the economy and thus true investment risks and opportunities. 

Given all of this, consumer sentiment may well move sideways in the year ahead. Job growth is likely to be much slower and, while we don’t expect a large rise in the unemployment rate, an upward drift is certainly possible. However, on the credit side of the ledger, year-over-year inflation is continuing to fall and gasoline prices have returned to reasonable levels. The country is showing continued signs of moving on beyond the pandemic and, hopefully, both the bond market and stock market should do better in 2023 than in 2022. Thankfully, there are no federal elections in 2023, which could slightly reduce partisanship.

That being said, there is still huge uncertainty about the eventual outcome of Russia’s brutal war in Ukraine, how China transitions from a zero-Covid policy or how quickly central banks will wrap up their tightening cycles, even as global inflation pressures fade. Even more important are unforeseen events that could impact the investment environment in 2023 and beyond.

However, in the midst of all of this confusion, investors should recognize two certainties: 

First, after a year of rising interest rates, falling stock prices and a soaring U.S. dollar, valuations for both domestic and international financial assets are much cheaper than they were a year ago. Dramatic market movements have, in many cases, distorted portfolios and opened up a wide range of investment opportunities that deserve to be explored.

Second, while news outlets and social media feeds will continue to try to draw an audience by raising the alarm on a wide range of issues, no one will cover any improvement in the economy, any lessening of global tensions or any resolution of the issues that plagued markets in 2022. For this reason, investors should resolve to examine the environment for themselves and invest while prices are more reflective of the state of public attitudes than the reality of economic prospects. 

David Kelly is chief global strategist at JPMorgan Funds.