Why Morgan Stanley Says 2023 Will Be a 'Year to be Patient' When It Comes to Investing

Short-term forecasts are for short-term investors.

In 2023, everyone's a prophet. Most middle-class American investors predict an economic downturn. The Fed continues to raise rates at historic speed to combat inflation (which may or may not still be happening). Recession predictions swing from wild to mild.

This year, Morgan Stanley thinks cautious investors will win the stock market game. Here's why Lisa Shalett, the company's Wealth Management Chief Investment Officer, says 2023 will be a "year to be patient" when it comes to investing.

Morgan Stanley thinks investors are "too optimistic"

Shalett thinks investors may be jumping the gun. The market is still down, but recent rallies point to inflated expectations. Take the S&P 500. The broader market anticipates year-end earnings of around $230. Morgan Stanley pegs the value at a much more modest $195. Why is that?

The financial firm's logic is that companies have yet to be hit with the consequences of rising thriftiness among consumers. To put it plainly, people aren't buying. Morgan Stanley anticipates companies will sell fewer goods and suffer lower profits as they're pressured to drop prices.

Another one of Morgan Stanley's Chief Investment Officers predicts the U.S. market will fall by 22% and slowly bounce back, ending the year on a flat note. The firm suggests consumers consider investing in U.S. stock alternatives, such as Treasury securities and emerging markets.

Two-year Treasury

Shalett suggests a two-year Treasury note as a stable alternative to volatile U.S. stocks. Right now, investors can make around 4% on their investments. Investors can purchase two-year Treasury securities through TreasuryDirect. Or, they can invest in exchange-traded funds (ETFs) through a great ETF broker.

Emerging markets

According to Shalett, emerging markets are ripe for investment. She cites factors like a weakening U.S. dollar and relatively cheap valuations as reasons to invest. She names China specifically as entering 2023 with strong growth prospects.

Short-term investors, take caution

Recessions have an outsized impact on traders, retirees, and short-term investors. Investors who anticipate withdrawing money within the next year or so may want to take Morgan Stanley's advice and stick to Treasury notes or emerging markets. At the very least, a U.S. recession is likely.

Long-term investors, stay the course

Long-term investors should take price valuations by firms like Morgan Stanley with a grain of salt. Year-end valuations shouldn't matter much to investors who hold their stocks for five years or more. Prices rise and fall, sometimes dramatically. That's a given.

That said, bear markets bite. Investors worried about day-to-day stock swings can fortify their resolve by jotting down "why I invested in X" in an investment journal. They can also ensure their investments are diversified by holding at least 25 stocks.

Keep an investment journal

Sometimes, companies fail. In bear markets, red lines blur together. It's tough to tell the difference between a company hurtling toward bankruptcy and one suffering the temporary effects of a broad market downturn like the one we had in 2022.

In times of doubt, refer to your investment journal: the place where you spell out the logic behind your investments. Reasoning can be as simple as "the Motley Fool recommended it" or as complicated as a twenty-column Excel sheet. The important thing is to record your thoughts.

An investment journal gives you something to measure when stocks are down. Refer back to it to make informed decisions during a stressful market.

Hold 25 or more stocks

Diversification is important for two reasons: 1.) hedging your bets and 2.) maintaining peace of mind. History suggests investors who diversify by holding at least 25 stocks for five years or more are more likely to see returns on their investments.

The best stock brokers offer savvy investors plenty of options to park their money. Record your investments in an investment journal before deciding whether to shift your investment strategy. Patience and informed decision making will see investors through a volatile 2023 market.