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Equity Downside Protection in 2023

Given the uncertainties of today’s market environment, investors may wish to consider different scenarios and downside protection approaches with the aim of better positioning their portfolios to weather volatile markets.

Senior Strategist / Investment Strategy & Research

Figure 1: Headline Inflation Appears to be Turning, Yet Core Inflation Remains Sticky

Headline Inflation Appears to be Turning, Yet Core Inflation Remains Sticky

How Bumpy Is the Road Ahead?

The current market environment is immersed in uncertainties. Market sentiment in 2023 has shifted from seeing a soft landing or a hard landing to a hard landing or worrying about which surprises could still hit us and lead to a market shock.

In a recent blog, Chief Economist Simona Mocuta cautions against an overly hawkish interpretation of the recent data flow, and argues the disinflation narrative remains well anchored. This supports the view of a soft landing.1

In a separate State Street Global Advisors publication2 we describe six Grey Swans that could unsettle markets in 2023. Our darkest Grey Swan is that of an outright deflationary bust. In this hard landing scenario central banks deliver multiple rate hikes while unemployment increases. Amid the weakening global demand and improved supply, oil prices tumble to send a deflationary impulse through the economy.

A possible market shock might also be triggered by a major oil price hike, another one of our Grey Swans. With the Ukraine War, past OPEC+ production cuts, and Russian sanctions as a backdrop, a larger-than-anticipated economic response to China’s scrapping of COVID-19-related policies could stoke oil demand from Chinese industry and be the catalyst for renewed surging energy prices.

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