Position equities for a moderate recession and a 2 second-half recovery Heading into 2023, we prefer an underweight to global stocks as the economy continues to slow, yet we do see opportunities to add to equity positions on the horizon. Based on our view of a recession in early 2023, we advocate remaining defensively positioned in equities, favoring high-quality U.S. large-cap and mid-cap equities over small-cap and international equities and, in U.S. markets, the Information Technology, Health Care, and Energy sectors. Over the first two quarters of 2023, investors should have more clarity regarding a credible pivot from the Fed, potentially signaling an opportunity for investors to add risk to their portfolios. Once the economy starts to mend, a recovery later in 2023 and into 2024 should send stock prices and price-to-earnings multiples higher even as earnings contract. In this scenario, we may prefer shifting to an overweight position in equities, including higher allocations to U.S. small-caps stocks. The sharp rise in the U.S. dollar should ease only partially in 2023, providing little tailwind for international stocks. Lock in higher-yielding bonds 3 With many interest rates above pre-2008 levels but likely approaching a peak, fixed income appears attractive again (see chart on following page). Short-term fixed income is attractive today, with 12-month Treasury yields increasing from 0.1% a year ago to over 4.0%. If the Fed cuts rates next year as we expect, short-term rates should decline. We believe long-term yields are nearing peak levels and represent good value, so we prefer to add to longer-term bonds. Once yields peak and inflation eases, long-term bonds should become more attractive versus shorter-term bonds. We also suggest patience with lower-quality bonds. High-yield bonds currently offer attractive long-term value, but we remain unfavorable on non-investment-grade debt and are waiting for spreads to widen further before considering an upgrade to the sector. At this stage in the cycle, we prefer that investors increase duration (a measure of a bond's interest rate sensitivity) before considering lower-quality debt. 2023 Outlook | 21