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February 2023

Challenges to Overcome in the First Half 2023; Thinking Optimistically Longer Term

Key Points

  • Better returns for stocks and bonds expected in 2023
  • Near-term recession expected, but likely mild
  • US economy continues to be best positioned globally

Several key forward-looking indicators are flashing recession signals for the US economy in the first half of 2023. We have set our investment strategy and asset allocation for clients to reflect our near-term cautious outlook by underweighting risky asset classes, like growth equities, and overweighting less risky asset classes, like income-producing, fixed-income investments. Our recession forecast calls for a mild downturn, which means that GDP will decline less than normal and only for a few quarters before the economy begins to recover. Because financial markets usually anticipate this, we think the stage should be set for a rise in stock and bond values later this year and leading into 2024.

The primary reasons for our mild recession outlook pertain to our view of the consumer, who represents approximately 68% of overall economic activity. When consumers have good financial resiliency, as they do today, history shows that recessions tend to be shorter and milder. In evaluating consumer financial health, the labor market outlook while trending downward is still quite solid. Despite unemployment at a 50-year low of 3.5%, millions of jobs remain unfilled, forcing businesses to continue to hire and raise wages even as economic growth slows. Should a recession occur, we think these ongoing labor shortages will limit a rise in the unemployment rate to only 4.5%–5%. By historical standards, this should not cause a meaningful retrenchment in consumer activity because roughly 95% of all those wanting to work will still be employed.

We believe our focus on holding high-quality US stocks and bonds through this turbulent period gives us the best opportunity for achieving your individual goals. In our assessment, the US continues to rank as the world’s primary economic region, with the most resilience and long-term promise for investors.

There are two dominant forces that drive an economy forward and ultimately support corporate profit growth. The first is demographics — countries with slowing or shrinking working-age populations historically have little ability to grow. The second main driver is an economy’s capacity for productivity and innovation. As the accompanying charts show, when compared with other major economies, the US outlook for labor force growth and productivity is likely to be among the best globally in the years ahead.

The year 2022 was a disappointing one for stock and bond investors, and there are likely to be further challenges to overcome in the months ahead.

However, as we move through 2023, we expect more positive economic and corporate earnings trends to develop that should favor a recovery in both stocks and bonds. Although we can’t know exactly when the current turbulence will end, we believe adhering to your long-term investment strategy, while being flexible during volatile times, will be an optimal approach to achieving your goals.


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