2023 Economic Outlook: Stay the Course

Recession is a word that comes up consistently in conversations about the 2023 economy. But next year’s outlook is far more complex than “will there be a recession or not?”

While higher interest rates may lead to a slowing of economic growth, we do not see a repeat of the severe downturn last seen during the Great Financial Crisis. In fact, we see companies able to maintain healthy profitability in 2023.

Next year is an opportunity to retool. You can play it safe, but there are also opportunities to stay invested and benefit from a possible turnaround.

There is good news ahead. As with any cycle, normalization occurs. Think of last year ― supply chains were out of whack. This year, you can finally buy a PlayStation 5 for holiday delivery.

Normalization happens. Expect the labor crunch to improve. Expect interest rates to fall. Also, expect inflation to continue dropping after data shows price hikes peaked in summer 2022.

Economic tailwinds and headwinds

There are a lot of factors in play in the 2023 economy, including both tailwind and headwind economic indicators. Consider these big ones as we look forward to the new year.

Positive tailwinds:

• The economy: robust consumer spending (at 70% of GDP) is expected to continue while inflation is likely to continue to trend lower.
• Industry: Wall Street analysts are forecasting growth in business profitability during 2023 and given the current shortage of labor, we expect the use of data insights and outsourcing to increase.
• Financial markets: Attractive valuations in equity, fixed income, and alternative markets are available.
• Your portfolio: Well-constructed portfolios can participate in market upside while mitigating volatility to help achieve your goals.

Concerning headwinds

• The economy: Slowing GDP growth is expected in 2023.
• Industry: Tight labor markets and the rising cost of capital may challenge unprepared business owners.
• Financial markets: Expect more restrictive credit conditions as the Fed continues to withdraw liquidity in a bid to fight inflation.
• Your portfolio: Remember, recoveries take time and reward patient long-term investors rather than market-timers.

Economic and market recommendations

What does this mix of tailwinds and headwinds mean for you? Here are some of our key takeaways and recommendations:

For businesses

• Despite higher interest rates and slowing economic growth impacting areas such as housing, consumer spending and labor, markets are resilient. For the most part, we recommend continuing to manage your business as you have.
• For businesses feeling the pinch from top-line price increases, carefully manage your expenses to drive bottom-line growth. This includes focusing on technology to drive efficiency to maintain margins and utilize outsourcing to address labor needs.
• 2023 is shaping up to be a year that rewards businesses who maintain sufficient liquidity to weather a possible “liquidity crunch” brought on by the Federal Reserve’s continued tightening of credit conditions.

For investors

• Ignore the headlines and dig deeper. Most headlines focus on a recession but the full economic picture is much more complex. Across industry, the economy, and the markets, it’s a much more even picture. Dig into financial data to get a more complete economic outlook and a more comprehensive background for your investment decisions.
• Along those lines, take a holistic approach to your investments. Consider all facets of the economy ― business, industry, policy, and markets. A multi-faceted outlook can make a significant difference for your investment plan.
• Within markets, the three big buckets are fixed income markets, equity markets, and alternative markets. Within each of these asset classes, the market selloff seems to be exacerbated by fear rather than fundamentals, creating opportunities for investors. To us, it seems like the market is overreacting. Let’s dive deeper:
  • In the fixed income market, credit risk appears low right now so we don’t see worry about getting repaid if you’re buying bonds.
  • In the equity market, growth is still occurring and many equities are affordable. We favor long-term investment in this area.
  • In alternative markets, a lot of interesting opportunities are available for those who can lock up their money for several years.
• Focus on high quality investments. High-quality companies should be able to withstand most slowdowns. This strategy is a solid way to navigate market volatility.
  • Within fixed income, high quality translates to investment grade companies, mostly large cap companies and equities.
  • In the alternative space, focus on managers with long track records who are looking at specific areas of high quality real estate and other areas of the alternative market.
• Investors seeking current income should consider short maturities (1 – 3 years). Total return investors should consider intermediate maturities (5 – 7 years). High quality credit (A-rated or higher) should be favored until credit spreads widen further.
• The bottom line is, even with some market concerns, if you build robust portfolios with selectivity biases, you can still stay invested.

How we can help

CLA wealth advisors give business owners and other investors a holistic economic outlook to enable strong investment decisions. With a complex outlook on the horizon for 2023, you could benefit from our multi-faceted insights into the spectrum of economic indicators that impact your portfolio. We’re ready to help you prepare now and into the future.