- Despite some economic volatility in the first quarter of 2023, our outlook for the rest of the year is constructive.
- Overall, the inflation picture is getting better. We believe it’s peaked and that the Federal Reserve is at the end of its hike cycle.
- The end of an interest rate hike cycle means increasing liquidity. Market dislocations also allow for new participants to take part in investing.
Is your business or investment portfolio resilient given potential economic and policy uncertainty?
Bank failures. Stock market fluctuations. Another interest rate hike.
Seems bad, right? Well, despite some economic volatility in the first quarter of 2023, our outlook for the rest of the year is more positive than negative. Here's why.
Market conditions and economic data continue to stabilize. Sure, there are lots of concerning headlines with inflation, some banks under stress, and unease with some companies and stocks.
But overall, the inflation picture is getting better. We believe it's peaked and that the Federal Reserve is at the end of its hike cycle. We're in a better place than we were at the end of 2022, when it seemed like the Fed was going to raise interest rates forever.
The end of an interest rate hike cycle means increasing liquidity. Market dislocations also allow for new participants to take part in investing.
When we consider our economic outlook, we look at four factors: the economy, industry, policy, and the markets. Here's what we're seeing in these four factors.
Inflation-adjusted gross domestic product (GDP) — the broadest measure of economic activity — was positive in the first quarter of 2023, continuing the trend since mid-2022. While the first two quarters of 2022 were negative, the second two were positive and exceeded expectations.
Consumer spending is the biggest factor in GDP, and Walmart — the country's biggest retailer — announced earlier this month it expects consumer spending to remain steady going forward. Certainly, there are areas of softness in certain economic sectors, but overall the economy looks quite healthy.
The industry outlook isn't quite as rosy, especially considering the banking industry upheaval. But there was some good news coming out of the collapse of Silicon Valley Bank and Signature Bank.
The biggest positive indicator for the economy was the Fed's quick decision to fully protect all depositors. Some people think the Fed is tone deaf and was only focused on raising interest rates, but the announcements following Silicon Valley's and Signature's failures show the Fed cares a lot and will provide liquidity to protect the economy in many cases.
The bank failures also provided some good economic lessons for investors and business owners. It's important to know where and how your cash is invested. We haven't had to think about this in a few years as there were no bank failures in 2021 or 2022. Everyone was under the false assumption that there was nothing to be concerned about if your money was in a bank.
But the recent bank failures are a good reminder to make sure all your cash is insured, meaning a maximum of $250,000 per depositor, per FDIC-insured bank, per ownership category. Business owners should have money in several different banks in preparation of a worst-case scenario so you can make payroll in case of a bank failure.
Overall, the inflation picture is getting better. We believe it's peaked and that the Federal Reserve is at the end of its hike cycle. We're in a better place than we were at the end of 2022, when it seemed like the Fed was going to raise interest rates forever.
The bank failures also opened people's eyes to other cash management options. A great option a lot of people don't know about is the ability to buy United States municipal bonds or single government treasuries. They have the potential to provide high-quality yields while historically being less risky.
Most other industries are far more stable. Service sector growth is robust while manufacturing is turning the corner after a bit of a slump. Manufacturing had slowed with supply chain issues and higher materials and labor costs, but they've now adjusted to the new costs and methods of operations.
To balance the higher costs, a lot of manufacturers are turning to automation and creating efficiencies, including shutting some unprofitable factories. While not great news for those workers, this economic cycle is actually healthy. They say good times make weak people — you almost need a level of austerity for business owners to drive efficiency to get lean and remain able to serve its customers and communities.
Construction and real estate are seeing some slowdown but affordable housing, warehouses, and other industrial construction remain quite strong. Anything discretionary —like the vacation home market — is slow. But even the office market is recovering quickly in certain markets.
We're more bullish about the markets now compared to the beginning of the year. Last year, we predicted continued higher interest rates and the related fallout, which turned out to be the case — markets went down once people started worrying about higher interest rates.
Now that markets are forecasting cut or flat interest rates, uncertainty is off the board, and assets have repriced themselves, there are opportunities for companies to shine. At CLA, we are focusing on high-quality investments: blue chip companies, dividend-growing companies, and municipal bonds.
We believe now is the time to stay the course and participate with any excess cash. Holding on to cash may seem attractive in the near-term, but having a long-term investment plan can help you avoid the constant decreasing in purchasing power that is inflation. Invest in a diversified basket of equities. Depending on your age and risk tolerance, you should consider an optimized mix of bonds, alternatives, and fixed income options.
Domestic and foreign policy are significant factors investors should stay on top of. There are continued concerns with the war between Russia and Ukraine and new potential concerns with possible U.S.-China trade policy changes.
On the domestic front, the U.S. government will have to resolve its debt ceiling soon. Also, President Biden has announced intentions to raise income taxes on high earners, especially multi-millionaires, and increasing taxes on corporate stock buybacks.
The upcoming 2024 election makes it unlikely the United States will default on its debt. A presidential election year also makes it unlikely there will be major tax changes, not to mention having a divided Congress. While political gridlock has pros and cons, it's mostly good for the markets as fewer tax and economic changes means more stability.
How we can help
Whether you're looking to grow assets, create sustainable income, or preserve wealth, CLA can help you customize a diversified portfolio to help you achieve your dreams. With 2023's continued varied outlook, you could benefit from our multi-faceted insights into the range of economic factors affecting your portfolio. We're ready to help you prepare now and into the future.