Key insights
- Recent policy decisions — the debt ceiling resolution and the Federal Reserve likely pausing future interest rates hikes — have resolved two major issues hanging over the economy and the markets. With their resolution comes a period of stability and optimism.
- Economic growth has proven to be surprisingly resilient. Inflation-adjusted gross domestic product (Real GDP) — the broadest measure of economic activity — has grown for three quarters.
- Markets experienced strong recovery rallies in the first half of the year. A handful of growth stocks have generated most of the stock market gains this year. We expect the market rally to broaden to other non-tech sectors.
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Recent policy decisions — the debt ceiling resolution and the Federal Reserve (the Fed) likely pausing future interest rates hikes — have resolved two major issues hanging over the economy and the markets. With their resolution comes a period of stability and optimism.
We’re starting to see confidence in many industries, including certain sectors of commercial real estate. Economic confidence will likely continue in the second half of the year, with expected acceleration on consumer spending, mergers and acquisitions, and certain areas of the market (e.g., small-cap stocks).
Here’s more of what we’re seeing with the economy and markets as we enter the second half of 2023.
Economic outlook
Economic growth has proven to be surprisingly resilient. Inflation-adjusted gross domestic product (GDP) — the broadest measure of economic activity — has grown for three quarters. Inflation has dropped from 9% to 3%. Consumer spending is still quite robust and record-low unemployment continues.
Despite the continuing higher costs of materials and labor, many industries are posting record profits. Many companies are focusing on cash management and have strong balance sheets. A dedicated focus on margins and profitability is paying off.
High profits are also due to more companies embracing digital and artificial intelligence, continuing the multi-decade trend to use technology to identify inefficiencies. With other costs so high, technology can save money, helping to balance profitability.
While there are some industry outliers — office space is still underutilized in major cities and manufacturing is somewhat harmed due to hiring challenges — companies on average are faring well. Hiring has gotten somewhat easier as the “Great Resignation” appears to be in the rear-view mirror, which should further support economic conditions.
Economic growth has proven to be surprisingly resilient. Inflation-adjusted gross domestic product (GDP) — the broadest measure of economic activity — has grown for three quarters. Inflation has dropped from 9% to 3%. Consumer spending is still quite robust and record low unemployment continues.
Market outlook
Equities
Markets experienced strong recovery rallies in the first half of the year. A handful of growth stocks focused on AI have generated most of the stock market gains this year. However, those stocks now appear overvalued.
The upside? Many other sectors of the stock market appear undervalued (e.g., value, small cap, low volatility, and international developed). CLA’s investment allocation has distinct exposure in favor of these non-tech areas.
Fixed income
Within fixed-income markets, higher short-term interest rates are allowing corporations and individuals to earn attractive yields for generating income on excess cash. Tight credit spreads mean the credit markets have moved past concerns about an impending economic slowdown.
While the Fed has indicated that it will likely pause future rate hikes, officials there previously said they want to continue tightening credit conditions until inflation returns to a 2% target. There’s a risk they could overshoot and drain too much liquidity from the economy, which is why we would focus on investment grade rather than high-yield fixed income exposure.
Private markets
Within private markets, private credit continues to offer an attractive risk/reward profile. The large and fragmented real estate market creates an almost perpetual opportunity to acquire and improve properties.
While multi-family housing and warehousing have been strong for some time, we’re starting to see stabilization in retail and even office space outside of major cities. Commercial real estate transactions are picking up again, which can lead to more confidence and additional transactions.
Investment strategies
It is difficult to time the market because equity prices change based upon future expectations — staying invested is usually the wise course. Cash in standard bank accounts provides very little return. We don’t see market investment as making bets. Staying diversified and focusing on your long-term goals increases the odds for better portfolio returns over time.
How we can help
At CLA, we understand you may have different financial goals, whether it’s monitoring portfolio risk, generating sustainable income, or safeguarding your wealth. That’s why we offer personalized financial planning services to cater to your needs and aspirations. Our wealth advisory team can collaborate with you to help create a comprehensive, goal-oriented strategy for investing and financial planning.